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 October 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 October
31, 2006: 25,647,442
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - October 31, 2006 and January 31, 2006 3
Consolidated Statements of Operations - Three and Nine Months Ended 5
October 31, 2006 and 2005
Consolidated Statements of Cash Flows - Nine Months Ended 6
October 31, 2006 and 2005
Consolidated Statements of Comprehensive Loss -
Three and Nine Months Ended October 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 34
Item 4 Controls and Procedures 35
Part II OTHER INFORMATION
Item 1A Risk Factors 36
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 39
Item 6 Exhibits 40
SIGNATURES 41
EXHIBIT INDEX 42
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
October 31, January 31,
2006 2006
==============================================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 13,671 $ 25,693
Accounts receivable, less allowance for doubtful accounts
of $1,982 and $2,889 82,315 78,420
Inventories, net 90,336 83,803
Deferred income taxes 3,493 3,430
Prepaid taxes 6,583 6,838
Other current assets 9,131 8,892
- --------------------------------------------------------------------------------------------------------------
Total current assets 205,529 207,076
Property, plant and equipment, net 99,889 91,041
Goodwill 68,243 81,451
Intangible and other assets, net 36,033 38,450
Deferred income taxes 374 401
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 410,068 $ 418,419
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 5,474 $ 1,038
Accounts payable 45,516 50,199
Book overdrafts 3,134 71
Accrued liabilities 26,425 23,440
Other current liabilities 30,384 35,578
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 110,933 110,326
Deferred income taxes 12,509 11,660
Long-term debt 145,465 133,067
Other liabilities 34,484 24,051
- --------------------------------------------------------------------------------------------------------------
Total liabilities 303,391 279,104
- --------------------------------------------------------------------------------------------------------------
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
October 31, January 31,
2006 2006
===========================================================================================================
Commitments and contingencies (see Note 7)
Minority interest 8,304 8,498
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares
authorized; 29,040,960 and 28,828,428 shares issued and 25,647,442 and
25,448,326 outstanding, respectively 291 288
Additional paid-in capital 73,972 72,599
Unearned stock grant compensation 197 --
Treasury stock, at cost 3,393,518 and 3,380,102 shares, respectively (47,127) (47,094)
Accumulated other comprehensive loss (11,542) (11,876)
Retained earnings 82,582 116,900
- -----------------------------------------------------------------------------------------------------------
Total stockholders' equity 98,373 130,817
- -----------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 410,068 $ 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 Nine months ended
October 31, October 31,
2006 2005 2006 2005
==============================================================================================================
NET SALES $ 130,707 $ 126,966 $ 392,304 $ 372,863
COST OF SALES 112,695 109,167 331,964 309,876
- --------------------------------------------------------------------------------------------------------------
GROSS PROFIT 18,012 17,799 60,340 62,987
OPERATING EXPENSES:
Selling, general and administrative expenses 14,663 15,582 45,621 46,606
Research and development expenses 6,888 6,329 21,584 18,853
Identifiable intangible asset impairment -- 20,045 -- 20,045
Goodwill impairment 13,947 13,674 13,947 13,674
- --------------------------------------------------------------------------------------------------------------
OPERATING LOSS (17,486) (37,831) (20,812) (36,191)
- --------------------------------------------------------------------------------------------------------------
Interest expense, net 3,256 2,568 9,656 6,881
Other expense (income), net 439 (23) 869 33
- --------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (21,181) (40,376) (31,337) (43,105)
- --------------------------------------------------------------------------------------------------------------
Provision for income taxes 575 19,613 3,000 17,706
- --------------------------------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (21,756) (59,989) (34,337) (60,811)
- --------------------------------------------------------------------------------------------------------------
Minority interest (55) (6) (371) (169)
- --------------------------------------------------------------------------------------------------------------
NET LOSS $ (21,701) $ (59,983) $ (33,966) $ (60,642)
==============================================================================================================
Net loss per common share - basic $ (0.85) $ (2.36) $ (1.33) $ (2.39)
==============================================================================================================
Net loss per common share - diluted $ (0.85) $ (2.36) $ (1.33) $ (2.39)
==============================================================================================================
Dividends per share $ -- $ 0.01375 $ 0.01375 $ 0.04125
==============================================================================================================
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)
Nine months ended
October 31,
2006 2005
============================================================================================================
Cash flows from operating activities:
Net loss $ (33,966) $ (60,642)
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Minority interest in net loss of consolidated subsidiary (371) (169)
Stock based compensation 197 --
Depreciation and amortization 14,714 17,520
Impairment of fixed assets and long-lived assets -- 2,160
Impairment of goodwill 13,947 13,674
Impairment of intangible assets -- 20,045
Deferred income taxes 809 11,764
(Gain) loss on disposal of assets (38) 208
Annual retainer to Board of Directors paid by the issuance of common stock 224 199
Changes in:
Accounts receivable and other receivable (3,328) (4,209)
Inventories (5,930) (4,884)
Other current assets (686) (1,405)
Accounts payable (5,077) 10,075
Accrued liabilities 2,730 4,657
Income taxes payable 100 1,556
Other current liabilities (1,750) 2,555
Other liabilities 6,133 1,246
Other long-term assets 83 467
Other, net (923) 2,963
- ------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (13,132) 17,780
- ------------------------------------------------------------------------------------------------------------
Cash flows provided (used in) by investing activities:
Acquisition of property, plant and equipment (19,553) (5,101)
Proceeds from disposal of property, plant and equipment 54 74
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (19,499) (5,027)
- ------------------------------------------------------------------------------------------------------------
Cash flows provided (used in) by financing activities:
Reduction of long-term debt (781) (4,225)
Proceeds from new borrowings 17,428 --
Financing cost of long-term debt (701) (955)
Increase (decrease) in book overdrafts 3,063 (7,711)
Purchase of treasury stock (122) (158)
Proceeds from issuance of common stock, net 1,210 307
Payment of common stock dividends (352) (699)
- ------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 19,745 (13,441)
- ------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 864 224
- ------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents (12,022) (464)
Cash and cash equivalents, beginning of period 25,693 26,855
- ------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 13,671 $ 26,391
============================================================================================================
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(UNAUDITED)
SUPPLEMENTAL CASH FLOW DISCLOSURE
Schedule of non cash investing and financing activities
Nine months ended
October 31,
2006 2005
==================================================================================================
Increase (decrease) in property, plant, and equipment acquisitions
in accounts payable $ 176 $ (353)
Dividend declared, but not paid $ -- $ 350
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(UNAUDITED)
Three months ended Nine months ended
October 31, October 31,
2006 2005 2006 2005
========================================================================================================================
NET LOSS $ (21,701) $ (59,983) $ (33,966) $ (60,642)
Other comprehensive income (loss) net of tax:
Net unrealized income (loss) on derivative instruments 6,919 2,200 (108) 2,010
Foreign currency translation adjustments 3 (361) 442 (594)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL COMPREHENSIVE LOSS $ (14,779) $ (58,144) $ (33,632) $ (59,226)
========================================================================================================================
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
The accompanying interim unaudited consolidated financial statements of
C&D Technologies, Inc. (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, we do not include all the information and notes
required for complete financial statements. In the opinion of management, the
interim unaudited consolidated financial statements include all adjustments
considered necessary for the fair statements of the financial position, results
of operations and cash flows for the interim period presented. The financial
statements should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included in the Company's 2006 Annual Report on
Form 10-K dated April 10, 2006, and Form 10-K/A dated May 2, 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 No. 123R"). SFAS No. 123R requires the recognition of the fair value of
stock compensation in net income. The Company elected the modified prospective
method in adopting SFAS No. 123R. Under this method, the provisions of SFAS No.
