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 July 31, 2006.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
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 requests), 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 July 31,
2006: 25,613,042
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - July 31, 2006 and January 31, 2006 3
Consolidated Statements of Operations - Three and Six Months Ended 5
July 31, 2006 and 2005
Consolidated Statements of Cash Flows - Six Months Ended 6
July 31, 2006 and 2005
Consolidated Statements of Comprehensive (Loss) Income -
Three and Six Months Ended July 31, 2006 and 2005 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 26
Item 3 Quantitative and Qualitative Disclosures about Market Risk 33
Item 4 Controls and Procedures 34
Part II OTHER INFORMATION
Item 1A Risk Factors 35
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 36
Item 4 Submission of Matters to a Vote of Security Holders 37
Item 6 Exhibits 38
SIGNATURES 39
EXHIBIT INDEX 40
2
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(UNAUDITED)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
July 31, January 31,
2006 2006
============================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 21,623 $ 25,693
Accounts receivable, less allowance for doubtful accounts
of $2,404 and $2,889 85,463 78,420
Inventories 90,536 83,803
Deferred income taxes 3,309 3,430
Prepaid taxes 6,774 6,838
Other current assets 2,560 8,892
- ------------------------------------------------------------------------------------------------------------
Total current assets 210,265 207,076
Property, plant and equipment, net 94,237 91,041
Deferred income taxes 554 401
Intangible and other assets, net 36,755 38,450
Goodwill 81,956 81,451
- ------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 423,767 $ 418,419
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 921 $ 1,038
Accounts payable 41,309 50,199
Book overdrafts 4,230 71
Accrued liabilities 25,464 23,440
Other current liabilities 32,010 35,578
- ------------------------------------------------------------------------------------------------------------
Total current liabilities 103,934 110,326
Deferred income taxes 12,546 11,660
Long-term debt 153,097 133,067
Other liabilities 33,007 24,051
- ------------------------------------------------------------------------------------------------------------
Total liabilities 302,584 279,104
- ------------------------------------------------------------------------------------------------------------
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
July 31, January 31,
2006 2006
=============================================================================================================
Commitments and contingencies (see Note 7)
Minority interest 8,289 8,498
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 29,006,560 and 28,828,428 shares issued, respectively 290 288
Additional paid-in capital 73,912 72,599
Treasury stock, at cost 3,393,518 and 3,380,102 shares, respectively (47,127) (47,094)
Accumulated other comprehensive loss (18,464) (11,876)
Retained earnings 104,283 116,900
- -------------------------------------------------------------------------------------------------------------
Total stockholders' equity 112,894 130,817
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 423,767 $ 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 Six months ended
July 31, July 31,
2006 2005 2006 2005
================================================================================================================================
NET SALES $ 132,430 $ 123,076 $ 261,597 $ 245,897
- --------------------------------------------------------------------------------------------------------------------------------
COST OF SALES 108,779 99,639 219,269 200,709
- --------------------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 23,651 23,437 42,328 45,188
OPERATING EXPENSES:
Selling, general and administrative expenses 15,762 14,345 30,958 31,024
Research and development expenses 7,256 6,311 14,696 12,524
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 633 2,781 (3,326) 1,640
================================================================================================================================
Interest expense, net 3,372 2,309 6,400 4,313
Other expense (income), net 115 (258) 430 56
================================================================================================================================
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (2,854) 730 (10,156) (2,729)
- --------------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 855 (256) 2,425 (1,907)
- --------------------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (3,709) 986 (12,581) (822)
- --------------------------------------------------------------------------------------------------------------------------------
Minority interest (102) (64) (316) (163)
- --------------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (3,607) $ 1,050 $ (12,265) $ (659)
================================================================================================================================
Net (loss) income per common share - basic $ (0.14) $ 0.04 $ (0.48) $ (0.03)
================================================================================================================================
Net (loss) income per common share - diluted $ (0.14) $ 0.04 $ (0.48) $ (0.03)
================================================================================================================================
Dividends per share $ -- $ 0.01375 $ 0.01375 $ 0.02750
================================================================================================================================
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)
Six months ended
July 31,
2006 2005*
==============================================================================================================
Cash flows from operating activities:
Net loss $ (12,265) $ (659)
Adjustments to reconcile net loss to net cash (used) provided by
operating activities:
Minority interest (316) (163)
Stock option compensation 174 --
Depreciation and amortization 9,959 11,883
Deferred taxes 850 (256)
(Gain) loss on disposal of assets (33) 214
Annual retainer to Board of Directors paid by the issuance of common stock 224 198
Changes in:
Accounts and other notes receivable (6,559) (2,570)
Inventories (6,329) (4,421)
Other current assets (108) (122)
Accounts payable (9,475) 6,492
Accrued liabilities 1,879 177
Income taxes payable 73 (4,199)
Other current liabilities (982) 3,590
Other liabilities 4,801 911
Other long-term assets 118 906
Other, net (522) 1,701
- --------------------------------------------------------------------------------------------------------------
Net cash (used) provided by operating activities (18,511) 13,682
- --------------------------------------------------------------------------------------------------------------
Cash flows provided (used) by investing activities:
Acquisition of property, plant and equipment (10,262) (4,136)
Proceeds from disposal of property, plant and equipment 45 71
- --------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (10,217) (4,065)
- --------------------------------------------------------------------------------------------------------------
Cash flows provided (used) by financing activities:
Reduction of long-term debt (524) (7,014)
Proceeds from new borrowings 20,555 --
Financing cost of long-term debt (700) (735)
Increase (decrease) in book overdrafts 4,159 (7,575)
Purchase of treasury stock (122) (154)
Proceeds from issuance of common stock, net 975 47
Payment of common stock dividends (352) (349)
- --------------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities 23,991 (15,780)
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 667 223
- --------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (4,070) (5,940)
Cash and cash equivalents, beginning of period 25,693 26,855
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 21,623 $ 20,915
==============================================================================================================
The accompanying notes are an integral part of these statements.
