UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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)
Delaware 13-3314599
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
(Address of principal executive office)
(Zip Code)
(215) 619-2700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accepted filer and large accelerated filer" in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Securities Exchange Act). YES |_| NO |X|
Number of shares of the Registrant's Common Stock outstanding on April 30,
2006: 25,554,033
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - April 30, 2006 and January 31, 2006 3
Consolidated Statements of Operations - Three Months Ended 5
April 30, 2006 and 2005
Consolidated Statements of Cash Flows - Three Months Ended 6
April 30, 2006 and 2005
Consolidated Statements of Comprehensive Loss -
Three Months Ended April 30, 2006 and 2005 7
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of Financial Condition 21
and Results of Operations
Item 3 Quantitative and Qualitative Disclosures about Market Risk 27
Item 4 Controls and Procedures 28
Part II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 29
Item 4 Submission of Matters to a Vote of Security Holders 29
Item 6 Exhibits 30
SIGNATURES 31
EXHIBIT INDEX 32
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, January 31,
2006 2006
==========================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 25,939 $ 25,693
Accounts receivable, less allowance for doubtful accounts
of $2,433 and $2,889 84,293 78,420
Inventories 86,783 83,803
Deferred income taxes 3,492 3,430
Prepaid taxes 6,740 6,838
Other current assets 2,506 8,892
- ----------------------------------------------------------------------------------------
Total current assets 209,753 207,076
Property, plant and equipment, net 91,015 91,041
Deferred income taxes 372 401
Intangible and other assets, net 37,715 38,450
Goodwill 81,706 81,451
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $420,561 $418,419
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 990 $ 1,038
Accounts payable 51,076 50,199
Book overdrafts 395 71
Accrued liabilities 24,335 23,440
Other current liabilities 30,947 35,578
- ----------------------------------------------------------------------------------------
Total current liabilities 107,743 110,326
Deferred income taxes 12,907 11,660
Long-term debt 141,005 133,067
Other liabilities 31,745 24,051
- ----------------------------------------------------------------------------------------
Total liabilities 293,400 279,104
- ----------------------------------------------------------------------------------------
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, January 31,
2006 2006
====================================================================================================
Commitments and contingencies (see Note 7)
Minority interest 8,498 8,498
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 28,932,928 and 28,828,428 shares issued, respectively 289 288
Additional paid-in capital 73,326 72,599
Treasury stock, at cost 3,378,895 and 3,380,102 shares, respectively (47,067) (47,094)
Accumulated other comprehensive loss (15,775) (11,876)
Retained earnings 107,890 116,900
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 118,663 130,817
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $420,561 $418,419
==================================================================================================
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended
April 30,
2006 2005
===============================================================================
NET SALES $129,167 $122,821
- -------------------------------------------------------------------------------
COST OF SALES 110,490 101,070
- -------------------------------------------------------------------------------
GROSS PROFIT 18,677 21,751
OPERATING EXPENSES:
Selling, general and administrative expenses 15,196 16,679
Research and development expenses 7,440 6,213
- -------------------------------------------------------------------------------
OPERATING LOSS (3,959) (1,141)
- -------------------------------------------------------------------------------
Interest expense, net 3,028 2,004
Other expense, net 315 314
- -------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (7,302) (3,459)
- -------------------------------------------------------------------------------
Provision (benefit) for income taxes 1,570 (1,651)
- -------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (8,872) (1,808)
- -------------------------------------------------------------------------------
Minority interest (214) (99)
- -------------------------------------------------------------------------------
NET LOSS $ (8,658) $ (1,709)
===============================================================================
Net loss per common share - basic $ (0.34) $ (0.07)
===============================================================================
Net loss per common share - diluted $ (0.34) $ (0.07)
===============================================================================
Dividends per share $0.01375 $0.01375
===============================================================================
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Three months ended
April 30,
2006 2005
===============================================================================================
Cash flows from operating activities:
Net loss $ (8,658) $ (1,709)
Adjustments to reconcile net loss to net cash (used) provided by
operating activities:
Minority interest (214) (99)
Stock option compensation 50 --
Depreciation and amortization 4,974 6,098
Deferred taxes 1,218 556
(Gain) loss on disposal of assets (11) 128
Changes in:
Accounts and other notes receivable (5,498) (4,504)
Inventories (2,741) (936)
Other current assets 3,306 (432)
Accounts payable 567 4,279
Accrued liabilities 480 188
Current taxes payable (567) (3,253)
Other current liabilities (268) 1,732
Other liabilities 3,701 235
Other long-term assets (88) 463
Other, net (1,567) (73)
- -----------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (5,316) 2,673
- -----------------------------------------------------------------------------------------------
Cash flows provided (used) by investing activities:
Acquisition of property, plant and equipment (3,478) (1,337)
Proceeds from disposal of property, plant and equipment 18 8
- -----------------------------------------------------------------------------------------------
Net cash used by investing activities (3,460) (1,329)
- -----------------------------------------------------------------------------------------------
Cash flows provided (used) by financing activities:
Reduction of long-term debt (270) (1,364)
Proceeds from new borrowings 8,507 --
Financing cost of long-term debt (627) (735)
Increase (decrease) in book overdrafts 324 (4,029)
Purchase of treasury stock -- (10)
Proceeds from exercise of stock options 695 --
Payment of common stock dividends -- (349)
- -----------------------------------------------------------------------------------------------
Net cash provided (used) in by financing activities 8,629 (6,487)
- -----------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 393 8
- -----------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 246 (5,135)
Cash and cash equivalents, beginning of period 25,693 26,855
- -----------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 25,939 $ 21,720
===============================================================================================
Three months ended
April 30,
2006 2005
===============================================================================================
Schedule of noncash investing and financing activities
Increase (decrease) in property, plant and equipment acquisitions
in accounts payable $ 220 $ (134)
Dividend declared, but not paid $ 352 $ --
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(UNAUDITED)
Three months ended
April 30,
2006 2005
========================================================================================
NET LOSS $ (8,658) $ (1,709)
Other comprehensive income (loss) net of tax:
Change in unrealized (loss) gain on derivative instruments (4,153) 263
Foreign currency translation adjustments 254 (50)
- ----------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS $(12,557) $ (1,496)
========================================================================================
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim consolidated financial statements of C&D
Technologies, Inc. (together with its operating subsidiaries, the "Company")
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report to Stockholders for the
fiscal year ended January 31, 2006. The January 31, 2006 amounts were derived
from the Company's audited financial statements. The consolidated financial
statements presented herein are unaudited but, in the opinion of management,
include all necessary adjustments (which comprise only normal recurring items)
required for a fair statement of the consolidated financial position as of April
30, 2006, and the related consolidated statements of operations, comprehensive
loss and cash flows for the three months ended April 30, 2006 and 2005. However,
interim results of operations may not be indicative of results for the full
fiscal year. The accompanying interim consolidated financial statements of the
Company have been prepared in conformity with accounting principles generally
accepted in the United States of America.
2. SHARE-BASED COMPENSATION
Effective February 1, 2006, the company adopted Statement of Financial
Accounting Standards (SFAS) No. 123 (revised 2004), Share-Based Payment, (SFAS
123R). SFAS 123R requires the recognition of the fair value of stock
compensation in net income. The Company elected the modified prospective method
in adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to
all awards granted or modified after the date of adoption. In addition, the
unrecognized expense of awards not yet vested at the date of adoption is
recognized in net income in the periods after the date of adoption using the
same valuation method (i.e. Black-Scholes Merton Option Pricing Model
(Black-Scholes)) and assumptions determined under the original provisions of
SFAS 123, "Accounting for Stock-Based Compensation," as disclosed in our
previous filings. Prior to the Company's adoption of SFAS 123R, benefits of tax
deductions in excess of recognized compensation costs were reported as operating
cash flows. SFAS 123R requires excess tax benefits be reported as financing cash
inflow rather than as a reduction of taxes paid. For the three month period
ended April 30, 2006, due to the Company's net operating losses, no tax benefits
have been realized from the exercises of options. As a result there is no cash
flow impact related to tax benefits realized from the exercises during the three
months ended April 30, 2006. For the three month period ended April 30, 2005,
there were no options granted or exercised.
Prior to February 1, 2006, the Company accounted for employee stock option
grants using the intrinsic method in accordance with Accounting Principles Board
(APB) Opinion No. 25 "Accounting for Stock Issued to Employees". As such, no
compensation cost was recognized for employee stock options that had exercise
prices equal to the fair market value of the Company's common stock at the date
of granting the option. The Company also complied with the pro forma disclosure
requirements of SFAS No. 123 "Accounting for Stock Based Compensation", and SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure".
STOCK OPTIONS
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. Generally options are granted with a three year vesting
period unless the Compensation Committee deems it appropriate to adjust the
vesting period upon the date of grant. 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
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
during the fiscal year ended January 31, 2006 vested immediately upon the date
of grant. Under the U.K. Stock Option Plan, upon the adoption of SFAS 123R the
Company had unamortized compensation of $35 at February 1, 2006 related to 6,418
options granted in 2003, which are fully vested as of April 30, 2006, and 14,240
options granted in 2004, of which 3,140 are fully vested as of April 30, 2006.
As of April 30, 2006 the unamortized compensation for the remaining option was
$19, which is expected to be recognized over the period of approximately one
year.
Under the provisions of SFAS 123R, the Company recorded $50 of stock
compensation related to stock option awards in its unaudited condensed
consolidated statement of operations for the three months ended April 30, 2006.
The Company granted 13,000 stock option awards during the three months ended
April 30, 2006. Of the awards granted in the first quarter, 8,500 vested
immediately; accordingly, for the quarter ended April 30, 2006, compensation
cost included $32 for these awards that vested immediately. Compensation cost
recognized during the period relates to the awards granted during the first
quarter as well as the outstanding awards that were not vested at February 1,
2006. Based on the current awards outstanding, the estimated compensation
expense for the remainder of the fiscal year is approximately $21.