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 No. 123, "Accounting for Stock-Based
Compensation," as disclosed in our previous filings. Prior to the Company's
adoption of SFAS No. 123R, benefits of tax deductions in excess of recognized
compensation costs were reported as operating cash flows. SFAS No. 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 nine month periods ended October 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 nine
months ended October 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".
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.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
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 No. 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 October 31, 2006 the
unamortized compensation for these options was $8, which is expected to be
recognized over the weighted average period of approximately two months.
Under the provisions of SFAS No. 123R, the Company recorded $23 and $197
of stock compensation related to stock option awards in its unaudited
consolidated statement of operations for the three and nine months ended October
31, 2006. The impact on earnings per share for the three and nine months ended
October 31, 2006, was less than $0.01. The Company granted 28,000 and 123,000
stock option awards during the three and nine months ended October 31, 2006. Of
the awards granted in the third quarter, none vested immediately. Of awards
granted during the first nine months of fiscal year 2007, 40,500 vested
immediately; accordingly for the nine months ended October 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 $26.
The estimated fair value of the options granted was calculated using the
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 No. 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 nine months ended October
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 Nine months ended
October 31, 2005 October 31, 2005
==================================================================================================================
Net loss as reported $ (59,983) $ (60,642)
Deduct: Total stock based compensation expense determined
under the fair value method for all grants, net of related tax effects $ 2,756 $ 6,429
- ------------------------------------------------------------------------------------------------------------------
Net loss pro forma $ (62,739) $ (67,071)
==================================================================================================================
Net loss per common share-basic-as reported $ (2.36) $ (2.39)
Net loss per common share-basic-pro forma $ (2.47) $ (2.64)
Net loss per common share-diluted-as reported $ (2.36) $ (2.39)
Net loss per common share-diluted-pro forma $ (2.47) $ (2.64)
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 October 31, 2006, was $230, 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 Nine months ended
October 31, October 31,
2006 2005 2006 2005
=================================================================================================================
Weighted-average fair value of options granted per share $ 3.89 $ 4.86 $ 3.58 $ 3.58
Fair value of options vested during the period $ -- $ 282 $ 246 $ 10,745
Intrinsic value of options exercised $ 24 $ 103 $ 297 $ 120
Cash received from option exercises $ 235 $ 260 $ 1,210 $ 307
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 nine months ended October
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 $ 0
Options granted 123,000 $ 6.88 9.6 $ 0
Options exercised (179,850) $ 6.73 6.7 $ 0
Options forfeited (1,168,915) $ 19.30 5.3 $ 0
Balance at October 31, 2006 2,848,233 $ 15.72 6.8 $ 0
Exercisable, October 31, 2006 2,758,893 $ 15.99 6.7 $ 0
The aggregate intrinsic value on this table was calculated based on the
difference between the closing price of our common stock on October 31, 2006,
and the exercise price of the underlying options.
Stock options outstanding at October 31, 2006, are summarized in the table
below.
Weighted Weighted
Average Average
Remaining Weighted Remaining Weighted
Range of Number Contractual Average Number Contractual Average
Exercise Price Outstanding Life Exercise Price Exercisable Life Exercise Price
====================================================================================================================
$ 6.26 - $ 9.18 1,110,495 9.1 years $ 7.54 1,027,995 9.0 years $ 7.60
$ 9.80 - $ 14.50 255,224 5.7 years $ 11.36 255,224 5.7 years $ 11.36
$ 14.94 - $ 22.31 1,168,444 5.7 years $ 18.82 1,161,604 5.7 years $ 18.82
$ 26.76 - $ 37.28 261,320 4.4 years $ 33.12 261,320 4.4 years $ 33.12
$ 48.44 - $ 55.94 52,750 3.7 years $ 54.44 52,750 3.7 years $ 54.44
- --------------------------------------------------------------------------------------------------------------------
TOTAL 2,848,233 6.8 years $ 15.72 2,758,893 6.7 years $ 15.99
====================================================================================================================
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 Company's non-vested stock options as of
October 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 123,000 $ 3.58
Vested (53,758) $ 4.57
- -----------------------------------------------------------------------------------------
Non-Vested at October 31, 2006 89,340 $ 4.10
=========================================================================================
The fair value of stock options granted during the three and nine months
ended October 31, 2006, was estimated on the grant date using the Black-Scholes
option pricing model with the following average assumptions.
Three months ended Nine months ended
October 31, October 31,
2006 2005 2006 2005
==================================================================================================================
Risk-free interest rate 4.57% - 4.91% 3.89 - 4.45% 4.57% - 5.03% 3.73% - 4.45%
Dividend yield 0.00% 0.52% - 0.60% 0.00% - 0.66% 0.52% - 0.81%
Volatility factor 49.57% - 50.73% 49.90% - 51.30% 47.31% - 54.25% 49.90% - 55.07%
Expected lives 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 February 2006, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155
simplifies the accounting for certain hybrid financial instruments that contain
an embedded derivative that otherwise would have required bifurcation. SFAS No.
155 also eliminates the interim guidance in SFAS No. 133, which provides that
beneficial interests in securitized financial assets are not subject to the
provisions of SFAS No. 133. SFAS No. 155 is effective for all financial
instruments acquired or issued after the beginning of an entity's first fiscal
year that begins after September 15, 2006. SFAS No. 155 is required to be
adopted by the Company in the first quarter of fiscal 2008. The Company does not
expect the adoption of SFAS No. 155 to have a material impact on its financial
position and results of operations.
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets - an amendment of FASB Statement No. 140 ("SFAS No. 156"). SFAS
No. 156 requires that all separately recognized servicing assets and servicing
liabilities be initially measured at fair value, if practicable. The statement
permits, but does not require, the subsequent measurement of servicing assets
and servicing liabilities at fair value. SFAS No. 156 is effective as of the
beginning of an entity's first fiscal year that begins after September 15, 2006.
SFAS No. 156 is required to be adopted by the Company in the first quarter of
fiscal 2008. The Company does not expect the adoption of SFAS No. 156 to have a
material impact on its financial position and results of operations.
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, "Accounting for Income Taxes" ("SFAS No. 109")." FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109. FIN No. 48
prescribes a two-step process to determine the amount of tax benefit to be
recognized. First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon examination. If the tax position is
deemed "more-likely-than-not" to be sustained, the tax position is then measured
to determine the amount of benefit to recognize in the financial statements. The
tax position is measured at the largest amount of benefit that is greater than
50 percent likely of being realized upon ultimate settlement. FIN No. 48 is
required to be adopted by the Company in fiscal 2008. The Company is currently
evaluating the potential impact of FIN No. 48 on its financial position and
results of operations.
In June 2006, the Emerging Issues Task Force ("EITF") reached a consensus
on Issue No. 06-03, "How Taxes Collected from Customers and Remitted to
Governmental Authorities Should Be Presented in the Income Statement." EITF No.