* Reclassified for comparative purposes.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(UNAUDITED)
Six months ended
July 31,
2006 2005
======================================================================================================
Increase (decrease) in property, plant, and equipment acquisitions
in accounts payable $ 444 $ (440)
Dividend declared, but not paid $ -- $ 350
Tax effect of options exercised $ -- $ 7
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2006 2005 2006 2005
====================================================================================================================
NET (LOSS) INCOME $(3,607) $ 1,050 $(12,265) $ (659)
Other comprehensive income (loss) net of tax:
Net unrealized loss on derivative instruments (2,874) (453) (7,027) (190)
Foreign currency translation adjustments 185 (183) 439 (233)
- --------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE (LOSS) INCOME $(6,296) $ 414 $(18,853) $(1,082)
====================================================================================================================
The accompanying notes are an integral part of these statements.
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
These unaudited consolidated financial statements include all adjustments,
consisting only of normal recurring accruals, which management considers
necessary for a fair statement of the consolidated financial position, results
of operations, cash flows and comprehensive income of C&D Technologies, Inc.
(together with its operating subsidiaries, the "Company") for the interim
periods presented. Results for the interim periods are not necessarily
indicative of results for the entire year. Such statements are presented in
accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by generally accepted accounting principles or those normally
made on Form 10-K. These statements 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.
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) 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 to be
reported as a financing cash inflow rather than as a reduction of taxes paid.
For the three and six month periods ended July 31, 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 and six months ended July 31, 2006.
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".
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
STOCK OPTIONS
The Company has three stock option plans: The 1998 Stock Option Plan
reserved 3,900,000 shares of Common Stock; the U.K. Stock Option Plan reserved
500,000 shares of Common Stock; and the 2007 Stock Incentive Plan reserved
1,500,000 shares for option grants. In addition, stock can be granted to
officers, directors, employees and consultants of the Company, or an affiliate.
The 1996 Stock Option Plan expired on July 25, 2006. The 2007 Stock Incentive
Plan was approved by the stockholders on June 1, 2006. 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 adjusted
by the Compensation Committee. 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 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 fiscal year 2004, and 13,680 options granted in fiscal year 2005. As
of July 31, 2006 the unamortized compensation for these options was $12, which
is expected to be recognized over the weighted average period of approximately
nine months.
Under the provisions of SFAS 123R, the Company recorded $124 and $174 of
stock compensation related to stock option awards in its unaudited condensed
consolidated statement of operations for the three and six months ended July 31,
2006. The impact on earnings per share for the three and six months ended July
31, 2006 was less than $0.01. The Company granted 82,000 and 95,000 stock option
awards during the three and six months ended July 31, 2006. Of the awards
granted in the second quarter, 32,000 vested immediately; accordingly, for the
quarter ended July 31, 2006, compensation cost included $105 for these awards
that vested immediately. Of awards granted during the first six months of fiscal
year 2007, 40,500 vested immediately; accordingly for the six months ended July
31, 2006, compensation cost included $137 for these awards that vested
immediately. Compensation cost recognized during these periods relates to the
awards granted during the period 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 $38.
The estimated fair value of the options granted was calculated using a
Black Scholes Merton option pricing model (Black Scholes). 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 contractual 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 our historical experience, we have assumed an annualized
forfeiture rate of 10% for share-based compensation awards. Under the true-up
provisions of SFAS 123R, we will record additional expense if the actual
forfeiture rate is lower than we estimated, and will record a recovery of prior
expense if the actual forfeiture is higher than we estimated.
No compensation expense related to stock option grants was recorded in the
consolidated statement of operations for the three and six months ended July 31,
2005.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
SFAS No. 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
No. 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 No. 123 to stock-based employee compensation in the
prior-year periods:
Three months ended Six months ended
July 31, 2005 July 31, 2005
=================================================================================================================
Net income (loss) as reported $ 1,050 $ (659)
Deduct: Total stock based compensation expense determined
under the fair value method for all grants, net of related tax effects $ 1,364 $ 3,673
=================================================================================================================
Net loss pro forma $ (314) $ (4,332)
=================================================================================================================
Net income (loss) per common share-basic-as reported $ 0.04 $ (0.03)
Net loss per common share-basic-pro forma $ (0.01) $ (0.17)
Net income (loss) per common share-diluted-as reported $ 0.04 $ (0.03)
Net loss per common share-diluted-pro forma $ (0.01) $ (0.17)
The Company used the straight-line attribution method for the amortization
of stock compensation under SFAS No. 123R for the period after its adoption, and
under APB No. 25 or SFAS No. 123 (pro forma disclosure) for the period prior to
its adoption. Total compensation cost of stock options granted but not yet
vested, as of July 31, 2006, was $172, which is expected to be recognized over
the weighted average period of approximately 16 months.
The following table summarizes activity under all stock option plans for
the respective periods:
Three months ended Six months ended
July 31, July 31,
2006 2005 2006 2005
====================================================================================================================
Weighted-average fair value of options granted per share $3.40 $ 3.46 $3.50 $ 3.46
Fair value of options vested during the period $ 203 $2,277 $ 246 $10,463
Intrinsic value of options exercised $ 27 $ 17 $ 273 $ 17
Cash received from option exercises $ 280 $ 47 $ 975 $ 47
11
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 six months ended July 31, 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 $ 177
Options granted 95,000 $ 6.77 9.8 $ 50
Options exercised (145,450) $ 6.70 6.5 $ (69)
Options forfeited (871,795) $ 19.47 5.3 $ (3)
Balance at July 31, 2006 3,151,753 $ 15.99 7.0 $ 155
Exercisable, July 31, 2006 3,090,413 $ 16.15 6.9 $ 113
The aggregate intrinsic value on this table was calculated based on the positive
difference between the closing price of our common stock on July 31, 2006 (i.e.
$7.10) and the exercise price of the underlying options.
Stock options outstanding at July 31, 2006 are summarized in the table below.
Weighted Weighted
Average Weighted Average Weighted
Remaining Average Remaining Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Price Outstanding Life Price Exercisable Life Price
- ----------------------------------------------------------------------------------------------------------------
$ 6.26 - $ 9.18 1,181,145 9.3 years $ 7.55 1,126,645 9.3 years $ 7.60
$ 9.80 - $ 14.50 255,224 5.9 years $ 11.36 255,224 5.9 years $ 11.36
$ 14.94 - $ 22.31 1,363,794 5.9 years $ 18.84 1,356,954 5.9 years $ 18.85
$ 26.76 - $ 37.28 295,540 4.6 years $ 33.25 295,540 4.6 years $ 33.25
$ 48.44 - $ 55.94 56,050 4.0 years $ 54.44 56,050 4.0 years $ 54.44
- ----------------------------------------------------------------------------------------------------------------
TOTAL 3,151,753 7.0 years $ 15.99 3,090,413 6.9 years $ 16.15
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
A summary of the status of the comparative non-vested stock options as of
July 31, 2006 is summarized below.
