UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
------------------------ -----------------------
Common Stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act Yes [ ] No [x]
Indicate by check mark if the Registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act Yes [ ] No [x]
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes [x] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check
One):
Large accelerated filer [ ] Accelerated filer [x] Non-accelerated filer [ ]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Act) Yes [ ] No [x]
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant, based on the closing price on July 31, 2006:
$180,117,380
Number of shares outstanding of each of the Registrant's classes of common stock
as of March 31, 2007: 25,650,620 shares of Common Stock, par value $.01 per
share.
Documents incorporated by reference:
Part III - Portions of Registrant's Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of Registrant's fiscal year covered
by this Form 10-K.
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C&D TECHNOLOGIES, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2007
INDEX
PART I 1
Item 1 Business 3
Item 1A Risk Factors 13
Item 1B Unresolved Staff Comments 21
Item 2 Properties 21
Item 3 Legal Proceedings 22
Item 4 Submission of Matters to a Vote of Security Holders 22
PART II 23
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities 23
Item 6 Selected Financial Data 24
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 26
Item 7A Quantitative and Qualitative Disclosure about Market Risk 40
Item 8 Financial Statements and Supplementary Data 41
Item 9 Changes in and Disagreements with Auditors on Accounting and Financial Disclosure 41
Item 9A Controls and Procedures 41
Item 9B Other Information 41
PART III 42
Item 10 Directors and Executive Officers and Corporate Governance 42
Item 11 Executive Compensation 42
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
Item 13 Certain Relationships and Related Transactions and Director Independence 42
Item 14 Principal Accountant Fees and Services 42
PART IV 43
Item 15 Exhibits and Financial Statement Schedules 43
Signatures 53
Index to Financial Statements Schedule F-1
C&D TECHNOLOGIES, INC.
PART I
Cautionary Statement for Purposes of the Safe Harbor Provision of the Private
Securities Litigation Reform Act of 1995
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor for forward-looking statements we make. We may, from time to time, make
written or verbal forward-looking statements. Generally, the inclusion of the
words "believe," "expect," "intend," "estimate," "anticipate," "will,"
"guidance," "forecast," "plan," "outlook" and similar expressions in filings
with the Securities and Exchange Commission ("SEC"), in our press releases and
in oral statements made by our representatives, identify statements that
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934 (the
"Exchange Act") and are intended to come within the safe harbor protection
provided by those sections. The forward-looking statements are based upon
management's current views and assumptions regarding future events and operating
performance, and are applicable only as of the dates of such statements. We
undertake no obligation to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise.
By their nature, forward-looking statements involve risk and uncertainties
that could cause our actual results to differ materially from anticipated
results. Examples of forward-looking statements include, but are not limited to:
o projections of revenues, cost of raw materials, income or loss,
earnings or loss per share, capital expenditures, growth prospects,
dividends, the effect of currency translations, capital structure
and other financial items;
o statements of plans, strategies and objectives made by our
management or board of directors, including the introduction of new
products, or estimates or predictions of actions by customers,
suppliers, competitors or regulating authorities;
o statements of future economic performance; and
o statements regarding the ability to obtain amendments under our debt
agreements.