06-03 addresses the accounting for externally imposed taxes on revenue-producing
transactions that take place between a seller and its customer, including, but
not limited to sales, use, value added, and certain excise taxes. EITF No. 06-03
also provides guidance on the disclosure of an entity's accounting policies for
presenting such taxes on a gross or net basis and the amount of such taxes
reported on a gross basis. EITF No. 06-03 is effective for interim and fiscal
years beginning after December 15, 2006. The Company does not expect the
adoption of EITF No. 06-03 to have a material impact on its financial position
and results of operations.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157") which establishes a framework for measuring fair value in
generally accepted accounting principles ("GAAP"), and expands disclosures about
fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and, accordingly,
SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company is
currently evaluating the potential impact that the adoption of this statement
will have on its financial position and results of operations.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
In September 2006, the FASB issued Statement No. 158, "Employers'
Accounting for Defined Benefit Pension and Other Postretirement Plans" (an
amendment to FASB Statements No. 87, 88, 106, and 123R) ("SFAS No. 158"). SFAS
No. 158 requires an employer to: (1) recognize in its statement of financial
position and asset for a plan's overfunded status or a liability for a plan's
underfunded status; (2) measure a plan's assets and its obligations that
determine its funded status as of the end of the employer's fiscal year (with
limited exceptions); and (3) recognize changes in the funded status of a defined
benefit postretirement plan in the year in which the changes occur. Those
changes will be reported in comprehensive income. The requirement by SFAS No.
158 to recognize the funded status of a benefit plan and the disclosure
requirements of SFAS No. 158 are effective as of the end of the fiscal year
ending after December 15, 2006 for entities with publicly traded equity
securities. The requirement to measure plan assets and benefit obligations as of
the date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. Based upon current
assumptions, the Company expects to make an adjustment to record an incremental
net pension liability of approximately $6,000 upon the adoption of SFAS No.
158's recognition provisions.
In September 2006, the SEC Staff issued Staff Accounting Bulletin ("SAB")
No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements," which addresses how the
effects of prior-year uncorrected misstatements should be considered when
quantifying misstatements in current-year financial statements. The difference
in approaches for quantifying the amount of misstatements primarily results from
the effects of misstatements that were not corrected at the end of the prior
year (prior year misstatements). SAB No. 108 will require companies to quantify
misstatements using both the balance sheet and income-statement approaches and
to evaluate whether either approach results in quantifying an error that is
material in light of relevant quantitative and qualitative factors. When the
effect of initial adoption is determined to be material, SAB No. 108 allows
companies to record that effect as a cumulative effect adjustment to
beginning-of-year retained earnings. The requirements are effective for
reporting periods ending after November 15, 2006. The Company does not expect
the adoption of SAB No. 108 to have a material impact on its financial position
and results of operations.
4. INVENTORIES
Inventories consisted of the following:
October 31, January 31,
2006 2006
================================================================================
Raw materials $ 34,292 $ 36,828
Work-in-process 15,027 13,993
Finished goods 41,017 32,982
- --------------------------------------------------------------------------------
Total $ 90,336 $ 83,803
================================================================================
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. INCOME TAXES
Nine months ended
October 31,
2006 2005
================================================================================
Provision for income taxes $ 3,000 $ 17,706
Effective income tax rate (9.6%) (41.1%)
Tax expense in the nine months ended October 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 expense recorded in the nine
months ended October 31, 2005, principally resulted from the write off of
deferred tax assets related to the investment in foreign subsidiaries and the
establishment of a valuation allowance and tax reserves against deferred tax
assets due to the lack of evidence regarding the realization of these assets in
the foreseeable future.
6. NET LOSS PER COMMON SHARE
Net loss per common share is based on the weighted-average number of
shares of Common Stock outstanding. Net loss per common share - diluted reflects
the potential dilution that could occur if stock options were exercised.
Weighted-average common shares - basic and diluted were as follows:
Three months ended Nine months ended
October 31, October 31,
2006 2005 2006 2005
===================================================================================================================
Weighted-average common shares - basic and diluted 25,628,845 25,380,480 25,570,763 25,361,952
The dilutive effect of stock options outstanding at October 31, 2006 and
2005 was not included in the calculation of diluted loss per share for the three
and nine months periods ended October 31, 2006 and 2005 because to do so would
have had an anti- dilutive effect, as the Company had a net loss for each of
these periods. The weighed average number of shares excluded from the diluted
loss per share computation was 34,790 and 182,109 for the three-month periods
ended October 31, 2006 and 2005. The weighted average number of shares excluded
from the diluted loss per share computation was 63,477 and 104,600 for the
nine-month periods ended October 31, 2006 and 2005. Additionally, 8,854,785 of
dilutive securities issuable in connection with convertible bonds have been
excluded from the diluted loss per share calculation for the three and nine
months ended October 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 therefore), the Company may be held liable for
certain damages, the costs of investigation and remediation, and fines and
penalties, which could have a material adverse effect on the Company's business,
financial condition, or results of operations. However, under the terms of the
purchase agreement with Allied Corporation (Allied) for the acquisition (the
Acquisition) of the Company (the Acquisition Agreement), Allied was obligated to
indemnify the Company for any liabilities of this type resulting from conditions
existing at January 28, 1986, that were not disclosed by Allied to the Company
in the schedules to the Acquisition Agreement. These obligations have since been
assumed by Allied's successor in interest, Honeywell (Honeywell).
C&D is participating in the investigation of contamination at several lead
smelting facilities (Third Party Facilities) to which C&D allegedly made scrap
lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
C&D and several other potentially responsible parties (PRPs) agreed upon a cost
sharing allocation for performance of remedial activities required by the United
States EPA Administrative Order Consent Decree entered for the design and
remediation phases at the former NL Industries site in Pedricktown, New Jersey,
Third Party Facility. In April 2002, one of the original PRPs, Exide
Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the
United States Code. In August 2002, Exide notified the PRPs that it would no
longer be taking an active role in any further action at the site and
discontinued its financial participation, resulting in a pro rata increase in
the cost participation of the other PRPs, including C&D, for which C&D's
allocated share rose from 5.25% to 7.79%.
In August 2002, the Company was notified of its involvement as a PRP at
the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, continues
to negotiate with NL at this site regarding the Company's share of the allocated
liability.
The Company has terminated operations at its Huguenot, New York, facility,
and is currently conducting facility decontamination and disposal of chemicals
and hazardous wastes remaining at the facility following termination of
operations in accordance with applicable regulatory requirements. 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.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
C&D, together with Johnson Controls, Inc. (JCI), is conducting an
assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment
and remediation, with a maximum liability of $1,750 (ii) any environmental
liabilities at the facility that are not remediated as part of the ongoing
cleanup project and (iii) environmental liabilities for any new claims made
after the fifth anniversary of the closing, i.e. March 2004, that arise from
migration from a pre-closing condition at the Milwaukee facility to locations
other than the Milwaukee facility, but specifically excluding liabilities
relating to pre-closing offsite disposal. JCI retained the environmental
liability for the off-site assessment and remediation of lead. In March 2004,
the Company entered into an agreement with JCI to continue to share
responsibility as set forth in the original purchase agreement. The Company
continues to negotiate with JCI regarding the allocation of costs for assessment
and remediation of certain off-site chlorinated volatile organic compounds
(CVOCs) in groundwater.
In January 1999, the Company received notification from the U.S.