Weighted Average Option
Number of Shares Grant Date
Underlying Options Fair Value
- -------------------------------------------------------------------------------------------------
Non-vested at January 31, 2006 20,098 $ 8.53
Granted 95,000 $ 3.50
Vested (53,758) $ 4.57
- -------------------------------------------------------------------------------------------------
Non-Vested at July 31, 2006 61,340 $ 4.27
- -------------------------------------------------------------------------------------------------
Three months ended Six months ended
July 31, July 31,
2006 2005 2006 2005
- --------------------------------------------------------------------------------------------------------------------
Risk-free interest rate 4.96% - 5.03% 3.73% - 4.12% 4.66% - 5.03% 3.73% - 4.12%
Dividend yield 0.00% 0.55% - 0.81% 0.00% - 0.66% 0.55% - 0.81%
Volatility factor 47.31% - 52.53% 52.19% - 55.07% 47.31% - 54.25% 52.19% - 55.07%
Expected lives 5 - 6 years 5 years 5 - 6 years 5 years
13
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" (SFAS No. 155). This standard allows financial instruments
that have embedded derivatives to be accounted for as a whole (eliminating the
need to bifurcate the derivative from its host) if the holder elects to account
for the whole instrument on a fair value basis. This standard is effective for
all financial instruments acquired or issued by the Company in fiscal year 2008,
and may be applied to hybrid financial instruments previously entered into that
meet certain criteria. The Company will assess the impact of adoption of this
standard on its consolidated operations, financial position or cash flows as new
financing arrangements arise.
In June 2006, the FASB issued FASB Interpretation No. 48 (FIN No. 48),
"Accounting for Uncertainty in Income Taxes--an interpretation of FASB Statement
No. 109." The interpretation contains a two step approach to recognizing and
measuring uncertain tax positions accounted for in accordance with SFAS No. 109.
The first step is to evaluate the tax position for recognition by determining if
the weight of available evidence indicates it is more likely than not that the
position will be sustained on audit, including resolution of related appeals or
litigation processes, if any. The second step is to measure the tax benefit as
the largest amount which is more than 50% likely of being realized upon ultimate
settlement. This interpretation also provides related guidance on derecognition,
classification, interest and penalties, accounting in interim periods and
disclosure. The interpretation is effective for the company beginning in the
first quarter of fiscal year 2008. The company is evaluating the impact this
statement will have on its consolidated financial statements.
The FASB is currently reconsidering the accounting for pensions and other
postretirement benefits in a two-phase project. Phase I of this project
primarily addresses the balance sheet recognition of a plan's overfunded or
underfunded status. Phase II will be a comprehensive reconsideration of all
elements of pension accounting, and is expected to take several years to
complete once Phase I is complete. As part of Phase I, the FASB issued the
Exposure Draft in March 2006. Included in this Exposure Draft is a requirement
for an entity to recognize in its balance sheet, the overfunded or underfunded
status of its defined benefit postretirement plans measured as the difference
between the fair value of the plan assets and the benefit obligation. For a
pension plan, this would be the projected benefit obligation; for any other
postretirement plan, the benefit obligation would be the accumulated
postretirement benefit obligation. The Exposure Draft also eliminates early
measurement dates by requiring the pension plan obligations to be measured as of
the date of the entity's balance sheet. It is expected that the final standard
will be issued in the third quarter of fiscal 2007, with some of its key
provisions requiring implementation by the Company as of January 31, 2007. The
Company is currently evaluating the potential effects of the Exposure Draft on
its accounting for its defined benefit pension plans and other postretirement
benefit plans.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
4. INVENTORIES
Inventories consisted of the following:
July 31, January 31,
2006 2006
================================================================================
Raw materials $ 34,263 $ 36,828
Work-in-process 15,960 13,993
Finished goods 40,313 32,982
- --------------------------------------------------------------------------------
Total $ 90,536 $ 83,803
================================================================================
5. INCOME TAXES
Six months ended
July 31,
2006 2005
----------------------------------------------------------------
Provision (benefit) for income taxes $ 2,425 $ (1,907)
Effective income tax rate (23.9)% 69.9%
Tax expense in the six months ended July 31, 2006 is primarily 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. In the jurisdictions where the Company incurred a loss, the
Company recorded an increase to the Company's valuation allowance due to the
lack of evidence regarding future realization of certain deferred tax assets. In
addition, the Company incurred 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 six
months ended July 31, 2005, principally resulted from recognition of deferred
tax assets on reported losses.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
6. NET (LOSS) INCOME PER COMMON SHARE
Net (loss) income per common share is based on the weighted-average number
of shares of Common Stock outstanding. Net (loss) income per common share -
diluted reflects the potential dilution that could occur if stock options were
exercised. Weighted-average common shares - basic and diluted were as follows:
Three months ended Six months ended
July 31, July 31,
2006 2005 2006 2005
==================================================================================================================
Weighted-average common shares - outstanding 25,595,674 25,358,907 25,541,240 25,352,534
Dilutive effect of employee equity incentive plans -- 112,319 -- --
- ------------------------------------------------------------------------------------------------------------------
Weighted average common share outstanding,
assuming dilution 25,595,674 25,471,226 25,541,240 25,352,534
Due to a net loss in the three months ended July 31, 2006, 19,980 of
dilutive securities issuable in connection with stock option plans have been
excluded from the diluted loss per share calculation because their effect would
reduce the net loss per share. Due to net losses during the six months ended
July 31, 2006 and 2005, 77,828 and 65,844 of dilutive securities issuable in
connection with stock option plans have been excluded from the diluted loss per
share calculation because their effect would reduce the net loss per share.
During the three months ended July 31, 2005, there were 2,970,228 outstanding
employee stock options that were out-of-the-money and, therefore, excluded from
the calculation of diluted earnings per share because their inclusion would have
been anti-dilutive. 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 and six months ended July 31, 2006 because their
effect would reduce the loss per share.