We caution you not to place undue reliance on these forward-looking
statements. Factors that could cause actual results to differ materially from
these forward-looking statements include, but are not limited to, those factors
discussed under Item 1A - Risk Factors, Item 7 - Management's Discussion and
Analysis of Financial Conditions and Results of Operations and Item 8 -
Financial Statements and Supplementing Data, and the following general factors:
o our ability to implement and fund based on current liquidity,
business strategies and restructuring plans;
o our substantial debt and debt service requirements, which may
restrict our operational and financial flexibility, as well as
impose significant interest and financing costs;
o restrictive loan covenants may impact our ability to operate our
business and pursue business strategies;
o the litigation proceedings to which we are subject, the results of
which could have a material adverse effect on us and our business;
o our exposure to fluctuations in interest rates on our variable debt;
o the realization of the tax benefits of our net operating loss carry
forwards, which is dependent upon future taxable income;
o the fact that lead, a major constituent in most of our products,
experiences significant fluctuations in market price and is a
hazardous material that may give rise to costly environmental and
safety claims;
o our ability to successfully pass along increased material costs to
our customers;
o failure of our customers to renew supply agreements;
o competitiveness of the battery markets in North America and Europe;
o the substantial management time and financial and other resources
needed for our consolidation and rationalization of acquired
entities;
o the outcome of our review of strategic alternatives for the Power
Electronics business, including potential disruption to that
business during the review period;
o delays in production and product qualification due to the relocation
of our Shanghai facility;
o political, economic and social changes, or acts of terrorism or war;
o successful collective bargaining with our unionized workforce;
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o risks involved in our foreign operations such as disruption of
markets, changes in import and export laws, currency restrictions,
currency exchange rate fluctuations and possible terrorist attacks
against the United States interests;
o our ability to maintain and generate liquidity to meet our operating
needs;
o we may have additional impairment charges;
o our ability to acquire goods and services and/or fulfill labor needs
at budgeted costs;
o economic conditions or market changes in certain market sectors in
which we conduct business;
o our success or timing of new product development;
o changes in our product mix;
o success of productivity initiatives, including rationalizations,
relocations or consolidations;
o impact of changes in our management;
o costs of our compliance with environmental laws and regulations and
resulting liabilities; and
o our ability to protect our proprietary intellectual property and
technology;
Reportable Segments
Our operations are classified into the following reportable business
segments:
o Standby Power Division
o Power Electronics Division
o Motive Power Division
Segments are determined using the "management approach," which means the
way management organizes the segments within the enterprise for making operating
decisions and assessing performance. The Standby Power Division and the Motive
Power Division report to the same General Manager. Together, these two
reportable segments are sometimes referred to as the Power Systems Division.
The financial information regarding our three business segments, which
includes net sales and operating income for each of the three years in the
period ended January 31, 2007, is provided in Note 17 to the Consolidated
Financial Statements. See Part II, Item 8.
The Market for Our Products
We manufacture and market products in the following general categories by
business segment:
o Standby Power Division - industrial batteries and fully integrated
reserve power systems and components for the standby power market,
which includes uninterruptible power supply ("UPS") applications for
computer systems and corporate data networks, telecommunications
reserve power systems, cable television ("CATV") signal powering,
utilities and solar.
o Power Electronics Division - custom, standard and modified standard
direct current ("DC") to DC converters, embedded high frequency
alternating current ("AC") to DC and DC to DC switching power
supplies and magnetics (transformers and inductors); digital meters
and data acquisition components.
o Motive Power Division - motive power systems for the material
handling equipment market.
We market our products through independent manufacturer's representatives,
national and global distributors, specialty resellers and our own sales
personnel to end users and original equipment manufactures ("OEMs").
We sell some products to the U.S. Government. These sales accounted for
less than 5% of our total Company sales during each of our last three fiscal
years.
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Item 1. Business
Overview
C&D Technologies, Inc. (together with its operating subsidiaries, "we,"
"the Company," "our" or "C&D") is a leading manufacturer, marketer and
distributor of electrical power storage systems for the standby power and motive
power markets. We also are a leading producer of electronic power supply and
conversion products for large OEMs of telecommunications, networking, office,
industrial and military equipment.
History
We were organized in 1985 to acquire all the assets of C&D Power Systems
Division of Allied Corporation, which, along with its predecessors, had been
manufacturing batteries for more than 50 years. We have a global manufacturing
platform with plants located in the United States ("U.S."), United Kingdom
("U.K."), Mexico and China and sell our products globally in more than 65
countries and to thousands of customers. Through organic development and
strategic acquisitions, we believe we have become one of the largest providers
of lead acid batteries used in standby power systems and are a leading provider
of motive power systems in North America. Moreover, we believe our Power
Electronics division is one of the largest global providers of DC to DC
converter products to the merchant market.
We currently conduct our business in three reportable segments: (1)
Standby Power, (2) Motive Power and (3) Power Electronics.
Standby Power
Our Standby Power division manufactures, markets and distributes lead acid
batteries and standby power systems that integrate lead acid batteries with
other electronic components, which are used to provide backup or standby power
for electrical equipment in the event of power loss from the primary power
source. Our broad product offering includes: flooded lead acid batteries
("flooded"); valve-regulated lead acid ("VRLA") batteries; and power rectifiers
and other related power distribution and monitoring equipment. Standby power
systems are used in UPS systems, wireless and wireline telecommunications, CATV
systems, utilities and other applications.