Environmental Protection Agency (EPA) of alleged violations of permit effluent
and pretreatment discharge limits at its plant in Attica, Indiana. The Company
submitted a compliance plan to the EPA in April 2002. The Company engaged in
negotiations with both the EPA and U.S. Department of Justice (DOJ) through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 in the United States District court for the
Southern District of Indiana for alleged violations of the Clean Water Act. The
parties have reached a settlement, and agreed to the terms of a Consent Decree,
with an agreed civil penalty of $1,600. The Court entered the Consent Decree on
November 20, 2006. In addition to the civil penalty, the Consent Decree requires
the Company to implement a Compliance Work Plan for completing implementation of
certain compliance measures set forth in the Consent Decree. These compliance
measures are required to be implemented by the Company in accordance with a
schedule approved by the EPA. The Compliance Work Plan and schedule are fully
enforceable parts of the Consent Decree. The Consent Decree also requires
certain pretreatment compliance measures, including the continued operation of a
wastewater pretreatment system, which was previously installed at the Attica
facility. The Consent Decree further requires 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 provides for stipulated
penalties for noncompliance with the requirements of the Consent Decree.
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 October 31, 2006 and January
31, 2006, accrued environmental reserves totaled $3,258 and $3,775,
respectively, consisting of $2,154 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.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
8. OPERATIONS BY REPORTABLE SEGMENT
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies (UPS), cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television (CATV) signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large Original Equipment Manufacturers (OEMs),of
telecommunications and networking equipment, as well as office and industrial
equipment. In addition, the division also manufactures power conversion products
sold into military and CATV applications as well as digital panel meters and
data acquisition components.
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
Summarized financial information related to the Company's business
segments for three and nine months ended October 31, 2006 and 2005, is shown
below. All sales between business segments have been eliminated.
Standby Power Motive
Three months ended October 31, 2006 Power Electronics Power Consolidated
===================================================================================================
Net sales $ 68,805 $ 47,343 $ 14,559 $ 130,707
Gross profit $ 8,663 $ 9,101 $ 248 $ 18,012
Operating income (loss) $ 1,650 $ (15,735) $ (3,401) $ (17,486)
Three months ended October 31, 2005
===================================================================================================
Net sales $ 69,897 $ 43,292 $ 13,777 $ 126,966
Gross profit $ 12,365 $ 4,614 $ 820 $ 17,799
Operating income (loss) $ 4,766 $ (40,753) $ (1,844) $ (37,831)
Standby Power Motive
Nine months ended October 31, 2006 Power Electronics Power Consolidated
===================================================================================================
Net sales $ 204,795 $ 144,050 $ 43,459 $ 392,304
Gross profit $ 29,791 $ 28,697 $ 1,852 $ 60,340
Operating income (loss) $ 6,784 $ (19,107) $ (8,489) $ (20,812)
Nine months ended October 31, 2005
===================================================================================================
Net sales $ 197,177 $ 135,320 $ 40,366 $ 372,863
Gross profit $ 33,734 $ 27,735 $ 1,518 $ 62,987
Operating income (loss) $ 10,654 $ (40,070) $ (6,775) $ (36,191)
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.
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
9. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. The primary financial
risks include fluctuations in 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 instruments for speculative
purposes, but does enter into hedging arrangements in order to reduce its
exposure to fluctuations in 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).
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
October 31, January 31,
2006 2006
================================================================================
Foreign currency contracts $ (468) $ (38)
Commodity forward contracts $ 5,975 $ 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
contracts; however, a natural hedging relationship exists between the underlying
hedged items and the derivative instrument itself. Changes in fair value of the
foreign exchange contracts 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 continuing to be released
to earnings during fiscal year 2007 in the periods in which the hedged item is
recognized in cost of sales.
20
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:
Nine months ended
October 31,
2006 2005
================================================================================
Balance at beginning of period $ 7,630 $ 8,303
Current year provisions 5,150 3,882
Expenditures (5,531) (5,404)
Effect of foreign currency translation 12 3
- --------------------------------------------------------------------------------
Balance at end of period $ 7,261 $ 6,784
================================================================================
As of October 31, 2006, accrued warranty obligations of $7,261 include
$2,365 in current liabilities and $4,896 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
October 31, October 31,
2006 2005 2006 2005
===============================================================================================
Components of net periodic benefit cost:
Service cost $ 459 $ 430 $ 45 $ 44
Interest cost 1,055 974 62 64
Expected return on plan assets (1,213) (1,217) -- --
Amortization of prior service costs 4 5 (7) (7)
Recognized actuarial loss 529 372 -- --
- -----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 834 $ 564 $ 100 $ 101
===============================================================================================
Pension Benefits Postretirement Benefits
--------------------- -----------------------
Nine months ended Nine months ended
October 31, October 31,
2006 2005 2006 2005
===============================================================================================
Components of net periodic benefit cost:
Service cost $ 1,377 $ 1,374 $ 134 $ 150
Interest cost 3,164 3,070 185 193
Expected return on plan assets (3,638) (3,856) -- --
Amortization of prior service costs 11 12 (21) 15
Recognized actuarial loss 1,588 1,322 2 --
Curtailment 12 29 (36) --
- -----------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,514 $ 1,951 $ 264 $ 358
===============================================================================================
21
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 $46 to its Japanese pension
plan in the nine month period ended October 31, 2006. The Company plans to make
additional contributions of approximately $15 to its Japanese plan for fiscal
year 2007.
The Company also expects to make contributions totaling approximately $300
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 it's 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 October 31, 2006, the Company did
not meet the availability requirements to make these restricted payments.
The Term Loan also includes a maximum leverage ratio. On October 24, 2006,
C&D entered into an agreement with its second-lien lenders whereby the
second-lien lenders have agreed to a waiver of the leverage ratio covenant of
the Loan and Security Agreement, dated December 7, 2005, as amended, for October
31, 2006, until November 30, 2006.
On November 21 2006, the Company completed the private placement of
$54,500 aggregate principal amount of 5.5% Convertible Senior Notes Due 2026.
The Company used substantially all of the net proceeds to repay its $50,000
million secured term loan. This transaction is further described in Note 15.
The Company's debt is more fully described in Note 6 to the Consolidated
Financial Statements included in the Company's 2006 Annual Report on Form 10-K.
22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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 of $591 have since been
recorded. As of the end of the third quarter of fiscal year 2007, the transfer
of production was complete.
On October 31, 2006, the Company announced the closure of its Power
Electronic Division design facility in Portland, Oregon, and the centralization
of its activities into the Company's operations in Mansfield, Massachusetts, and
Toronto, Canada. The Company recognized severance obligations of $619 on October
31, 2006, for the affected employees. It is expected that the Company will
record additional costs of approximately $100 during the fourth quarter of
fiscal year 2007 in association with this move.
The Company expects to abandon its design facility in Portland, Oregon,
during the first quarter of fiscal year 2008. Under the terms of the lease, the
Company is obligated for rent and other costs associated with this lease, at an
annual cost of approximately $480, until March 31, 2010. The Company has no
plans to occupy this facility in the foreseeable future, but is examining
options to sub-lease or otherwise assign this agreement. In accordance with SFAS
No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," the
Company expects to record a charge to earnings to recognize the costs of exiting
this facility, which will be equal to the total amount of rent and other direct
costs, net of estimated sub-lease income, for the period of the lease during the
first quarter of fiscal year 2008.
A reconciliation of the beginning and ending liability and related activity is
shown below.