16
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.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
C&D and several other potentially responsible parties (PRPs) agreed upon a cost
sharing allocation for performance of remedial activities required by the United
States EPA Administrative Order Consent Decree entered for the design and
remediation phases at the former NL Industries site in Pedricktown, New Jersey,
Third Party Facility. In April 2002, one of the original PRPs, Exide
Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the
United States Code. In August 2002, Exide notified the PRPs that it would no
longer be taking an active role in any further action at the site and
discontinued its financial participation, resulting in a pro rata increase in
the cost participation of the other PRPs, including C&D, for which C&D's
allocated share rose from 5.25% to 7.79%.
In August 2002, the Company was notified of its involvement as a PRP at
the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, 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 work plan.
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.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
In January 1999, the Company received notification from the U.S.
Environmental Protection Agency (EPA of alleged violations of permit effluent
and pretreatment discharge limits at its plant in Attica, Indiana. The Company
submitted a compliance plan to the EPA in April 2002. The Company engaged in
negotiations with both the EPA and U.S. Department of Justice (DOJ) through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 in the United States District court for the
Southern District of Indiana for alleged violations of the Clean Water Act. The
parties have reached a tentative settlement, subject to execution of a Consent
Decree, with an agreed civil penalty of $1,600. Terms of the Consent Decree have
been negotiated and agreed to by the parties. The Company has executed the
Consent Decree and it has been submitted to the EPA and DOJ for signature. The
executed Consent Decree will then be lodged with the Court. In addition to the
civil penalty, the Consent Decree, if finalized in the form submitted to the EPA
and DOJ, will require the Company to submit to the EPA a Compliance work Plan
for completing implementation of certain compliance measures set forth in the
Consent Decree. These compliance measures will be required to be implemented by
the Company in accordance with a schedule approved by the EPA. Once approved,
the Compliance Work Plan and schedule will become fully enforceable parts of the
Consent Decree. The Consent Decree will also require certain pretreatment
compliance measures, including the continued operation of a wastewater
pretreatment system, which was previously installed at the Attica facility. The
Consent Decree will further require certain National Pollution Discharge
Elimination System (NPDES) compliance measures, including testing, sampling and
reporting requirements relating to a NPDES storm water monitoring system at the
facility. Additionally, the Consent Decree will provide for stipulated penalties
for noncompliance with the requirements of the Consent Decree occurring after
the lodging of the Consent Decree with the court.
In February 2005, the Company received a request from the EPA to conduct
exploratory testing to determine if the historical municipal landfill located on
the C&D Attica, Indiana property is the source of elevated levels of
trichloroethylene detected in two city wells downgradient of the C&D property.
EPA advised that it believes the former landfill is subject to remediation under
the RCRA corrective action program. The Company has 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 July 31, 2006 and January 31,
2006, accrued environmental reserves totaled $3,526 and $3,775, respectively,
consisting of $2,422 and $2,534 in other current liabilities and $1,104 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.
19
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, as a result of recent acquisitions, the division also
manufactures power conversion products sold into military and CATV applications
as well as digital panel meters and data acquisition components.
The Motive Power division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
Summarized financial information related to the Company's business
segments for three and six months ended July 31, 2006 and 2005, is shown below.
All sales between business segments have been eliminated.
Standby Power Motive
Three months ended July 31, 2006 Power Electronics Power Consolidated
====================================================================================================
Net sales $ 69,279 $ 49,019 $ 14,132 $ 132,430
Operating income (loss) $ 4,529 $ (778) $ (3,118) $ 633
Three months ended July 31, 2005
====================================================================================================
Net sales $ 66,743 $ 43,667 $ 12,666 $ 123,076
Operating income (loss) $ 3,696 $ 1,601 $ (2,516) $ 2,781
Standby Power Motive
Six months ended July 31, 2006 Power Electronics Power Consolidated
====================================================================================================
Net sales $135,990 $ 96,707 $ 28,900 $ 261,597
Operating income (loss) $ 5,134 $ (3,372) $ (5,088) $ (3,326)
Six months ended July 31, 2005
====================================================================================================
Net sales $127,280 $ 92,028 $ 26,589 $ 245,897
Operating income (loss) $ 5,888 $ 683 $ (4,931) $ 1,640
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.
9. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, certain commodity prices and
changes in currency exchange rates. The Company manages these risks through
normal operating and financing activities and when appropriate through the use
of derivative instruments.
The Company does not invest in derivative securities for speculative
purposes, but does enter into hedging arrangements in order to reduce its
exposure to fluctuations in interest rates, the price of lead as well as to
fluctuations in exchange rates. The Company applies hedge accounting in
accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," whereby the Company designates each derivative as a hedge of (i)
the fair value of a recognized asset or liability or of an unrecognized firm
commitment (fair value hedge); or (ii) the variability of anticipated cash flows
of a forecasted transaction or the cash flows to be received or paid related to
a recognized asset or liability (cash flow hedge). From time to time, however,
the Company may enter into derivatives that economically hedge certain of its
risks, even though hedge accounting is not allowed by SFAS No. 133 or is not
applied by the Company. In these cases, there generally exists a natural hedging
relationship in which changes in fair value of the derivative, that are
recognized currently in earnings, act as an economic offset to changes in the
fair value of the underlying hedged item(s).
21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table provides the fair value of the Company's derivative
contracts which include foreign exchange contracts and forward commodity
contracts.
Fair Value at Fair Value at
July 31, January 31,
2006 2006
=========================================================================
Foreign currency contracts $(496) $ (38)
Commodity forward contracts $(933) $ 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 approximately $3,099 in cash proceeds from commodity
contracts terminated by the counter party during the 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 year 2007 in the month in which the hedged
item is recognized in cost of sales.