To meet the needs of our customers, we sell our batteries and other
standby power systems components in a wide variety of sizes, configurations and
electrical capacities. Specifically, we sell lead acid batteries in two broad
categories: flooded and VRLA. Flooded batteries, which require periodic watering
and maintenance, are typically used in UPS, telecommunications and utility
applications. VRLA, or sealed, batteries, which are often smaller and require
less maintenance, have shorter useful lives and are used in wireless cell sites,
CATV systems, corporate data centers and computer networks and other
applications. Power rectifiers convert or "rectify" external AC power into DC
power at the required level and quality of voltage necessary to constantly
charge the standby battery and operate the user's equipment. Our batteries and
standby power systems are marketed and sold under the DYNASTY(R), MAXRATE(R),
msENDUR (R), LIBERTY(R) and SAGEON(R) brands.
Motive Power
Our Motive Power division manufactures, markets and distributes lead acid
batteries and systems used to power, monitor, charge and test the batteries used
in electric material handling vehicles, including forklift trucks, automated
guided vehicles and airline ground support equipment. Components for these
systems include lead acid batteries, battery charging equipment and related
specialty equipment and parts, which we also sell individually. Our customers
include end users in a broad array of industries, dealers of forklift trucks and
other material handling vehicles and, to a lesser extent, OEMs of forklift
trucks and material handling vehicles. Through our direct sales force and
distributor network, we sell to end users in industrial manufacturing, retail
distribution and airline ground support. Our batteries and motive power systems
are marketed and sold under the C-LINE(R) CLASSIC, EM-LINE(R) and V-LINE(R),
FR(TM), IFR(TM), VERSACHARGE(R) and VFR(TM) brands.
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Power Electronics
Through our Power Electronics division, we manufacture and market custom,
standard and modified-standard power supply and conversion products. Power
supply and conversion products are utilized in almost all electronic products to
convert available AC or DC voltage to the required level and quality of DC
voltage to power the associated equipment. Our products incorporate advanced
technology and are designed for reliable operation within the host device.
Specific products include DC to DC converters, AC to DC power supplies, digital
panel meters, data acquisition components, transformers and inductors. These
product families are used in a wide variety of applications, with outputs
ranging from sub-one watt to several kilowatts. Our customers include OEMs of
telecommunications equipment, computer and networking equipment, office
equipment, military equipment, industrial automation systems and test
instrumentation. Our power electronics products are marketed and sold under the
CELAB(TM), DATEL(R) and C&D(R) product brand names.
In fiscal year 2005, we acquired Celab Limited ("Celab"), a provider of
power conversion products predominantly sold into military, CATV and
telecommunications applications in Europe; Datel Holding Corporation ("Datel"),
a manufacturer of primarily DC to DC converters, with additional product
offerings in data acquisition components and digital panel meters; and the Power
Systems division of Celestica, Inc. ("CPS"), a provider of DC to DC converters
and AC to DC power supplies. As a result of these acquisitions, we provide a
full line of power supply and conversion products to a significantly expanded
Tier I customer base.
Fiscal Year Reporting
Our fiscal year ends on the last day of January. Any references to a
fiscal year means the 12-month period ending January 31 of the year mentioned.
Products and Customers by Business Segment
Standby Power Division
Through our Standby Power Division, we manufacture and market integrated
reserve power systems and components for the standby power market, which
includes telecommunications, UPS, military, cable, utilities, nuclear power
plant, pipeline, oil and gas and other process industries. 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, CATV signal powering, corporate data center network backup for
use during power outages and power for utility switching stations during periods
of power interruption. Our customers include industry-leading OEMs, broadband
and telecommunications providers, large investor owned utilities as well as
large end user customers across all industries including, banking, retail,
healthcare, and manufacturing.
We manufacture lead acid batteries for use in reserve power systems. We
sell these batteries in a wide range of sizes and configurations in two broad
categories:
o flooded batteries; and
o valve-regulated lead acid batteries (VRLA) (sealed type).
Flooded batteries require periodic watering and maintenance. VRLA
batteries require less maintenance and are often smaller.
To meet the needs of our customers, our reserve power systems include a
wide range of power electronics products, consisting principally of power
rectifiers and distribution and monitoring equipment. Our power rectifiers
convert or "rectify" external AC power into DC power at the required voltage to
constantly charge the reserve battery and operate the user's equipment. For
installations with end applications that require varied power levels from 12Amps
to 6000Amps, our power control and distribution equipment distributes the
rectified power for each of the applications.
