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