22
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:
Six months ended
July 31,
2006 2005
===============================================================================
Balance at beginning of period $ 7,630 $ 8,303
Current year provisions 3,514 2,884
Expenditures (4,218) (3,363)
Effect of foreign currency translation 9 (6)
- -------------------------------------------------------------------------------
Balance at end of period $ 6,935 $ 7,818
===============================================================================
As of July 31, 2006, accrued warranty obligations of $6,935 include $2,485
in current liabilities and $4,450 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
July 31, July 31,
2006 2005 2006 2005
===================================================================================================
Components of net periodic benefit cost:
Service cost $ 443 $ 436 $ 39 $ 45
Interest cost 1,058 1,019 60 64
Expected return on plan assets (1,212) (1,285) -- --
Amortization of prior service costs 4 5 (7) (7)
Recognized actuarial loss 540 443 2 --
Curtailment 12 -- (36) --
- ---------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 845 $ 618 $ 58 $ 102
===================================================================================================
Pension Benefits Postretirement Benefits
----------------------- -----------------------
Six months ended Six months ended
July 31, July 31,
2006 2005 2006 2005
===================================================================================================
Components of net periodic benefit cost:
Service cost $ 918 $ 936 $ 89 $ 106
Interest cost 2,109 2,050 123 129
Expected return on plan assets (2,425) (2,571) -- --
Amortization of prior service costs 7 10 (14) 22
Recognized actuarial loss 1,059 878 2 --
Curtailment 12 -- (36) --
- ---------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,680 $ 1,303 $ 164 $ 257
===================================================================================================
23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company is not required to make any contributions to its U.S. pension
plans for fiscal 2007 and the Company does not intend to make any discretionary
contributions. The Company made a contribution of $32 to its Japanese pension
plan in the six month period ended in July 31, 2006. The Company plans to make
additional contributions of approximately $29 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.
12. DEBT
On March 30, 2006, the Company executed a first amendment to both of its
credit facilities. These amendments modified the definition of EBITDA of both
credit facilities, changed the leverage ratio commencing February 28, 2006
through December 31, 2006 under the Term Loan facility and modified certain
other definitions. In consideration of these changes, the Company paid a fee of
$500 to the Term Loan lenders and $38 to the Line of Credit facility lenders.
The Company agreed to grant a security interest in its Leola, Pennsylvania
battery plant and its Mansfield, Massachusetts electronics plant. The Company
also agreed to an increase in the interest rate for the benefit of the Term Loan
lenders of .25% until such time as the leverage ratio falls below 3.0 as defined
in the amended Term Loan agreement.
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. As of July 31, 2006, the Company did not
meet the availability requirements to make these restricted payments. The Term
Loan also includes a maximum leverage ratio. At July 31, 2006, the Company was
in compliance with its covenants. Based upon the Company's most recent financial
projections, the Company believes it may require amendment of the leverage ratio
covenant as early as October 31, 2006. The Company has commenced discussions
with its lenders regarding possible change and/or amendment to its credit
facilities.
On June 14, 2006 the Company executed a second amendment to both of these
credit facilities. These amendments provided consent of the lenders to the sale
of certain excess real property owned by one of our U.K. subsidiaries.
Separately, the amendments deferred the first amendment requirement that the
company provide a second mortgage on its Mansfield, Massachusetts facility until
such time as the first mortgage is satisfied.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
13. Restructuring
On April 6, 2006, the Company announced the closure of its Motive Power
Manufacturing facility in Huguenot, New York and the transfer of production to
Reynosa, Mexico. As a result of this action, the Company recorded severance
accruals of $168 in its financial statements for the year ended January 31,
2006. Further severance and related closure costs have since been recorded. In
addition, during the second quarter the Company recorded severance charges of
$480 in connection with on-going organizational and integration changes. A
reconciliation of the beginning and ending liability and related activity is
shown below.
Balance at Provision Balance at
January 31, 2006 Additions Expenditures July 31, 2006
- --------------------------------------------------------------------------------------------------------
Severance 168 888 134 922
Other Employee Matters -- 63 63 --
Closure Costs -- 12 12 --
- --------------------------------------------------------------------------------------------------------
Total 168 963 209 922
========================================================================================================
The year to date expense of $963 is included in the cost of goods sold and
selling, general and administrative lines of the Company's Consolidated
Statement of Operations for the six months ended July 31, 2006. It is expected
that the Company will record additional costs of approximately $225 during the
third quarter of fiscal year 2007 in connection with these activities. It is
anticipated that the move to Reynosa will be completed during the third quarter
of fiscal year 2007.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Three Months Ended July 31, 2006, compared to Three Months Ended July 31,
2005
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period" refer to the second quarter of fiscal year 2007 and the six
months ended July 31, 2006. All comparisons are with the corresponding period in
the prior year, unless otherwise stated.
Net sales for the second quarter of fiscal year 2007 increased $9,354 or
8% to $132,430 from $123,076 in the second quarter of fiscal year 2006. This
increase resulted from higher sales in all three of the Company's divisions.
Sales in the Power Electronics Division increased $5,352 or 12% primarily due to
increased sales at our Tier I customers. Sales in the Standby Power Division
increased $2,536 or 4%. The increase in Standby Power Divisional sales is
primarily due to price increases, partially offset by lower volume within our 10
year product range. Motive Power sales increased by $1,466 or 12%. The increase
in Motive Power divisional sales is primarily due to price increases.
Gross profit for the second quarter of fiscal year 2007 increased $214 or
1% to $23,651 from $23,437. Margins decreased to 17.9% from 19.0% in the prior
year. Gross profit in the Standby Power Division increased $1,397, with margins
improving from 16.6% to 18.0%. Material costs, as a percentage of sales, were
down slightly as increases in the cost of lead, plastics and copper were offset
by pricing and hedging activities. Results for the second quarter also reflected
benefits from the Company's cost improvement programs. Gross profit in the
Motive Power Division increased by $359, with margins increasing from 0.0% to
2.5%. Price increases offset increases in the cost of raw materials, primarily
lead, and the impact of the Company's move of Motive Power production from
Huguenot, New York to Reynosa, Mexico. Approximately $1,111 in costs and
productivity losses were recorded in the quarter in connection with this
transfer, comprising severance and related closure costs of approximately $444
and productivity and absorption losses of approximately $667. Motive Power
results on a comparative basis were also impacted by the recognition of
environmental accruals in fiscal 2006 of $539. Gross profit in the Power
Electronics Division decreased $1,542, with margins decreasing from 28.3% to
22.0%. The Power Electronics Division improved over its first quarter divisional
margin percentage of 18.5%. The division continued to be impacted by costs
associated with the Company's transfer of production to new Asian contract
manufacturers, RoHs compliance and unfavorable customer mix.
Selling, general and administrative expenses for the second quarter of
fiscal year 2007 increased $1,417, or 10% to $15,762 from $14,345. This increase
was primarily due to higher warranty expense of $756, higher severance costs of
$535 and a litigation settlement in the amount of $212. Selling commissions were
also higher than fiscal 2006. These increases in expenses were partially offset
by lower external Sarbanes-Oxley compliance costs ($389) and lower amortization
expense ($320).