UPS. The Standby Power Division produces batteries for UPS systems, which
provide instant battery backup in the event of primary power loss or
interruption, thereby permitting an orderly shutdown of equipment or continued
operation for a limited period of time until another power source comes back
on-line. C&D offers distinct product families to meet the needs and requirements
of this growing industry. Our DYNASTY High Rate Max VRLA Series batteries have
been engineered specifically for UPS applications and deliver extended life,
improved runtime, in the same space as alternatives while complying with
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rigorous industry standards. Our flooded XT products are utilized for large
system back up in major data centers and critical 24/7 applications. As a
critical component supplier to overall power backup solutions, our Standby Power
Division continues to work closely with major global UPS OEMs to design
cost-effective, reliable products to meet customer expectations.
Telecommunications. As with UPS, the Standby Power Division produces
battery solutions to fill the many application needs of today's
telecommunications industry. Designed specifically for the telecommunications
need for long life and extended runtime, our flooded MCT(TM) and LCT(TM) family
of products have become the battery of choice for central office and critical
back up applications. With the addition of our facility in Reynosa, Mexico, in
fiscal year 2004, we have added the VRLA MSE(TM) and msENDUR family of products
designed for wireless applications, as well as other applications for
non-flooded requirements. In addition, our C&D Tel Series VRLA Long Duration
batteries are designed to Telcordia standards to meet the demanding requirements
of telecommunications applications. These batteries operate in a wide variety of
environmental conditions, meet prolonged run time needs so as to maintain
operations during power loss and protect sophisticated electronics equipment.
Our telecommunications customers use the majority of our standby power products
in applications, such as central telephone exchanges, microwave relay stations,
private branch exchange ("PBX") systems and wireless telephone systems. Our
major telecommunications customers include national long distance companies,
competitive local exchange carriers, wireline and wireless system operators,
paging systems and PBX telephone locations using fiber optic, microwave
transmission or traditional copper-wired systems.
CATV Signal Powering and Broadband. DYNASTY Broadband Series batteries are
designed for demanding standby float applications in abusive environments. These
batteries have been designed to offer the best combination of run time and
service life for CATV signal powering and broadband applications. Our gelled
electrolyte technology provides excellent heat transfer properties, which enable
these batteries to perform in high temperature environments. Unlike other
competitive gel technologies, the DYNASTY Broadband Series does not require
cycling subsequent to delivery to meet 100% of rated capacity. Our DYNASTY
Broadband Series of batteries is considered the market leader for CATV powering
in North America.
Modular Power Plants. We offer several modular power plants, which are a
type of integrated reserve power system. These products, which are referred to
as the SAGEON(TM) Series Power Plant, integrate advanced rectifiers with
virtually maintenance-free valve-regulated batteries. These plants are designed
to fit virtually any application that demands stable, reliable and easily
expandable DC power.
Equipment for Electric Utilities and Industrial Control Applications. We
produce rectifiers, batteries and integrated systems used in reserve power
systems for switchgear and instrumentation control systems used in electric
utilities and industrial control applications. These power systems provide
auxiliary power that enables fossil fuel, hydro and nuclear power generating
stations, switching substations offshore platforms and other industrial control
facilities to be shut down in an orderly fashion during emergencies or power
failures until a power source comes back on-line.
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Motive Power Division
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.
We offer a broad line of motive power equipment including the C-LINE
battery, which we believe is the industry standard for long life, the V-LINE
battery for general material handling applications and the new LIBRA(TM) VRLA
battery for light duty and environmentally sensitive applications. In addition
we have introduced Velocity, a new fast charge battery system, that integrates
both battery and charger technology to optimize shift operations in many large
customers. We also offer a broad line of battery charging, and associated
specialty equipment and parts.
Power Electronics Division
Through our Power Electronics Division, we manufacture and market custom,
standard and modified-standard electronic power supply systems, including DC to
DC converters, for large 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.
We sell the majority of our power supply products to OEMs of electronic
products on either a custom, standard or modified-standard basis. Power supplies
are embedded in almost all electronic products and are used to convert available
AC or DC voltage to the required level and quality of DC voltage to power the
associated equipment.