The estimated fair value of the options granted was calculated using a
Black-Scholes option pricing model. The Black- Scholes model incorporates
assumptions to value stock-based awards. The risk-free rate of interest for
periods within the estimated life of the option is based on U.S. Government
Securities Treasury Constant Maturities over the estimated term of the equity
instrument. Expected volatility is based on the historical volatility of the
Company's stock. The Company uses the shortcut method described in Staff
Accounting Bulletin No. 107 to determine the expected life assumption.
Based on historical experience, the Company has assumed an annualized
forfeiture rate of 4% for share-based compensation awards. This forfeiture rate
relates to the UK stock option plan, which is the only plan that had non-vested
options as of February 1, 2006. Under the true-up provisions of SFAS 123R, the
Company will record additional expense if the actual forfeiture rate is lower
than estimated, and will record a recovery of prior expense if the actual
forfeiture is higher than estimated.
No compensation expense related to stock option grants was recorded in the
consolidated statement of operations for the three months ended April 30, 2005.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
SFAS 123R requires the Company to present pro-forma information for the
comparative period prior to the adoption as if the Company had accounted for all
its employee stock options under the fair value method of the original SFAS 123.
The following table illustrates the effect on net income and net income per
common share if the Company had applied the fair value recognition provisions of
SFAS 123 to stock-based employee compensation in the prior-year periods:
Three months ended
April 30, 2005
- ----------------------------------------------------------------------------------------------
Net loss as reported $ (1,709)
Deduct: Total stock based compensation expense determined
under the fair value method for all grants, net of related tax effects $ (2,309)
Net loss pro forma $ (4,018)
Net loss per common share-basic-as reported $ (0.07)
Net loss per common share-basic-pro forma $ (0.16)
Net loss per common share-diluted-as reported $ (0.07)
Net loss per common share-diluted-pro forma $ (0.16)
The Company used the straight-line attribution method for the amortization
of stock compensation under SFAS 123R for the period after its adoption, and
under APB 25 or SFAS 123 (pro forma disclosure) for the period prior to its
adoption. Total compensation cost of stock options granted but not yet vested,
as of April 30, 2006, was $38, which is expected to be recognized over the
weighted average period of approximately two years.
The following table summarizes activity under all stock option plans for
the respective periods:
Three months ended
April 30,
2006 2005
- --------------------------------------------------------------------------------
Weighted-average fair value of options granted per share $ 4.09 --
Fair value of options vested during the period $ 43 --
Intrinsic value of options exercised $ 246 --
Cash received from option exercises $ 695 --
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
Stock option activity under all plans during the three months ended April 30,
2006 is as follows:
Weighted Average
Weighted Average Remaining
Number of Exercise Price Contractual Term Aggregate
Shares per Share (years) Intrinsic Value
- ----------------------------------------------------------------------------------------------------------
Balance at January 31, 2006 4,073,998 $ 16.62 7.0 $ 702
Options granted 13,000 $ 8.48 9.9 --
Options exercised (104,500) $ 6.65 5.8 $ (148)
Options forfeited (419,820) $ 20.20 5.2 $ (2)
Balance at April 30, 2006 3,562,678 $ 16.46 7.0 $ 552
Exercisable, April 30, 2006 3,547,638 $ 16.47 7.0 $ 552
(1) The aggregate intrinsic value on this table was calculated based on the
positive difference between the closing price of the Company's common stock on
April 30, 2006 (i.e. $8.06) and the exercise price of the underlying options.
Stock options outstanding at April 30, 2006 are summarized in the table below.
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Price Outstanding Life Exercise Price Exercisable Life Exercise Price
- --------------------------------------------------------------------------------------------------------------------
$ 6.81 - $ 9.18 1,200,195 9.5 years $ 7.61 1,195,695 9.5 years $ 7.61
$ 9.80 - $ 14.70 302,524 5.6 years $ 11.44 302,524 5.6 years $ 11.44
$ 14.94 - $ 22.31 1,654,999 6.1 years $ 18.91 1,644,459 6.0 years $ 18.92
$ 26.76 - $ 37.28 347,110 4.9 years $ 33.40 347,110 4.9 years $ 33.40
$ 48.44 - $ 55.94 57,850 4.2 years $ 54.49 57,850 4.2 years $ 54.49
- ----------------------------------------------------------------------------------------------------------------
TOTAL 3,562,678 7.0 years $ 16.46 3,547,638 7.0 years $ 16.47
A summary of the status of the comparative non-vested stock options as of April
30, 2006 is summarized below.
Weighted Average Option
Number of Shares Grant Date
Underlying Options Fair Value
- -------------------------------------------------------------------------------------
Non-vested at February 1, 2006 20,098 $ 8.53
Granted 13,000 $ 8.48
Vested (18,058) $ 6.28
- -----------------------------------------------------------------------------
Non-Vested at April 30, 2006 15,040 $ 7.52
- -----------------------------------------------------------------------------
The per share weighted average value of stock options granted in the first three
months of fiscal year 2007 was $8.48. The fair value was estimated on the grant
date using the Black-Sholes option pricing model with the following average
assumptions.