Research and development expenses for the second quarter of fiscal year
2007 increased $945 or 15% to $7,256 from $6,311. As a percentage of sales,
research and development expenses increased from 5.1% during the second quarter
of fiscal year 2006 to 5.5% during the first quarter of fiscal year 2007.
Operating income for the second quarter of fiscal year 2007 decreased
$2,148 to $633 from $2,781 in the second quarter of fiscal year 2006.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Analysis of Change in Operating Income (Loss)
Second Quarter of Fiscal Year 2007 vs. Second Quarter of Fiscal Year 2006
Power
Standby Power Electronics Motive Power
Division Division Division Consolidated
- --------------------------------------------------------------------------------------------------------------
Operating income (Loss) - 2Q06 $ 3,696 $ 1,601 $(2,516) $ 2,781
Lead - increased costs (2,928) -- (166) (3,094)
Lead - hedge income (loss) 1,069 -- (109) 960
Pricing 2,907 -- 1,400 4,307
Huguenot closure -- -- (1,111) (1,111)
Volume/Mix (111) (795) (78) (984)
Contract manufacturers transition costs -- (463) -- (463)
RoHs -- (115) -- (115)
Sarbanes-Oxley compliance costs 186 154 49 389
Management severance costs (39) (19) 3 (55)
Divisional severance costs (380) (204) (100) (684)
Environmental Accruals -- -- 539 539
Warranty costs 50 (51) (755) (756)
Other- including material costs 79 (886) (274) (1,081)
- --------------------------------------------------------------------------------------------------------------
Operating income (Loss) - 2Q07 $ 4,529 $ (778) $(3,118) $ 633
- --------------------------------------------------------------------------------------------------------------
Interest expense, net, increased $1,063 or 46% in the second quarter of
fiscal year 2007, primarily due to higher debt levels, coupled with a higher
effective interest rate.
Income tax expense of $855 was recorded in the second quarter of fiscal
year 2007, compared to an income tax benefit of $256 in the second quarter of
fiscal year 2006. Tax expense in the three months ended July 31, 2006 is
primarily due to a combination of tax expense in certain profitable foreign
subsidiaries and the impact of losses for which no tax benefit is recognized
under SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109). The tax
benefit recorded in the three months ended July 31, 2005, principally resulted
from the 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 second quarter of the current fiscal year, the joint venture had minority
interest of $(102) compared to a minority interest of $(64) in the comparable
period of the prior fiscal year.
As a result of the above, a net loss of $3,607 was recorded compared to a
net income of $1,050 in the prior year. On a per share basis, the net loss was
$0.14 compared to a net income of $0.04 - basic and fully diluted for the second
quarter of fiscal years 2007 and 2006, respectively.
Other Comprehensive Loss
Other comprehensive loss was $6,296 in the second quarter of fiscal year
2007 as compared to other comprehensive income of $414 in the comparable period
of fiscal year 2006. This was primarily due to the Company's net loss of $3,607
during the three months ended July 31, 2006 as compared with net income of
$1,050 during the three months ended July 31, 2005. Additionally, the Company's
unrealized loss on derivative instruments increased from $453 in the second
quarter of fiscal year 2006 to $2,874 during the second quarter of fiscal year
2007.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Six Months Ended July 31, 2006, compared to Six Months Ended July 31, 2005
Net sales for the six months ended July 31, 2006 increased $15,700 or 6%
to $261,597 from $245,897 in the six months ended July 31, 2005. This increase
resulted from higher sales in all three of the Company's divisions. Sales in the
Standby Power Division increased $8,710 or 7%. The increase in Standby Power
divisional sales is primarily due to price increases, coupled with higher
volume. Sales in the Power Electronic Division increased $4,679 or 5%, primarily
due to increased sales to the Company's Tier I customers. Motive Power sales
increased by $2,311 or 9%, again principally due to pricing.
Gross profit for the six months ended July 31, 2006 decreased $2,860 or 6%
to $42,328 from $45,188. Margins decreased to 16.2% from 18.4% in the prior
year. Gross profit in the Power Electronic Division decreased $3,525, with
margins decreasing from 25.1% to 20.3%. Margins in the division have been
negatively impacted by domestic sourcing of certain new business opportunities
during the first quarter of fiscal 2007, other customer mix changes, costs
associated with the Company's transfer of production to new Asian contract
manufacturers and general increases in raw material and component costs. Gross
profit in the Standby Power Division decreased $241, with margins decreasing
from 16.8% to 15.5%. Price increases, higher sales volume and gains on raw
material hedges were offset by higher raw material costs. Gross profit in the
Motive Power Division increased by $906, with margins increasing from 2.6% to
5.6%. This increase is primarily due to improved pricing, partially offset by
costs incurred in closing Huguenot, New York and the transfer of production to
Reynosa, Mexico. In addition, on a comparative basis, results were also impacted
by the recognition of environmental accruals of $539 in fiscal 2006.
Selling, general and administrative expenses for the six months ended July
31, 2006 decreased $66 to $30,958 from $31,024. This decrease was primarily due
to severance accruals of $2,080 in the comparable period of the prior fiscal
years, as compared to $937 in the current fiscal year. Additionally, external
Sarbanes-Oxley compliance costs decreased by $761 and amortization expense
decreased by $580. These decreases were partially offset by higher warranty
costs of $630 and selling commissions.
Research and development expenses for the six months ended July 31, 2006
increased $2,172 or 17% to $14,696 from $12,524. As a percentage of sales,
research and development expenses increased from 5.1% during the first six
months of fiscal year 2006 to 5.6% during the first six months of fiscal year
2007.