Our power supplies incorporate advanced technology and are designed for
reliable operation of the host equipment. These products include DC to DC
converters, AC to DC and DC to DC power supplies and magnetics (transformers and
inductors) for use in a wide variety of applications, with outputs ranging from
sub one watt to several kilowatts. DC to DC products are circuit board mounted
devices used to convert available system power to required component voltages.
DC to DC converters are widely used in distributed power and intermediate bus
architecture where system voltages require conversion to a higher or lower
voltage to power components such as microprocessors and arrays. AC to DC power
supplies convert alternating current, the form in which virtually all power is
delivered by electric utilities to end users, into precisely controlled direct
current that is required by sensitive electronic application architecture.
In the telecommunications industry, our power supplies are broadly used in
central office and transmission equipment. We also produce power supplies for
networking equipment (switches, routers, hubs, etc.), office equipment (mass
storage, digital printing, etc.), and industrial equipment (computing,
automation and test instrumentation).
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.
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Sales, Installation and Servicing
The sales, installation and servicing of certain Standby Power and Motive
Power products are performed through several networks of independent
manufacturer's representatives located throughout North America. Most of our
independent manufacturer's representatives (or contractors in the case of
installation or service) operate under contracts providing for compensation on a
commission basis or as a distributor with product purchased for resale. Certain
Standby Power and Power Electronics products are sold via a network of
independent manufacturer's representatives as well as independent distributors
located throughout the world.
In addition to these networks of independent manufacturer's
representatives and distributors, we employ internal sales management consisting
of regional sales managers, account specific sales persons and product/market
specialists. The regional sales managers are each responsible for managing a
number of independent manufacturer's representatives and for developing
long-term relationships with large end users, OEMs and national accounts. We
also employ a separate sales organization that works with the independent
manufacturer's representative network and directly with certain large customers.
We have internal product management and marketing personnel in each of our
divisions to manage the development of new products from the initial concept
definition and management approval stages through the engineering, production
and sales processes. They are also responsible for applications engineering,
technical training of sales representatives and the marketing communications
function.
We maintain branch sales and service facilities in North America, Europe
and Asia, with the support of our headquarters and service personnel, and have
business relationships with sales representatives and distributors throughout
the world.
No single customer of C&D accounted for 10% or more of our net sales for
the year ended January 31, 2007. We typically sell our products with terms
requiring payment in full within 30 days. We warrant our battery products for
various periods of time depending on the type of product and its application.
The longest warranties, for periods up to twenty years, generally are applicable
to flooded standby power batteries sold by our Standby Power Division. Power
supply products from our Power Electronics Division are generally sold with a
one year warranty.
Backlog
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of orders, customer
requirements and, taking into account considerations of manufacturing capacity
and flexibility, the speed with which we fill those orders. Period-to-period
comparisons may not be meaningful. Occasionally, orders may be canceled by the
customer prior to shipment.
Our order backlog at March 31, 2007 and 2006 was $115,055,000 and
$109,481,000, respectively. With the exception of our Celab subsidiary, we
expect to fill virtually all of the March 31, 2007, backlog during fiscal year
2008. Approximately $15,534,000 of backlog related to Celab is expected to be
shipped after fiscal year 2008.
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Manufacturing and Raw Materials
We manufacture our products at seven domestic plants, two plants in China,
two plants in Mexico and two plants in the United Kingdom. Additionally, the
Company maintains four design centers in the U.S., Canada and China. We
manufacture most key product lines at a single focused plant in order to
optimize manufacturing efficiency, asset management and quality control. A
significant portion of our Power Electronics products are manufactured by third
party manufacturers.
On April 6, 2006, the Company announced actions associated with the
revitalization of its Motive Power business. These actions included launching
new products to open access to several unaddressed markets, the closure of our
Huguenot, New York facility and relocation of production to Reynosa, Mexico and
the establishment of new distribution centers to service the Company's customer
base. The transfer of production of Motive Power products was completed during
the fourth quarter of fiscal year 2007. In January 2007, the Company sold its
Huguenot, New York facility. Additionally during the fourth quarter of fiscal
year 2007, the Company closed its Milwaukie, Oregon Power Electronics facility,
transferring its design, development and manufacturing capabilities to other
Power Electronics Divisions locations, primarily Mansfield, Massachusetts and
Toronto, Ontario, Canada.
The principal raw materials used in the manufacture of our products
include lead, steel, copper, plastics, printed circuit boards and electronic
components, all of which are generally available from multiple suppliers. We use
a number of suppliers to satisfy our raw materials needs.