Risk-free interest rate 4.66% - 4.97%
Dividend yield 0.60% - 0.66%
Volatility factor 47.51% - 54.25%
Expected lives 5 - 6 years
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
3. NEW ACCOUNTING PRONOUNCEMENTS
In November 2004, the Financial Accounting Standards Board (FASB) issued
SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin No.
43, Chapter 4," which 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 was effective for inventory costs incurred beginning February 1, 2006.
Adoption of this standard did not have a material impact on C&D's consolidated
operations, financial position or cash flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain
Hybrid Instruments". 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 need
certain criteria. The Company will assess the impact of adoption of this
standard on its consolidated operations, financial position or cash flows as new
financing arrangements arise.
4. INVENTORIES
Inventories consisted of the following:
April 30, January 31,
2006 2006
================================================================================
Raw materials $37,134 $36,828
Work-in-process 15,629 13,993
Finished goods 34,020 32,982
- -----------------------------------------------------------------------------
Total $86,783 $83,803
=============================================================================
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. INCOME TAXES
Three months ended
April 30,
2006 2005
- --------------------------------------------------------------------------------
Provision (benefit) for income taxes $ 1,570 $ (1,651)
Effective income tax rate (21.5)% 47.7%
Tax expense in the three months ended April 30, 2006 is due to a
combination of tax expense in certain profitable foreign subsidiaries and the
lack of tax benefit recognized in certain jurisdictions where the Company
incurred a loss resulting in an increase to the Company's valuation allowance
due to the lack of evidence regarding future realization of certain deferred tax
assets coupled with the deferred tax expense resulting from the amortization of
goodwill for tax which the corresponding deferred tax liability cannot be used
as a source of income to substantiate the realizability of deferred tax assets.
These items are partially offset by the tax effect of the resolution of certain
state tax matters. The tax benefit recorded in the three months ended April 30,
2005, principally resulted from the prior period recognition of deferred tax
assets on reported losses.
6. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted-average number of
shares of Common Stock outstanding. Net loss per common share - diluted reflects
the potential dilution that could occur if stock options were exercised.
Weighted-average common shares - basic and diluted were as follows:
Three months ended
April 30,
2006 2005
================================================================================
Weighted-average common shares -
basic and diluted 25,484,971 25,345,947
================================================================================
The dilutive effect of stock options outstanding at April 30, 2006 and
2005 was not included in the calculation of diluted loss per share for the three
month periods ended April 30, 2006 and 2005 because to do so would have had an
anti-dilutive effect, as the Company had a net loss for each of these periods.
The weighted average number of shares excluded from the diluted loss per share
computation was 135,668 and 1,498,541 for the three-month periods ended April
30, 2006 and 2005. Additionally, 8,854,785 of dilutive securities issuable in
connection with convertible bonds have been excluded from the diluted loss per
share calculation for the three months ended April 30, 2006 because their effect
would reduce the loss per share.
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES
Legal and 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%.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
In August 2002, the Company was notified of its involvement as a PRP at
the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, continues
to negotiate with NL at this site regarding the Company's share of the allocated
liability.
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 (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 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
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
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 Resource Conservation and Recovery Act corrective action program. The
Company has conducted testing in accordance with an investigation work plan and
has submitted the test results to EPA. 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.
The Company accrues reserves for liabilities in its consolidated financial
statements and periodically reevaluates the reserved amounts for these
liabilities in view of the most current information available in accordance with
SFAS No. 5, "Accounting for Contingencies." As of April 30, 2006 and January 31,
2006, accrued environmental reserves totaled $3,714 and $3,775, respectively,
consisting of $2,473 and $2,534 in other current liabilities and $1,241 and
$1,241 in other liabilities, respectively. 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.
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
8. OPERATIONS BY REPORTABLE SEGMENT
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies (UPS), cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television (CATV) signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large Original Equipment Manufacturers (OEMs) of
telecommunications and networking equipment, as well as office and industrial
equipment. In addition, the division also manufactures power conversion products
sold into military and CATV applications as well as digital panel meters and
data acquisition components.
The Motive Power division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
Summarized financial information related to the Company's business
segments for the three months ended April 30, 2006 and 2005, is shown below. All
sales between business segments have been eliminated.
Standby Power Motive
Three months ended April 30, 2006 Power Electronics Power Consolidated
=============================================================================================
Net sales $ 66,711 $ 47,688 $ 14,768 $ 129,167
Operating income (loss) $ 605 $ (2,594) $ (1,970) $ (3,959)
Three months ended April 30, 2005
=============================================================================================
Net sales $ 60,537 $ 48,361 $ 13,923 $ 122,821
Operating income (loss) $ 2,192 $ (918) $ (2,415) $ (1,141)
Many of the Company's facilities manufacture products for more than one
segment. Therefore, it is not practical to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
9. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, certain commodity prices and
changes in currency exchange rates. The Company manages these risks through
normal operating and financing activities and when appropriate through the use
of derivative instruments.