Balance at Provision Balance at
January 31, 2006 Additions Expenditures October 31, 2006
===============================================================================================
Severance 168 1,885 688 1,365
Other Employee Matters -- 63 63 --
Closure Costs -- 12 12 --
- -----------------------------------------------------------------------------------------------
Total 168 1,960 763 1,365
===============================================================================================
The year to date expense of $1,960 is included in cost of goods sold
($705), selling and general and administrative expense ($834) and research and
development expenses ($421) lines of the Company's consolidated statement of
operations for the nine months ended October 31, 2006.
14. GOODWILL IMPAIRMENT
During the quarter ended October 31, 2006, the Company identified
circumstances suggesting that goodwill within the Power Electronics Division may
be impaired. These circumstances included a decision made by the Company to
evaluate strategic alternatives for the Power Electronics Division, including
the possible sale of the business. In accordance with SFAS No. 142, "Goodwill
and Other Intangible Assets," the Company determined that the carrying value of
its goodwill within the Power Electronic Division exceeded its fair value. The
fair value was calculated using a combination of the income and market approach.
As a result of the impairment test, the Company recorded a pre-tax charge of
$13,947 related to goodwill.
In the comparative quarter in fiscal year 2006, the Company recorded a
pre-tax charge of $2,160 related to the fixed assets at its Tucson, Arizona,
location. The charge was included in cost of sales. The Company also recorded a
pre-tax charge of $20,045 for impairments of its identifiable intangible assets
at Portland Oregon, and Toronto, Canada. In addition, the Company recorded a
pre-tax charge in its Power Electronic Division of $13,674 related to goodwill
impairment.
Other than as described above, there were no impairment indicators with
regard to fixed assets, identifiable intangible assets or goodwill as of October
31, 2006.
23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
15. SUBSEQUENT EVENTS
On November 16, 2006, the Company announced that it has made the decision
to evaluate strategic alternatives for its Power Electronics Division, including
the possible sale of the business.
On November 21, 2006, the Company completed the private placement of
$54,500 aggregate principal amount of 5.5% Convertible Senior Unsecured Notes
Due 2026. The Company used the proceeds to repay its $50,000 secured term loan,
fees and expenses associated with the offering and for general corporate
purposes.
The notes are unsubordinated unsecured obligations and rank equally within
the Company's existing and future unsubordinated and unsecured obligations and
are junior to any of the Company's future secured obligations to the extent of
the value of the collateral securing such obligations. The notes are not
guaranteed by, and are structurally subordinate in right of payment to, all
obligations of the Company's subsidiaries, except for those subsidiaries that
may in the future guarantee certain of the Company's other obligations will also
be required to guarantee the notes.
The notes require the semi-annual payment of interest on May 1 and
November 1 of each year beginning May 15, 2007, at 5.5% per annum on the
principal amount outstanding. The notes will mature on November 15, 2026. Prior
to maturity, the holders may convert their notes into shares of the Company's
common stock under certain circumstances. The initial conversion rate is 206.72
shares of common stock per $1,000 principal amount of notes, which is equivalent
to an initial conversion price of approximately $4.84 per share.
At any time on or after November 15, 2011, the Company may at its option
redeem the notes, in whole or in part, for cash, at a redemption price equal to
100% of the principal amount of the notes to be redeemed, plus any accrued and
unpaid interest. The holder of the notes may require the Company to repurchase
some or all of the holder's notes for cash upon the occurrence of a fundamental
change as defined in the indenture and on each of November 15, 2011, 2016 and
2021 at a price equal to 100% of the principal amount to the notes being
repurchased, plus accrued and unpaid interest, if any, in each case.
If applicable, the Company will pay a make-whole premium on notes
converted in connection with any fundamental change that occurs prior to
November 15, 2011. The amount of the make-whole premium, if any, will be based
on the Company's stock price and the effective date of the fundamental change.
The indenture contains a detailed description of how the make-whole premium will
be determined and a table showing the make-whole premium that would apply at
various stock prices and fundamental change effective dates based on assumed
interest and conversion rates. No make-whole premium will be paid if the price
of the Common Stock on the effective date of the fundamental change is less than
$4.30. Any make-whole premium will be payable in shares of Common Stock (or the
consideration into which the Company's Common Stock has been exchanged in the
fundamental change) on the conversion date for the notes converted in connection
with the fundamental change.
24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The notes were issued in an offering not registered under the Securities
Act of 1933, as amended (Securities Act) and were sold to the Initial Purchasers
on a private placement basis in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act and Rule 144A. Pursuant to the
Registration Rights Agreement, the Company agreed, as promptly as practicable,
but in no event more than 90 days after the original issuance of the notes, to
file a shelf registration statement with the Securities and Exchange Commission
(SEC) covering resales of the notes and the Common Stock issuable upon
conversion of the notes. In addition, the Company agreed to use its commercially
reasonable efforts to cause the shelf registration statement to become effective
under the Securities Act on or prior to 210 days following the date the notes
were originally issued. If the Company should fail to meet the registration
obligations described above, the interest rate payable on the notes will
increase by 0.25% per annum for the first 90 days the Company is not in
compliance with such registration obligations and by an additional 0.25% per
annum from and after the 91st day during which such registration default
continues. As of December 7, 2006, the Company had not filed a shelf
registration statement with the SEC.
In connection with the issuance of the notes, the Company incurred
approximately $2,500 in issuance costs which primarily consisted of investment
banker fees, legal and other professional fees. These costs will be amortized to
interest expense over five years. The Company expects to write off $982 of
deferred financing costs associated with debt under the Company's previous
capital structure during the fourth 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 October 31, 2006, compared to Three Months Ended October
31, 2005
Within the following discussion, unless otherwise stated, "quarter" and
"nine-month period" refer to the third quarter of fiscal year 2007 and the nine
months ended October 31, 2006. All comparisons are with the corresponding period
in the prior year, unless otherwise stated.
Net sales for the third quarter of fiscal year 2007 increased $3,741 or 3%
to $130,707 from $126,966 in the third quarter of fiscal year 2006. This
increase resulted from higher sales in the Power Electronics and Motive Power
divisions, partially offset by lower sales in the Standby Power Division. Sales
in the Power Electronics Division increased $4,051 or 9% primarily due to
increased sales in magnetics, military and data acquisition markets. Sales in
the Motive Power Division increased $782 or 6%, primarily due to pricing.
Standby Power sales decreased by $1,092 or 2%, primarily due to lower volume,
partially offset by higher pricing.
Gross profit for the third quarter of fiscal year 2007 increased $213 or
1% to $18,012 from $17,799. Margins decreased to 13.8% from 14.0% in the prior
year. Gross profit in the Power Electronics Division increased $4,487, with
margins improving from 10.7% to 19.2%. This increase in margin was primarily due
to the increase in sales coupled with prior year charges for fixed asset
impairments of $2,160 and inventory write-offs of $2,434 resulting from
compliance with the European Union's "Restriction on Use of Hazardous Substances
in Electrical and Electronic Equipment" (RoHS) legislation. Gross profit in the
Standby Power Division decreased $3,702, with margins decreasing from 17.7% to
12.6%. This decrease in margin was primarily due to the lower sales, coupled
with higher lead costs. Average London Metal Exchange ("LME") prices increased
from an average of 43 cents per pound in the third quarter of fiscal year 2006
to 61 cents per pound in the third quarter of fiscal year 2007. Gross profit in
the Motive Power Division decreased by $572, with margins decreasing from 6.0%
to 1.7%. Approximately $1,471 in costs and productivity losses were recorded in
the quarter in connection with the transfer of production from Huguenot, New
York, to Reynosa, Mexico, comprising severance and related closure costs of
approximately $108 and productivity and unabsorbed overheads of approximately
$1,363.