The Company had an operating loss during the first six months of fiscal
year 2007 in the amount of $3,326 as compared to operating income of $1,640
during the first six months of fiscal year 2006.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Analysis of Change in Operating Income (Loss)
Six Months Ended July 31, 2006 vs. Six Months Ended July 31, 2005
Power
Standby Power Electronics Motive Power
Division Division Division Consolidated
- ------------------------------------------------------------------------------------------------------------------
Operating income (Loss) - Six months ended 7/31/05 $ 5,888 $ 683 $ (4,931) $ 1,640
Lead - increased costs (6,622) -- (654) (7,276)
Lead - hedge income 2,609 -- 16 2,625
Pricing 4,558 -- 2,700 7,258
Huguenot closure -- -- (1,219) (1,219)
Volume/Mix 1,382 (2,563) (135) (1,316)
Contract manufacturers transition costs -- (1,613) -- (1,613)
RoHs -- (704) -- (704)
Management severance costs 601 767 413 1,781
Divisional severance costs (380) (204) (100) (684)
Sarbanes-Oxley compliance costs 415 260 86 761
Environmental Accruals -- -- 539 539
Warranty costs 610 10 (1,250) (630)
Other- including material costs (3,927) (8) (553) (4,488)
- ------------------------------------------------------------------------------------------------------------------
Operating income (Loss) - Six months ended 7/31/06 $ 5,134 $ (3,372) $ (5,088) $ (3,326)
- ------------------------------------------------------------------------------------------------------------------
Interest expense, net, increased $2,087 or 48% in the six months ended
July 31, 2006, primarily due to higher debt levels, coupled with a higher
effective interest rate.
Income tax expense of $2,425 was recorded in the first six months of
fiscal year 2007, compared to an income tax benefit of $1,907 in the comparable
period of the prior fiscal year. Tax expense in the six months ended July 31,
2006 is primarily due to a combination of tax expense in certain profitable
foreign subsidiaries, and the impact of losses for which no tax benefit is
recognized under SFAS No. 109. The tax benefit recorded in the six months ended
July 31, 2005 principally resulted from the 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 six months ended July 31, 2006, the joint venture had minority interest
of $(316) compared to a minority interest of $(163) in the comparable period of
the prior fiscal year.
As a result of the above, a net loss was recorded of $12,265 compared to a
net loss of $659 in the prior year. On a per share basis, the net loss was $0.48
compared to $0.03 in the comparable period of the prior fiscal year.
29
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 was $18,853 in the six months ended July 31, 2006
as compared to $1,082 in the comparable period of fiscal year 2006. This was
primarily due to the Company's net loss of $12,265 during the period as compared
to $659 during the comparable period of the prior fiscal year. Additionally, the
Company's unrealized loss on derivative instruments increased from $190 in the
first six months of fiscal year 2006 to $7,027 during the first six months of
fiscal year 2007.
Liquidity and Capital Resources
Net cash used by operating activities was $18,511 for the six months ended
July 31, 2006, compared to net cash provided by operating activities of $13,682
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 $12,265
in the current fiscal year as compared to a net loss of $659 in the comparable
period of the prior fiscal year; (ii) a decrease of $9,475 in accounts payable
in the first six months of fiscal year 2007 as compared to an increase of $6,492
in the first six months on fiscal year 2006 and (iii) an increase of $6,559 in
accounts receivable in the current fiscal year as compared to an increase of
$2,570 in the comparable period of the prior fiscal year. These changes were
partially offset by an increase in current taxes payable of $73 in the six
months ended July 31, 2006 as compared to a decrease of $4,199 in the six months
ended July 31, 2005. Inventory was a use of cash in both the six months ended
July 31, 2006 ($6,329) and the six months ended July 31, 2005 ($4,421). The
decrease in accounts payable in the current fiscal year is due to the timing of
cash payments at the end of fiscal year 2006, coupled with inventory reductions
from June 30, 2006 to July 31, 2006. The increase that took place in the prior
fiscal year was due to the timing of payments at July 31, 2005. The increase in
accounts receivable in the current fiscal year is primarily due to the stronger
sales pace that occurred in the latter part of the quarter.
Net cash used by investing activities increased $6,152 to $10,217 in the
first six months of fiscal year 2007 as compared to $4,065 in the first six
months of the prior fiscal year, primarily due to expenditures on the
construction of the Company's new battery manufacturing facility in Shanghai,
China.
The Company had net cash provided by financing activities of $23,991 in
the first six months of fiscal year 2007 as compared to net cash used in
financing activities of $15,780 in the first six months of the prior fiscal
year. Current year financing activities included $20,555 in proceeds from new
borrowings, primarily used to fund operations, including certain of the
Company's manufacturing moves. Prior year financing activities included a
decrease in book overdrafts of $7,575 and the reduction of long-term debt in the
amount of $7,014.
The Company's 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 July 31, 2006, the maximum availability
calculated under the borrowing base was $55,537, of which $28,698 was funded,
and $7,520 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%. In accordance with the terms of the Credit Facility pricing
structure, effective July 1, 2006, the interest rate increased to LIBOR plus
2.00% or Prime plus .50% as a result of a reduction in the average excess
availability during the three months ended June 30, 2006. 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%.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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.
On June 14, 2006, the Company executed a second amendment to both of these
credit facilities. These amendments provided consent of the lenders to the sale
of certain excess real property owned by one of our U.K. subsidiaries.
Separately,the amendments deferred the first amendment requirement that the
company provide a second mortgage on its Mansfield, Massachusetts facility until
such time as the first mortgage is satisfied. Capital expenditures incurred
during the first six 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 $30,000 primarily for the
construction of our new Shanghai joint-venture facility (of which approximately
$15,547 has already been received from the Chinese government to fund
construction).
The Credit Facility and Term Loan include a minimum fixed charge coverage
ratio that is measured only when the excess availability as defined in the
agreements is less than $15,000. Both agreements limit restricted payments
including dividends and Treasury Stock purchases to no more than $250 for
Treasury Stock in any one calendar year and $1,750 for dividends for any one
calendar year subject to adjustments of up to $400 per year in the case of the
conversion of debt to stock per the terms of the 5.25% convertible offering.
These restricted payments can only occur with prior notice to the lenders and
provided that there is a minimum of $30,000 in excess availability for a period
of thirty days prior to the dividend. As of July 31, 2006, the Company did not
meet the availability requirements to pay dividends. The Term Loan also includes
a maximum leverage ratio. The Company was in compliance with its covenants at
July 31, 2006. Based upon the Company's most recent financial projections, the
Company believes it may require amendment of the leverage ratio covenant as
early as October 31, 2006. The Company has commenced discussions with its
lenders regarding possible change and/or amendment to its credit facilities.
The Credit Facility includes a swingline sub-loan facility not to exceed
$7,000. As of July 31, 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.
31
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" under Item 1A of Part II of
this report.