ISO certification assures customers that our internal processes and
systems meet internationally recognized standards. We are ISO 9001:2000 standard
certified at the majority of our locations.
Competition
The industrial battery market is highly competitive and has experienced
substantial consolidation both among competitors who manufacture and sell
industrial batteries and among customers who purchase industrial batteries. Our
competitors range from start up companies to major domestic and international
corporations. We also compete with other energy storage technologies.
Our products compete on the basis of:
o product quality and reliability;
o technology;
o reputation;
o delivery capability; and
o customer service.
We offer competitive pricing and highly value our relationships with our
customers. In addition, we believe that we have certain competitive advantages
in specific product lines.
We believe that we are one of the largest producers in the standby market
and one of the five largest producers of motive power systems in North America.
We believe that the ability to provide a single source for design, engineering,
manufacturing and service is an important element in our competitive position.
We compete principally with Exide Technologies, GS Yuasa, Enersys and East Penn
Manufacturing in the standby power market. In the motive power segment, our
principal competitors include Enersys, Exide Technologies and East Penn
Manufacturing.
When lead prices rise, certain of our battery competitors that own
smelting operations may have lower lead costs than we have. However, when lead
prices decline, the high fixed costs associated with these operations may
provide the Company with a cost advantage.
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We believe our Power Electronics Division is a leading supplier of board
mounted DC to DC technologies worldwide. In addition we have leading technology
in the area of AC to DC and DC to DC power supplies, data acquisition, digital
panel meters and magnetics. Our channels-to-market and preferred supplier
position at major global OEMs set us apart in the power electronics field. We
have several major technology licenses (with other power companies) and
development alliances with industry-leading silicon vendors that give us a
competitive portfolio in the power electronics space. Our Power Electronics
Division's value proposition is rooted in technology, quality and reliability
coupled with strategically located manufacturing facilities worldwide to meet
the cost and logistic needs of our customers.
Research and Development
Research and development expenses for the fiscal years ended January 31,
2007, 2006 and 2005, were $27,302,000, $25,128,000 and $18,641,000,
respectively.
We maintain extensive technology departments concentrating on
electrochemical and electronics technologies. We focus on:
o research into lead-acid and other energy storage technologies;
o design and development of new products;
o development and improvement of existing products;
o sustaining engineering;
o production engineering (including quality testing and managing the
changes in production capacity); and
o evaluation of competitive products.
We have research and development facilities in North America, China and
Europe, which utilize computer-aided design tools and testing equipment.
o Standby Power and Motive Divisions. New products have become a
significant contributor to revenue. The division has a very active
new product development program for products to be launched in the
next three years. New product launches in fiscal year 2007 include:
o a new motive power product line - the LIBRA Line. This product
eliminates the need for water additions while maintaining long
cycle life and traditional vertical cell orientation;
o a higher capacity front access VRLA battery, the TEL-170. This
product enhances energy storage for telecom applications in a
space efficient, customer friendly package;
o an expansion of our UPS line, the XTR(TM) line. This product
provides new battery sizes and configurations to match
customer power requirements;
o a new electronic power system, the SAGEON Micro Power Module,
that offers the flexibility to configure an effective power
solution for switchgear and telecommunications customers in
space saving rack configurations; and
o certification of the msEndur product line to the requirements
of Telcordia specification SR-4228, the standard for battery
performance and reliability for the telecommunications
industry.
Additionally, the divisions strive to partner with companies and
organizations that can potentially provide breakthrough technologies for our
existing and new markets. We established a number of such arrangements during
the year.
o Power Electronics Division. Development effectiveness continued to
improve during the year, and a continued emphasis was placed on
designs at the leading edge of function, density and efficiency. In
addition, the Power Electronics Division continued to develop high
performance custom AC to DC and DC to DC solutions for use in
communications and high-end computing applications such as in blade
servers, fiber-to-the-home and central office applications.
9
International Operations
Along with our domestic manufacturing facilities, we have international
manufacturing facilities in China, Mexico, and the United Kingdom. Our 67% joint
venture facility in Shanghai, China, manufactures industrial batteries that are
sold primarily in China, Europe and the Middle East. Our Power Electronics
Division facilities in China and the United Kingdom manufacture electronics that
are sold primarily in Europe, North America, and the Far East. International
sales accounted for 36%, 33% and 26% of net sales for the years ended January
31, 2007, 2006 and 2005, respectively.