Selling, general and administrative expenses for the third quarter of
fiscal year 2007 decreased $919, or 6% to $14,663 from $15,582. This decrease
was primarily due to lower fees for outside professional services in the amount
of $1,002, lower salary and fringe costs in the amount of $823 and lower
amortization expense of $321. These decreases were partially offset by higher
warranty expense of $638. The decrease in professional fees was primarily due to
lower Sarbanes-Oxley related expenses. The decrease in salary and fringes were
primarily due to lower bonus and severance expenses. The decrease in
amortization was primarily due to the intangible asset impairments which took
place during the third quarter of fiscal year 2006.
Research and development expenses for the third quarter of fiscal year
2007 increased $559 or 9% to $6,888 from $6,329. As a percentage of sales,
research and development expenses increased from 5.0% during the third quarter
of fiscal year 2006 to 5.3% during the third quarter of fiscal year 2007. Fiscal
year 2007 expenses include severance costs of $421 associated with the closure
of the Company's design facility in Portland, Oregon.
During the third quarter of fiscal years 2007 and 2006, the Company
recorded goodwill impairments in the amount of $13,947 and $13,674,
respectively.
During the third quarter of fiscal year 2006, the Company recorded
impairments to identifiable intangible assets in the amount of $20,045.
Operating loss for the third quarter of fiscal year 2007 decreased $20,345
to $17,486 from $37,831 in the third 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)
Third Quarter of Fiscal Year 2007 vs. Third Quarter of Fiscal Year 2006
Standby Power Motive
Power Electonics Power
Division Division Division Consolidated
================================================================================================================
Operating Income (loss) - 3Q06 $ 4,766 $(40,753) $ (1,844) $(37,831)
Impairment of identifiable intangible assets - 3Q06 -- 20,045 -- 20,045
Impairment of goodwill - 3Q06 -- 13,674 -- 13,674
Impairment of goodwill - 3Q07 -- (13,947) -- (13,947)
Impairment of fixed assets - 3Q06 -- 2,160 -- 2,160
Management severance costs - 3Q06 487 259 82 828
Management severance costs - 3Q07 (56) (93) (127) (276)
Huguenot closure -- -- (1,471) (1,471)
Portland closure costs -- (619) -- (619)
Assimilation charges - 3Q06 -- 770 -- 770
RoHS compliance - 3Q06 -- 2,434 -- 2,434
Contract manufacturers transition costs -- (203) -- (203)
Lead - increased cost (6,003) -- (500) (6,503)
Lead - hedge income 861 -- 10 871
Decrease (increase) in warranty expenses 204 72 (914) (638)
Decrease in Sarbanes Oxley compliance costs 305 228 73 606
Pricing 3,100 -- 1,300 4,400
Volume/mix (1,377) 500 (500) (1,377)
Other (637) (262) 490 (409)
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) - 3Q07 $ 1,650 $(15,735) $ (3,401) $(17,486)
================================================================================================================
Interest expense, net, increased $688 or 27% in the third quarter of
fiscal year 2007, primarily due to higher debt levels, coupled with a higher
effective interest rate.
Income tax expense of $575 was recorded in the third quarter of fiscal
year 2007, compared to income tax expense of $19,613 in the third quarter of
fiscal year 2006. Tax expense in the three months ended October 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). In the
comparable period of the prior fiscal year, the Company wrote off a significant
portion of its deferred tax assets and recorded valuation allowances against an
additional portion of these deferred tax assets primarily due to the significant
losses recognized in the fiscal year ended January 31, 2005, and the nine months
ended October 31, 2005.
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 third quarter of the current fiscal year, the joint venture had minority
interest of $(55) compared to a minority interest of $(6) in the comparable
period of the prior fiscal year.
As a result of the above, a net loss of $21,701 was recorded compared to a
net loss of $59,983 in the prior year. On a per share basis, the net loss was
$0.85 compared to $2.36 in the third quarter of fiscal years 2007 and 2006,
respectively.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Other Comprehensive Loss
Other comprehensive loss was $14,779 in the third quarter of fiscal year
2007 as compared to $58,144 in the comparable period of fiscal year 2006. This
was primarily due to the Company's net loss of $21,701 during the three months
ended October 31, 2006, as compared to $59,983 during the three months ended
October 31, 2005. Additionally, the Company had an unrealized gain on derivative
instruments in the three months ended October 31, 2006, of $6,919 as compared to
$2,200 during the three months ended October 31, 2005. The gains reflect the
mark to market of the Company's forward commodity contracts as of October 31,
2006 and 2005.
Nine months Ended October 31, 2006, compared to Nine months Ended October
31, 2005
Net sales for the nine months ended October 31, 2006, increased $19,441 or
5% to $392,304 from $372,863 in the nine months ended October 31, 2005. This
increase resulted from higher sales in all three of the Company's divisions.
Sales in the Power Electronics Division increased $8,730 or 6%, primarily due to
higher volume with the Company's tier I customers. Sales in the Standby Power
Division increased $7,618 or 4%. Motive Power sales increased by $3,093 or 8%.
Sales increases in the Standby Power and Motive Power divisions are primarily
due to increased pricing.
Gross profit for the nine months ended October 31, 2006, decreased $2,647
or 4% to $60,340 from $62,987. Margins decreased to 15.4% from 16.9% in the
prior year. Gross profit in the Standby Power Division decreased $3,943, with
margins decreasing from 17.1% to 14.5%. Price increases were more than offset by
higher raw material costs, principally lead, resins, copper and steel. Average
"LME" prices increased from an average of 43 cents per pound in the nine months
ended October 31, 2005, to 55 cents per pound in the nine months ended October
31, 2006. Gross profit in the Power Electronics Division increased $962, with
margins decreasing from 20.5% to 19.9%. Prior year results included charges for
fixed asset impairments of $2,160 and inventory write-offs of $2,434 resulting
from compliance with the European Union's RoHS legislation. Margins in the
division have otherwise 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 Motive Power Division increased by $334,
with margins increasing from 3.8% to 4.3%. This increase is primarily due to
improved pricing, partially offset by higher lead costs as well as expenses
incurred and higher unabsorbed overhead resulting from closing Huguenot, New
York and the transfer of production to Reynosa, Mexico.
Selling, general and administrative expenses for the nine months ended
October 31, 2006, decreased $985 or 2% to $45,621 from $46,606. This decrease
was primarily due to lower salary and fringe costs in the amount of $1,981,
lower fees for outside professional services in the amount of $1,728, and lower
amortization expense of $901. These decreases were partially offset by higher
warranty expense of $1,268, as well as higher selling commissions and travel
costs. The decrease in salary and fringes were primarily due to lower bonus and
severance expenses. The decrease in professional fees was primarily due to lower
Sarbanes-Oxley related expenses. The decrease in amortization was primarily due
to the intangible asset impairments which took place during the third quarter of
fiscal year 2006. Higher warranty costs principally reflect experience changes
in the Motive Power Division.