The Company does not invest in derivative securities for speculative
purposes, but does enter into hedging arrangements in order to reduce its
exposure to fluctuations in interest rates, the price of lead as well as to
fluctuations in exchange rates. The Company applies hedge accounting in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," 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, that are recognized currently in earnings, act as an economic
offset to changes in the fair value of the underlying hedged item(s).
The following table provides the fair value of the Company's derivative
contracts which include foreign exchange contracts and forward commodity
contracts.
Fair Value at Fair Value at
April 30, January 31,
2006 2006
=========================================================================
Foreign currency contracts $ (501) $ (38)
Commodity forward contracts $ 391 $ 6,507
The commodity forwards are designated as cash flow hedges. Therefore,
changes in their fair value, net of tax, are recorded in accumulated other
comprehensive income.
Hedge accounting was not applied by the Company for its foreign exchange
derivatives; however, a natural hedging relationship exists between the
underlying hedged items and the derivative instrument itself. Changes in fair
value of the foreign exchange derivatives are recorded in earnings each period.
The Company received $3,099 in cash proceeds from commodity contracts
terminated by the counter party during first quarter of fiscal year 2007. This
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.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. WARRANTY
The Company provides for estimated product warranty expenses when the
related products are sold. Because warranty estimates are forecasts that are
based on the best available information, primarily historical claims experience,
claims costs may differ from amounts provided. An analysis of changes in the
liability for product warranties follows:
Three months ended
April 30,
2006 2005
===============================================================================
Balance at beginning of period $ 7,630 $ 8,303
Current year provisions 1,665 1,791
Expenditures (1,656) (1,358)
Effect of foreign currency translation 3 2
- -------------------------------------------------------------------------------
Balance at end of period $ 7,642 $ 8,738
===============================================================================
As of April 30, 2006, accrued warranty obligations of $7,642 include
$3,691 in current liabilities and $3,951 in other liabilities. As of January 31,
2006, accrued warranty obligations of $7,630 include $4,020 in current
liabilities and $3,610 in other liabilities.
11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard requires the
disclosure of the components of net periodic benefit cost recognized during
interim periods.
Pension Benefits Postretirement Benefits ---------------------
- ----------------------- Three months ended Three months ended April 30, April
30, 2006 2005 2006 2005
================================================================================================
Components of net periodic benefit cost:
Service cost $ 475 $ 500 $ 50 $ 61
Interest cost 1,051 1,031 63 65
Expected return on plan assets (1,213) (1,286) -- --
Amortization of prior service costs 3 5 (7) 29
Recognized actuarial loss 519 435 -- --
- -----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 835 $ 685 $ 106 $ 155
===============================================================================================
The Company is not required to make any contributions to its U.S. pension
plans for fiscal 2007. However, based upon preliminary estimates, the Company
expects to make a discretionary contribution of approximately $1,520 to one of
its U.S. pension plans during fiscal year 2007. The Company made a contribution
of $16 to its Japanese pension in the first quarter of fiscal 2007. The Company
plans to make additional contributions of approximately $45 to its Japanese plan
for fiscal year 2007.
The Company also expects to make contributions totaling approximately $266
to the two Company sponsored postretirement benefit plans for fiscal year 2007.
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
12. DEBT
On March 30, 2006, the Company executed a first amendment to its Credit
Facility and its Term Loan. 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 to both its Term Loan
and Credit Facility lenders. 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.
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. At April 30, 2006, the Company was in compliance with its
covenants.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Three Months Ended April 30, 2006, compared to Three Months Ended April
30, 2005
Within the following discussion, unless otherwise stated, "quarter" and
"three-month" period" refer to the first quarter of fiscal year 2007. All
comparisons are with the corresponding period in the prior year, unless
otherwise stated.
Net sales for the first quarter of fiscal year 2007 increased $6,346 or 5%
to $129,167 from $122,821 in the first quarter of fiscal year 2006. This
increase resulted primarily from higher sales in the Standby Power Division,
which had increased sales of $6,174 or 10%. This increase was primarily the
result of higher sales to the telecom and UPS markets. Approximately $1,650 of
this increase was due to price increases with the remainder due to increases in
volume. Motive Power sales increase by $845 or 6%. Price increases accounted for
approximately $1,300. Volume in the Motive Power Division was slightly down
compared with the comparable period of the prior year. These increases were
partially offset by a decrease in the Power Electronics Division of $673 or 1%.
Power Electronics Division results were negatively impacted by RoHS conversion
disruption and raw material component availability.