Patents and Trademarks
Our practice is to apply for patents on new inventions, designs and
processes that have strategic value or are associated with existing or
prospective product lines, service offerings or operations. We believe that the
growth of our business will depend primarily upon the quality and reliability of
our products and our relationships with our customers, rather than the extent of
our patent protection. While we believe that patents are important to our
business operations, the loss of any single or several patents would not have a
material adverse effect on our company. We regard all of our trademarks as being
of substantial value in the marketing of our products, some of which are:
C&D(R), C&D TECHNOLOGIES(R), C&D TECHNOLOGIES POWER SOLUTIONS(R), DATEL(R),
DYNASTY(R), LIBERTY(R), LIBRA(TM), LIBERTY SERIES(R), C-LINE(R), COMPUCHARGE(R),
EM-LINE(R), FERRO FIVE(R), FERRO 1500(TM), HYPERON(R), MAXRATE(R), msENDUR(R),
RANGER(R), SAGEON(R), SCOUT(R), SMARTBATTERY(R), and V-LINE(R).
Employees
On January 31, 2007, we employed approximately 2,900 people. Of these
employees, approximately 1,900 were employed in manufacturing and approximately
1,000 were employed in field sales, technology, manufacturing support, sales
support, marketing and administrative activities. Our management considers our
employee relations to be satisfactory. Employees at five North American plants
are represented by five different unions under collective bargaining agreements.
Environmental Regulations
Our operations are 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, the following:
o requirements relating to the handling, storage, use and
disposal of lead and other hazardous materials used in
manufacturing processes and contained in solid wastes;
o record keeping and periodic reporting to governmental entities
regarding the use and disposal of hazardous materials;
o monitoring and permitting of air emissions and water
discharge; and
o 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.
10
We operate under a comprehensive environmental, health and safety
compliance program, which is headed by an environmental director and staffed
with trained environmental professionals. As part of our program, we:
o prepare environmental and health and safety practice manuals
and policies;
o conduct employee training;
o develop and implement waste minimization initiatives;
o undertake periodic internal and oversee external audits of our
operations and environmental and health and safety programs;
o practice and engage in routine sampling and monitoring of
employee chemical and physical exposure levels;
o engage in sampling and monitoring of potential points of
environmental emissions; and
o prepare and/or review internal reports to regulatory bodies
and interface with them regarding environmental, safety and
other issues.
In addition, we also have installed certain pollution abatement equipment
to reduce emissions and discharges of regulated pollutants into the environment.
Our program monitors and seeks to resolve potential environmental liabilities
that result from, or may arise from, current and historic hazardous materials
handling and waste disposal practices. We have in place a spent product
recapture and recycling program for our facilities and our customers.
While we believe that we are in material compliance with the applicable
environmental requirements, we have received, and in the future may receive,
citations and notices from governmental regulatory authorities that certain of
our operations are not in compliance with our permits or applicable
environmental requirements. Occasionally we are required to pay a penalty or
fine, to install control technology or to make equipment or process changes (or
a combination thereof) as a result of the non-compliance or changing regulatory
requirements. When we become aware of any non-compliance or change in regulatory
requirements, we take immediate steps to correct and resolve the issues. The
associated costs have not had a material adverse effect on our business,
financial condition or results of operations.
Notwithstanding the Company's efforts to maintain compliance with
applicable environmental requirements, if injury or damage to persons or the
environment arises from hazardous substances used, generated or disposed of in
the conduct of the Company's business (or that of a predecessor to the extent
the Company is not indemnified therefor), the Company may be held liable for
certain damages, the costs of investigation and remediation, and fines and
penalties, which could have a material adverse effect on the Company's business,
financial condition, or results of operations. However, under the terms of the
purchase agreement with Allied Corporation ("Allied") for the acquisition (the
"Acquisition") of the Company (the "Acquisition Agreement"), Allied was
obligated to indemnify the Company for any liabilities of this type resulting
from conditions existing at January 28, 1986, that were not disclosed by Allied
to the Company in the schedules to the Acquisition Agreement. These obligations
have since been assumed by Allied's successor in interest, Honeywell
("Honeywell").
C&D is participating in the investigation of contamination at several lead
smelting facilities ("Third Party Facilities") to which C&D allegedly made scrap
lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
C&D and several other potentially responsible parties ("PRP"s) agreed upon a
cost sharing allocation for performance of remedial activities required by the
United States Environmental Protection Agency ("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.