32
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 Power Systems Division. We employ
hedge accounting in the treatment of these contracts. Changes in the value of
the contracts are marked to market each month and the gains and losses are
recorded in other comprehensive income (loss) until they are released to the
income statement through cost of goods sold in the same period as is the hedged
item (lead).
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.
33
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 submit under the Exchange Act.
Internal Control over Financial Reporting:
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
34
PART II. OTHER INFORMATION
Item 1A - Risk Factors
Restrictive loan covenants associated with certain of our debt instruments
may impact our ability to operate our business and to pursue our business
strategies, and our failure to comply with these covenants could result in an
acceleration of our indebtedness.
Our $75,000,000 principal amount Line of Credit Facility (Credit Facility)
and $50,000,000 Term Loan facility (Term Loan), as well as the indenture
governing our 5.25% Convertible Senior Notes Due 2025 (Notes), contain certain
covenants that restrict our ability to finance future operations or capital
needs, to respond to changing business and economic conditions or to engage in
other transactions or business activities that may be important to our growth
strategy or otherwise important to us. The Credit Facility, Term Loan and the
indenture governing our Notes restrict, among other things, our ability and the
ability of our subsidiaries to:
o incur additional indebtedness or enter into sale and leaseback
transactions;
o pay dividends or make distributions on our capital stock or
certain other restricted payments or investments;
o purchase or redeem stock;
o issue stock of our subsidiaries;
o make investments and extend credit;
o engage in transactions with affiliates;
o transfer and sell assets;
o effect a consolidation or merger or sell, transfer, lease or
otherwise dispose of all or substantially all of our assets;
and
o create liens on our assets to secure debt.
Our liquidity derived from the Credit Facility is based on availability
determined by a borrowing base. The availability is calculated monthly and is
dependent upon our eligible receivables, inventory and certain equipment. We may
not be able to maintain adequate levels of eligible assets to support our
required liquidity.
In addition, our Credit Facility and Term Loan require us to meet certain
financial ratios. Our ability to comply with these provisions may be affected by
events beyond our control, and we may not be able to meet the financial ratios.
Rising prices of lead and other commodities and other circumstances have
resulted in us obtaining amendments to our financial covenants in the past.
Any breach of the covenants in our Credit Facility, Term Loan or the
indenture governing our Notes could cause a default under our Credit Facility
and other debt (including the Term Loan and the Notes), which would restrict our
ability to borrow under our Credit Facility, thereby significantly impacting our
liquidity. If there were an event of default under any of these debt instruments
that was not cured or waived, the holders of the defaulted debt could cause all
amounts outstanding with respect to these debt instruments to be due and payable
immediately. Our assets and cash flow may not be sufficient to fully repay
borrowings under these debt instruments if accelerated upon an event of default.
If, as or when required, we are unable to repay, refinance or restructure our
indebtedness under, or amend the covenants contained in, our Credit Facility or
Term Loan, the lenders under our Credit Facility or Term Loan could institute
foreclosure proceedings against the assets securing borrowings under those
facilities.
At July 31, 2006, the Company was in compliance with its covenants. Based
upon the Company's most recent financial projections, the Company believes it
may require amendment of its leverage ratio covenant as early as October 31,
2006. The Company has commenced discussions with its lenders regarding possible
change and/or amendment to its credit facilities.
35
Item 2. 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
====================================================================================================================
May 1 - May 31, 2006 -- -- -- 1,000,000
June 1 - June 30, 2006 17,722 6.89 -- 1,000,000
July 1 - July 31, 2006 -- -- -- 1,000,000
- ----------------------------------------------------- -------------
Total 17,722 --
====================================================================================================================
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. As of July 31, 2006, the Company did not meet the
availability requirements to make these restricted payments.
36
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of C&D on June 1, 2006, the
stockholders voted on three proposals: The election of nine directors for
one-year terms; a proposal to ratify the Company's 2007 Stock Incentive Plan;
and a proposal to ratify the appointment of PricewaterhouseCoopers LLP as the
independent registered public accounting firm for C&D for the fiscal year ended
January 31, 2007.
Proposal 1 - Election of Directors
Nominee Votes for Votes Withheld
=======================================================================
William Harral, III 20,627,344 3,659,309
Kevin P. Dowd 20,112,059 4,174,594
Jeffrey A. Graves 24,203,563 83,090
Robert I. Harries 20,619,159 3,667,494
Pamela Lewis Davies 20,110,760 4,175,893
George MacKenzie 23,467,200 819,453
John A. H. Shober 23,236,015 1,050,638
Stanley W. Silverman 23,774,512 512,141
Ellen C. Wolf 23,242,851 1,043,802
Proposal 2 - Approval of the Company's 2007 Stock Incentive Plan.
For Against Abstain Broker Non-Votes
========================================================================
16,837,937 4,138,546 407,131 2,903,039
Proposal 3 - Ratification of the appointment of PricewaterhouseCoopers LLP
as the independent registered public accounting firm for the fiscal year ending
January 31, 2007.
For Against Abstain
===========================================================
24,239,681 44,454 2,518
37
Item 6. Exhibits.
10.1 Loan and Security Agreement by and among C&D Technologies, Inc.,
C&D Technologies (Datel), Inc., C&D Technologies (CPS) LLC, as
Borrowers and C&D Charter Holdings, Inc., C&D Dynamo Corp.,
Dynamo Acquisition Corp., C&D International Investment Holdings
Inc. and Datel Holding Corporation, as Guarantors, and Ableco
Finance LLC, as Agent (filed herewith).
10.2 Loan and Security Agreement by and among C&D Technologies, Inc.,
C&D Technologies (Datel), Inc., C&D Technologies (CPS) LLC, as
Borrowers and C&D Charter Holdings, Inc., C&D Dynamo Corp.,
Dynamo Acquisition Corp., C&D International Investment Holdings
Inc. and Datel Holding Corporation, as Guarantors, and Wachovia
Bank National Association, as Administrative Agent and Wachovia
Capital Markets, LLC as Sole Lead Arranger, Manager and
Bookrunner (filed herewith).
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).
38
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.
September 11, 2006 By: /s/ Jeffrey A. Graves
------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
September 11, 2006 By: /s/ Ian J. Harvie
------------------------------
Ian J. Harvie
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
39
EXHIBIT INDEX
10.1 Loan and Security Agreement 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 .
10.2 Loan and Security Agreement 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.
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.
40