Gross profit for the first quarter of fiscal year 2007 decreased $3,074 or
14% to $18,677 from $21,751. Margins decreased to 14.5% from 17.7% in the prior
year. Gross profit in the Power Electronics Division decreased $1,983, with
margins decreasing from 22.3% to 18.5%. The decrease was primarily due to the
domestic sourcing of certain new business opportunities, which resulted in
negative first quarter fiscal year 2007 margin performance. Production under
these contracts has been transferred to manufacturers in Asia beginning in May
2006, which should provide positive margin improvement in the Company's second
quarter and beyond. In addition, gross margins in the Power Electronics Division
were impacted by other costs associated with the Company's transfer of
production to new Asian contract manufacturers as well as general increases in
raw material and component costs. Gross profit in the Standby Power Division
decreased $1,638, with margins decreasing from 17.0% to 12.9%. The decrease in
gross profit and gross profit margins was primarily due to an increase in
material costs. Lead costs, net of hedges, increased by approximately $2,154 in
the first quarter of fiscal year 2007 as compared to the comparable period in
the prior fiscal year. Other raw materials such as steel, resins and copper also
contributed to the decrease. Increases in raw material costs more than offset
the Company's pricing actions. Gross profit in the Motive Power Division
increased by $547, with margins increasing from 5.0% to 8.4%. In the first
quarter of the prior fiscal year, the Motive Power Division had significant
business at low or negative margins.
Selling, general and administrative expenses for the first quarter of
fiscal year 2007 decreased $1,483 or 9% to $15,196 from $16,679. This decrease
was primarily due to severance accruals in the amount of $2,078 in the
comparative period of the prior fiscal year as compared to severance accruals of
$442 in the current fiscal year. In addition, external Sarbanes-Oxley compliance
costs decreased in the amount of $372.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Research and development expenses for the first quarter of fiscal year
2007 increased $1,227 or 20% to $7,440 from $6,213. As a percentage of sales,
research and development expenses increased from 5.1% during the first quarter
of fiscal year 2006 to 5.8% during the first quarter of fiscal year 2007.
Operating loss for the first quarter of fiscal year 2007 increased $2,818
to an operating loss of $3,959 from an operating loss of $1,141 in the first
quarter of fiscal year 2006.
Analysis of Change in Operating Income (Loss)
First Quarter of Fiscal Year 2007 vs. First Quarter of Fiscal Year 2006
Power
Standby Power Electronics Motive Power
Division Division Division Consolidated
- --------------------------------------------------------------------------------------------------
Operating income (loss) - 1Q06 $ 2,192 $ (918) $(2,415) $(1,141)
Lead - increased costs (3,694) -- (488) (4,182)
Lead - hedge income 1,540 -- 125 1,665
Pricing 1,651 -- 1,300 2,951
Volume/mix 1,493 (1,768) (57) (332)
Contract manufacturers transition costs -- (1,150) -- (1,150)
RoHS -- (589) -- (589)
Fiscal 2006 management changes 1,052 824 497 2,373
Fiscal 2007 management changes (451) (57) (84) (592)
Decrease in external Sarbanes-Oxley
compliance costs 229 106 37 372
Decrease (increase) in warranty costs 560 61 (495) 126
Other- including material costs (3,967) 897 (390) (3,460)
- -----------------------------------------------------------------------------------------------
Operating income (loss) - 1Q07 $ 605 $(2,594) $(1,970) $(3,959)
- -----------------------------------------------------------------------------------------------
Interest expense, net, increased $1,024 or 51% in the first quarter of
fiscal year 2007, primarily due to higher debt levels, coupled with a higher
effective interest rate.
Income tax expense of $1,570 was recorded in the first quarter of fiscal
year 2007, compared to an income tax benefit of $1,651 in the first quarter of
fiscal year 2006. Tax expense in the three months ended April 30, 2006 is due to
a combination of tax expense in certain profitable foreign subsidiaries and the
lack of tax benefit recognized in certain jurisdictions where the Company
incurred a loss resulting in an increase to the Company's valuation allowance
due to the lack of evidence regarding future realization of certain deferred tax
assets. These items are partially offset by the tax effect of the resolution of
certain state tax matters. The tax benefit recorded in the three months ended
April 30, 2005, principally resulted from the prior period recognition of
deferred tax assets on reported losses.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by the Company.
In the first quarter of the current fiscal year, the joint venture had minority
interest of $(214) at the Shanghai facility compared to a minority interest of
$(99) in the comparable period of the prior fiscal year.
As a result of the above, a net loss was recorded of $8,658 compared to a
net loss of $1,709 in the prior year. On a per share basis, the net loss was
$0.34 compared to a net loss of $0.07 - basic and fully diluted for the first
quarter of fiscal years 2007 and 2006, respectively.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Other Comprehensive Loss
Other comprehensive loss increased from $1,496 in the first three months
of fiscal year 2007 to $12,557 in first three months of fiscal year 2007. This
increase was primarily due to an increase in the Company's net loss, coupled
with a net unrealized loss on derivative instruments in the three months ended
April 30, 2006 as compared with a net gain on derivative instruments in the
three months ended April 30, 2005.
Adoption of SFAS 123R
Effective February 1, 2006, the company adopted SFAS 123R. SFAS 123R
requires the recognition of the fair value of stock compensation in net income.
The Company elected the modified prospective method in adopting SFAS 123R. Under
this method, the provisions of SFAS 123R apply to all awards granted or modified
after the date of adoption. In addition, the unrecognized expense of awards not
yet vested at the date of adoption is recognized in net income in the periods
after the date of adoption using the same valuation method (i.e. Black-Scholes)
and assumptions determined under the original provisions of SFAS 123,
"Accounting for Stock-Based Compensation," as disclosed in our previous filings.