Research and development expenses for the nine months ended October 31,
2006, increased $2,731 or 14% to $21,584 from $18,853. As a percentage of sales,
research and development expenses increased from 5.1% during the first nine
months of fiscal year 2006 to 5.5% during the first nine months of fiscal year
2007. Fiscal year 2007 expenses include severance costs of $421 associated with
the closure of the Company's design facility in Portland, Oregon. In addition
higher costs were incurred during the first six months of fiscal year 2007 in
connection with the Company's RoHS Compliance Programs.
During the third quarter of fiscal years 2007 and 2006, the Company
recorded impairments to goodwill in the amount of $13,947 and $13,674,
respectively. During the third quarter of fiscal year 2006, the Company recorded
impairments to identifiable intangible assets in the amount of $20,045.
The Company had an operating loss during the first nine months of fiscal
year 2007 in the amount of $20,812 as compared to $36,191 during the first nine
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)
Nine months Ended October 31, 2006 vs. Nine months Ended October 31, 2005
Standby Power Motive
Power Electonics Power
Division Division Division Consolidated
========================================================================================================================
Operating income (loss) - nine months ended October 31, 2005 $ 10,654 $(40,070) $ (6,775) $(36,191)
Impairment of identifiable intangible assets - 3Q06 -- 20,045 -- 20,045
Impairment of goodwill - 3Q06 -- 13,674 -- 13,674
Impairment of goodwill - 3Q07 -- (13,947) -- (13,947)
Impairment of fixed assets - 3Q06 -- 2,160 -- 2,160
Management severance costs - FY06 1,676 1,179 601 3,456
Management severance costs - FY07 (1,025) (246) (333) (1,604)
Huguenot closure -- -- (2,690) (2,690)
Portland closure costs - serverance -- (619) -- (619)
Assimilation charges -- 770 -- 770
RoHS compliance - 3Q06 -- 2,434 -- 2,434
RoHS compliance - FY07 -- (704) -- (704)
Contract manufacturers transition costs -- (1,816) -- (1,816)
Lead - increased cost (12,625) -- (1,154) (13,779)
Lead - hedge income 3,470 -- 26 3,496
Decrease (increase) in warranty expenses 814 82 (2,164) (1,268)
Decrease in Sarbanes Oxley compliance costs 720 488 159 1,367
Pricing 7,658 -- 4,000 11,658
Environmental accruals -- -- 756 756
Volume/mix 5 (2,063) (635) (2,693)
Other - including material costs (4,563) (474) (280) (5,317)
- ------------------------------------------------------------------------------------------------------------------------
Operating income (loss) - nine months ended October 31, 2006 $ 6,784 $(19,107) $ (8,489) $(20,812)
========================================================================================================================
Interest expense, net, increased $2,775 or 40% in the nine months ended
October 31, 2006, primarily due to higher debt levels, coupled with a higher
effective interest rate.
Income tax expense of $3,000 was recorded in the first nine months of
fiscal year 2007, compared to $17,706 in the comparable period of the prior
fiscal year. Tax expense in the nine months ended October 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. In the comparable period of the prior fiscal year, the Company wrote off a
significant portion of its deferred tax assets and recorded valuation allowances
against an additional portion of these deferred tax assets primarily due to the
significant losses recognized in the fiscal year ended January 31, 2005, and the
nine months ended October 31, 2005.
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 nine months ended October 31, 2006, the joint venture had minority
interest of $(371) compared to a minority interest of $(169) in the comparable
period of the prior fiscal year.
As a result of the above, a net loss of $33,966 was recorded as compared
to a net loss of $60,642 in the prior year. On a per share basis, the net loss
was $1.33 compared to $2.39 in the comparable period of the prior fiscal year.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Other Comprehensive Loss
Other comprehensive loss was $33,632 in the nine months ended October 31,
2006, as compared to $59,226 in the comparable period of fiscal year 2006. This
was primarily due to the Company's net loss of $33,966 during the period as
compared to $60,642 during the comparable period of the prior fiscal year.
Liquidity and Capital Resources
Net cash used by operating activities was $13,132 for the nine months
ended October 31, 2006, compared to net cash provided by operating activities of
$17,780 in the comparable period of the prior fiscal year. The decrease in net
cash provided by operating activities was primarily due to: (i) a higher net
loss in fiscal 2007 than fiscal 2006, excluding non cash impairment charges and
the write-off of deferred tax assets and (ii) a decrease of $5,077 in accounts
payable in the first nine months of fiscal year 2007 as compared to an increase
of $10,075 in the first nine months on fiscal year 2006. Inventory was a use of
cash in both the nine months ended October 31, 2006 ($5,930) and the nine months
ended October 31, 2005 ($4,884) as was accounts receivable reflecting stronger
Power Electronics divisional performance in the third quarters of fiscal years
2007 and 2006. The decrease in accounts payable in the current fiscal year is
due to the timing of cash payments and book overdraft activity.
Net cash used by investing activities increased $14,472 to $19,499 in the
first nine months of fiscal year 2007 as compared to $5,027 in the first nine
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 $19,745 in
the first nine months of fiscal year 2007 as compared to net cash used in
financing activities of $13,441 in the first nine months of the prior fiscal
year. Current year financing activities included $17,428 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 $7,711 and the reduction of long-term debt in the
amount of $4,225.
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 October 31, 2006, the maximum availability
calculated under the borrowing base including a $10,000 blocking provision was
$56,224, of which $25,571 was funded, and $8,078 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 2.00% or Prime plus .50%. 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 it's 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 nine 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 October 31, 2006, the Company did
not meet the availability requirements to pay dividends. The Term Loan also
includes a maximum leverage ratio.
On October 24, 2006, C&D entered into an agreement with its second-lien
lenders whereby the second-lien lenders have agreed to a waiver of the leverage
ratio covenant of the Loan and Security Agreement, dated December 7, 2005, as
amended, for October 31, 2006, until November 30, 2006. On November 21, 2006,
the Company completed the private placement of $54,500 aggregate principal
amount of 5.5% Convertible Senior Notes Due 2026. The Company used substantially
all of the net proceeds to repay its $50,000 million secured term loan.
As of October 31, 2006, the Company had $2,100 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,
the following factors that could impact those statements:
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 the outcome of our review of strategic alternatives for the Power
Electronics business, including potential disruption to the business
during the review period;
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 agreements;
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.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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 and in Item 1A of the Company's Form 10-K report for the year ended
January 31, 2006.
33
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 instruments
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.
From time to time, the Company has entered into non-deliverable forward
contracts with certain financial counterparties to hedge our exposure to the
fluctuations in the price of lead, the primary raw material component used in
our Standby Power and Motive Power divisions. The Company employs hedge
accounting in the treatment of these contracts. Changes in the value of the
contracts are marked to market each month and the gains and losses are recorded
in other comprehensive loss 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.
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 4. Controls and Procedures:
Management, with the participation of its Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by it in the reports that it files or submits under the Exchange Act.
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.
35
PART II. OTHER INFORMATION
Item 1A - Risk Factors
FLUCTUATIONS IN PRICES AND AVAILABILITY OF RAW MATERIALS, PARTICULARLY
LEAD, COULD INCREASE OUR COSTS OR CAUSE DELAYS IN SHIPMENTS, WHICH WOULD
ADVERSELY IMPACT OUR RESULTS OF OPERATIONS.
Our operating results could be adversely affected by increases in the cost
of raw materials, particularly lead, the primary component cost of our battery
products, or other product parts or components. Lead represented approximately
32% of our combined Standby and Motive cost of sales for the nine months ended
October 31, 2006. Lead market prices per pound averaged $0.22, $0.20, $0.25,
$0.41 and $0.45 per pound in fiscal years 2002, 2003, 2004, 2005 and 2006,
respectively, and $0.55 for the nine months ended October 31, 2006. Lead traded
as high as $0.81 per pound on December 5, 2006. The increase in lead market
price has negatively impacted our financial results in recent periods. We
historically have not been able to fully offset the effects of higher costs of
raw materials through price increases to customers or by way of productivity
improvements. We estimate that a variation of $0.01 per pound of lead changes
materials costs by approximately $1.5 million for our Standby Power and Motive
Power divisions.
We have lead escalator clauses in certain of our customer contracts which
allow us to offset the increase in lead costs through higher revenue-generally
on a lag basis. Also, during fiscal 2007 we have announced several price
increases and in November 2006 implemented a lead surcharge to mitigate the
impact of the higher lead costs on our results of operations. A significant
increase in the price of one or more raw materials, parts or components or the
inability to successfully implement price increases / surcharges to mitigate
such cost increases could have a material adverse effect on our results of
operations. Additionally, we have instituted lead hedging programs to mitigate
our exposure to volatility in the price of lead. To the extent lead market
prices decline in the future, we may be obligated to purchase a portion of our
lead requirements at higher prices than are then available in the market.
Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate supply and delivery of raw materials, including lead
and other product parts or components from our suppliers or from internal
manufacturing capacity. Although we work closely with both our internal and
external suppliers (and, as to the continuing availability of lead, our industry
associations) to avoid encountering unavailability or shortages, we may
encounter them in the future. The cessation, reduction or interruption of supply
of raw materials, product parts or components could have a material adverse
effect on our operations. The loss of a key supplier or the inability to obtain
certain key products or components could cause delays or reductions in shipments
of our products, which could negatively affect customer satisfaction, thereby
reducing our revenues, or could increase our costs.
WE MAY PURSUE STRATEGIC ALTERNATIVES FOR THE POWER ELECTRONICS DIVISION,
INCLUDING THE POSSIBLE SALE OF THE DIVISION, WHICH COULD DISRUPT OUR BUSINESS
AND MAY UNFAVORABLY IMPACT OUR FUTURE FINANCIAL PERFORMANCE.
We are evaluating strategic alternatives for our Power Electronics
Division, including the possible sale of the business. Any such strategic
alternative, including the possible sale of the Division, may involve risks and
uncertainties that could disrupt our business and may unfavorably impact our
future financial performance. There can be no assurance that any specific
strategic alternative or transaction involving our Power Electronics Division
will occur or, if one is undertaken, of its potential terms or timing. With any
strategic alternative, including a sale of the Division, there are risks that
future operating results could be unfavorably impacted if targeted objectives,
such as cost savings, are not achieved or if other business disruptions occur as
a result of implementing the strategic alternative or activities related to the
strategic alternative.
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.
36
RESTRICTIVE LOAN COVENANTS MAY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS
AND TO PURSUE OUR BUSINESS STRATEGIES, AND OUR FAILURE TO COMPLY WITH THESE
COVENANTS COULD RESULT IN AN ACCELERATION OF OUR INDEBTEDNESS.
Our $75,000,000 principal amount Line of Credit Facility ("Credit
Facility"), the indenture governing our 5.25% Convertible Senior Notes Due 2025
("2005 Notes") and the indenture governing our 5.50% Convertible Senior Notes
Due 2026 ("2006 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 and the indentures governing our 2005 Notes and 2006 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 requires 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.
37
Any breach of the covenants in our Credit Facility or the indentures
governing our 2005 Notes and 2006 Notes could cause a default under our Credit
Facility and other debt (including the 2005 and 2006 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 or, in the case of the 2005 Notes and 2006 Notes, following certain
fundamental changes. 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 the indentures governing the 2005 Notes and 2006 Notes, the
lenders under our Credit Facility or the holders of the 2005 Notes and 2006
Notes could institute foreclosure proceedings against the assets securing
borrowings under those facilities.
DELAYS IN THE RELOCATION OF OUR SHANGHAI FACILITY OR THE FAILURE TO
COMPLETE THAT RELOCATION MAY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF
OPERATIONS.
The government in the Peoples Republic of China has notified our joint
venture that it is required to relocate our Shanghai facility, for which the
Chinese government has paid the joint venture approximately $15.5 million to
effect the relocation and the construction of a new facility with an additional
$1.7 million payable by the Chinese government upon the transfer of the Shanghai
facility to the Chinese government on or about February 2007. We anticipate
commencing production in the new facility in the first quarter of fiscal year
2008. Delays in or failure to complete the relocation and construction of the
new facility, as well as labor disruptions or stoppages relating to the
relocation and related reductions in workforce, may inhibit our ability to
complete orders and deliver products to our customers, and delays in or a
failure to complete the relocation would require us to move production of some
products to other facilities, which would adversely impact our operations and
hinder our growth. Also, this relocation will require us to build up higher
levels of inventory to enable us to continue to satisfy customer demand during
the transition period, which will require a higher investment in working capital
and affect our financial position.
Furthermore, recent changes in the tax legislation in the Peoples Republic
of China have effectively increased the cost basis of product manufactured at
our Shanghai facility and exported from China by over 10%. Absent price
increases to our customers, this would impact profitability of our Shanghai
facility and may also impact the competitiveness of this operation versus
alternative manufacturing locations.
38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
Total Number of Maximum Number
Shares Purchased (or Approximate
as Part of 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
======================================================================================================================
August 1 - August 31, 2006 -- -- -- 1,000,000
September 1 - September 30, 2006 -- -- -- 1,000,000
October 1 - October 31, 2006 -- -- -- 1,000,000
- ------------------------------------------------------ --------------
Total -- --
======================================================================================================================
On September 30, 2004, the Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1 million shares of C&D Technologies common stock having a total purchase
price of no greater than $25 million. This program entirely replaces and
supersedes all previously authorized stock repurchase programs.
Restrictions on Dividends and Treasury Stock Purchases:
The Company entered into two new credit facilities on December 7, 2005.
Both agreements limit restricted payments including dividends and Treasury Stock
purchases to no more than $250,000 for Treasury Stock in any one calendar year
and $1,750,000 for dividends for any one calendar year subject to adjustments of
up to $400,000 per year in the case of the conversion of debt to stock per the
terms of the 5.25% convertible offering. These restricted payments can only
occur with prior notice to the lenders and provided that there is a minimum of
$30,000,000 in excess availability for a period of thirty days prior to the
dividend. The Term Loan also includes a maximum leverage ratio. The Company may
declare and pay a dividend provided these conditions are met and there does not
exist an event of default. As of October 31, 2006, the Company did not meet the
availability requirements to make these restricted payments.
39
Item 6. Exhibits.
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
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).
40
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.
December 7, 2006 By: /s/ Jeffrey A. Graves
------------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
December 7, 2006 By: /s/ Ian J. Harvie
------------------------------------
Ian J. Harvie
Vice President, Finance
and Chief Financial Officer
(Principal Financial
Accounting Officer)
December 7, 2006 By: /s/ Neil E. Daniels
------------------------------------
Neil E. Daniels
Vice President, Corporate
Controller and Treasurer
(Principal Accounting Officer)
41
EXHIBIT INDEX
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.
42