The estimated annual increase in share-based compensation expense relating
to the adoption of SFAS 123R is approximately $71 in fiscal year 2007, including
the $50 recognized for the three months ended April 30, 2006. (See Note 2 of the
condensed consolidated financial statements in item 1 for further detail).
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Liquidity and Capital Resources
Net cash used by operating activities was $5,316 for the three months
ended April 30, 2006, compared to net cash provided by operating activities of
$2,673 in the comparable period of the prior fiscal year. The decrease in net
cash provided by operating activities was primarily due to: (i) a net loss of
$8,658 in the current fiscal year as compared to a net loss of $1,709 in the
comparable period of the prior fiscal year; (ii) an increase of $567 in accounts
payable in the first three months of fiscal year 2007 as compared to an increase
of $4,279 in the first three months on fiscal year 2006; and (iii) a decrease of
$268 in other current liabilities in the three months ended April 30, 2006 as
compared to an increase of $1,732 in the three months ended April 30, 2005. The
increase in other current liabilities in the prior year is primarily related to
the severance accrual for the former Chief Executive Officer. These changes were
partially offset by (i) a decrease of $3,306 in other current assets in the
current fiscal year as compared to an increase of $432 in the comparable period
of the prior fiscal year; (ii) an increase of $3,701 in other liabilities in the
first three months of fiscal year 2007 as compared to an increase of $235 in the
first three months of fiscal year 2006; and (iii) a decrease in current taxes
payable of $567 in the three months ended April 30, 2006 as compared to a
decrease of $3,253 in the three months ended April 30, 2005. The decrease in
other current assets in the three months ended April 30, 2006 was primarily due
to $3,099 received on a lead hedge settlement in February, 2006.
Net cash used by investing activities increased $2,131 to $3,460 in the
first three months of fiscal year 2007 as compared to $1,329 in the first three
months of the prior fiscal year, primarily due to expenditures on the
construction of a new battery manufacturing facility in Shanghai, China.
The Company had net cash provided by financing activities of $8,629 in the
first three months of fiscal year 2007 as compared to net cash used in financing
activities of $6,487 in the first three months of the prior fiscal year. Current
year financing activities included $8,507 in proceeds from new borrowings,
primarily used to fund operations and the acquisition of property, plant and
equipment. Prior year financing activities included a decrease in book
overdrafts and the reduction of long-term debt.
Our 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 April 30, 2006, the maximum availability calculated under
the borrowing base was $56,659, of which $16,650 was funded, and $7,212 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 fiscal year 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.
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 for at least the next twelve months. Capital expenditures
incurred during the first three months of fiscal year 2007 were primarily
incurred for the construction of our new Shanghai joint-venture facility, 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).
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
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.
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 April 30, 2006, the Company had $2,158 of letters of credit with
other financial institutions that do not reduce the Company's availability under
its Credit Facility.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
FORWARD-LOOKING STATEMENTS
The Company is furnishing information that contains certain statements
that are, or may be deemed to be, "forward-looking statements" within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. All statements, other
than statements of historical facts, included herein are forward-looking
statements. Included among forward-looking statements are, among other things:
o fluctuations in prices and availability of raw materials,
particularly lead;
o the success of integration of acquired businesses and the ability to
make additional acquisitions or form strategic alliances;
o restrictive loan covenants may impact our ability to operate our
business and to pursue business strategies;
o we may have additional impairment charges;
o economic conditions or market changes in certain market sectors in
which the Company conducts business;
o changes in pricing environment;
o success or timing of new product development;
o foreign operations;
o delays in the relocation of our Shanghai facility or the failure to
complete that relocation;
o political, economic and social changes, or acts of terrorism or war;
o reliance on third parties whose operations are outside our control;
o success of maintaining our operations through capital expenditures;
o success of productivity initiatives, including rationalizations,
relocations or consolidations;
o impact of changes in management;
o costs of complying with environmental laws and regulations and
liabilities;
o customers that become insolvent or bankrupt;
o successful collective bargaining with our unionized workforce;
o changes in our product mix;
o consolidation of existing enterprise resource planning systems;
o failure of customers to renew supply agreement;
o protection of our proprietary intellectual property and technology;
o statements regarding the Company's business strategy, business plans
or any other plans, forecasts or objectives, any or all of which are
subject to change;
o statements regarding any SEC or other governmental, regulatory,
administrative or other public body actions, requirements, permits
or decisions, and;
o any other statements that relate to nonhistorical or future
information.
These forward-looking statements are often identified by the use of terms
and phrases such as "achieve," "anticipate," "believe," "estimate," "expect,"
"forecast," "plan," "project," "propose," "strategy" and similar terms and
phrases. Although the Company believes that the expectations reflected in these
forward-looking statements are reasonable, they do involve assumptions, risks
and uncertainties, and these expectations may prove to be incorrect. The reader
should not place undue reliance on these forward-looking statements, which speak
only as of the date of this report.
The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those discussed in "Risk Factors" included in the Company's
Form 10-K annual report for the year ended January 31, 2006.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, certain raw material commodity
prices, and changes in currency exchange rates. The Company manages these risks
through normal operating and financing activities and when appropriate through
the use of derivative instruments. It does not invest in derivative securities
for speculative purposes, but enters into hedging arrangements in order to
reduce its exposure to fluctuations in interest rates, the price of lead, as
well as to fluctuations in exchange rates.
Our financial instruments that are subject to interest rate risk include
our mortgage, capital leases, term and revolving credit facilities and our
convertible notes. 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.
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 Standby Power and Motive Power
divisions. 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).
Additional disclosure regarding various market risks were set forth in the
Company's fiscal year 2006 Annual Report on Form 10-K filed with the SEC.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 4. Controls and Procedures:
Management, with the participation of its Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by it in the reports that it files or submits under the Exchange Act
and/or disclosure controls and procedures are also effective to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosures.
Internal Control over Financial Reporting:
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
28
PART II. OTHER INFORMATION
Item 1. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
Total Number of
Shares Purchased Maximum Number
as Part of (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
- ----------------------------------------------------------------------------------------------------------------
February 1 - February 28, 2006 -- -- -- 1,000,000
March 1 - March 31, 2006 -- -- -- 1,000,000
April 1 - April 30, 2006 -- -- -- 1,000,000
- ------------------------------------------------ ----------
Total -- -- --
================================================ ==========
On September 30, 2004, the Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1 million shares of C&D Technologies common stock having a total purchase
price of no greater than $25 million. This program entirely replaces and
supersedes all previously authorized stock repurchase programs.
Restrictions on Dividends and Treasury Stock Purchases:
The Company entered into two new credit facilities on December 7, 2005.
Both agreements limit restricted payments including dividends and Treasury Stock
purchases to no more than $250,000 for Treasury Stock in any one calendar year
and $1,750,000 for dividends for any one calendar year subject to adjustments of
up to $400,000 per year in the case of the conversion of debt to stock per the
terms of 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
$30,000,000 in excess availability for a period of thirty days prior to the
dividend. The Term Loan also includes a maximum leverage ratio. The Company may
declare and pay a dividend provided these conditions are met and there does not
exist an event of default.
Item 2. Submission of Matters to a Vote of Security Holders
None
29
Item 3. Exhibits.
10.1 Amendment No. 1 to the Company's 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 thereto
dated March 30, 2006 (incorporated by reference to C&D's Current
Report on Form 8-K dated April 5, 2006).
10.2 Amendment No. 1 to the Company's 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. thereto dated March 30, 2006
(incorporated by reference to C&D's Current Report on Form 8-K dated
April 5, 2006).
10.3 Employment Agreement dated February 1, 2006, between Charles R.
Giesige and C&D (incorporated by reference to Exhibit 10.34 to C&D's
Annual Report on Form 10-K for the period ended January 31, 2006).
10.4 Release Agreement dated March 2, 2006, between C&D Technologies,
Inc. and Charles R. Giesige (incorporated by reference to Exhibit
10.35 to C&D's Annual Report on Form 10-K for the period ended
January 31, 2006).
10.5 Employment Agreement dated February 1, 2006, between James D. Dee
and C&D (incorporated by reference to Exhibit 10.36 to C&D's Annual
Report on Form 10-K for the period ended January 31, 2006).
10.6 Employment Agreement dated February 1, 2006, between Ian J. Harvie
and C&D (incorporated by reference to Exhibit 10.37 to C&D's Annual
Report on Form 10-K for the period ended January 31, 206).
10.7 Employment Agreement dated February 1, 2006, between William E.
Bachrach and C&D (incorporated by reference to Exhibit 10.38 to
C&D's Annual Report on Form 10-K for the period ended January 31,
2006).
10.8 Amendment dated February 1, 2006, to the Employment Agreement
between C&D Technologies and Dr. Jeffrey A. Graves (incorporated by
reference to Exhibit 10.51 to C&D's Annual Report on Form 10-K for
the period ended January 31, 2006).
10.9 Agreement for Termination of Manufacturing Agreement and Transfer of
Manufacturing Operations between C&D Technologies (CPS), LLC, C&D
Technologies, Inc. and Celestica Hong Kong Limited dated April 3,
2006 (filed herewith). 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 Rule
24b-2 promulgated thereunder.
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).
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
June 5, 2006 By: /s/ Jeffrey A. Graves
-----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
June 5, 2006 By: /s/ Ian J. Harvie
-----------------------------------
Ian J. Harvie
Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
31
EXHIBIT INDEX
Item 3. Exhibits.
10.9 Agreement for Termination of Manufacturing Agreement and Transfer of
Manufacturing Operations between C&D Technologies (CPS), LLC, C&D
Technologies, Inc. and Celestica Hong Kong Limited dated April 3,
2006. 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 Rule 24b-2 promulgated
thereunder.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Section 1350 Certification of the President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Section 1350 Certification of the Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32