11
The Company has terminated operations at its Huguenot, New York, facility,
and has completed 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 the 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., and in December 2006, the parties executed a settlement
agreement which provides for a cost sharing arrangement with Avnet bearing a
majority of the future costs associated with the investigation and remediation
of the lagoon-related contamination
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 $1,750,000 (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
("CVOC"s) in groundwater.
In January 1999, the Company received notification from the U.S. 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 $1,600,000. The Court entered the Consent Decree on November 20,
2006. In addition to payment of 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 Resource Conservation and Recovery Act ("RCRA") corrective action program.
The Company conducted testing in accordance with an investigation work plan and
submitted the test results to EPA. EPA thereafter notified C&D that EPA also
wanted the Company to embark upon a more comprehensive RCRA investigation 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. In January 2007, C&D agreed to an
Administrative Order on Consent with EPA to investigate, and remediate if
necessary, site conditions at the facility. The scope of any potential exposure
is not defined at this time.
12
The Company has conducted site investigations at its Conyers, Georgia
facility, and has detected chlorinated solvents in groundwater and lead in soil
both onsite and offsite. The Company has recently initiated remediation of the
chlorinated solvents in accordance with a Corrective Action Plan, which was
approved by the Georgia Department of Natural Resources in January 2007.
Additionally, the Company has recently initiated remediation of lead impacted
soils identified in the site investigations. In September 2005, an adjoining
landowner filed suit against C&D alleging, among other things, that C&D was
allowing lead contaminated stormwater runoff to leave the C&D property and
contaminate the adjoining property. The parties settled the litigation in March
2007 with C&D agreeing to purchase a parcel of land between the C&D property and
plaintiff's property and to use the transferred parcel to construct a
bioremediation area to prevent potential future lead contamination to
plaintiff's property.
We accrue reserves for liabilities in our consolidated financial
statements and periodically reevaluate the reserved amounts for these
liabilities in view of the most current information available in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies." As of January 31, 2007, accrued environmental reserves totaled
$2,192,000 consisting of $1,469,000 in other current liabilities and $723,000 in
other liabilities. Based on currently available information, we believe 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 our business, financial condition or results of operations.
Certifications
C&D has included as Exhibits 31.1 and 31.2 to its Annual Report on form
10-K for fiscal year ended January 31, 2007, filed with the SEC, certifications
of the Chief Executive Officer and Chief Financial Officer of C&D regarding the
quality of C&D's public disclosure. In June 2006, C&D submitted to the New York
Stock Exchange the certification of the Chief Executive Officer required by the
rules of the New York Stock Exchange certifying that he was not aware of any
violation by C&D of the New York Stock Exchange corporate governance listing
standards.
Available Information
We file annual, quarterly and current reports, proxy statements and other
information with the SEC. These filings are available to the public on the
Internet at the SEC's website at www.sec.gov. You may also read and copy any
document we file with the SEC at the SEC's public reference room, located at 100
F Street, N.E. Room 1580, Washington, D.C. 20549.
C&D maintains an Internet web site (www.cdtechno.com) and makes available
free of charge on or through the web site its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. C&D also makes available on its web site and in
printed form upon request, C&D's Code of Business Conduct, which includes C&D's
Corporate Compliance Program and a Code of Ethics for C&D's Chief Executive
Officer, Chief Financial Officer and all C&D personnel serving in a finance,
accounting, tax or investor relations role.
Item 1A. Risk Factors
Our operations could be affected by various risks, many of which are
beyond our control. Based on current information, we believe that the following
identifies the most significant risk factors that could affect our business.
However, the risks and uncertainties we face are not limited to those discussed
below. Additional risks and uncertainties not presently known to us or that we
currently believe to be immaterial also could affect our business. Past
financial performance may not be a reliable indicator of future performance and
historical trends should not be used to anticipate results or trends in future
periods. You should carefully consider the following risks, which could
adversely affect our results of operations and financial condition.
13
Fluctuations in prices and availability of raw materials, particularly
lead, could increase our costs or cause delays in shipments, which would
adversely impact our business and results of operations.
Our operating results could be adversely affected by increases in the cost
of raw materials, particularly lead, the primary cost component of our battery
products, or other product parts or components. Lead represented approximately
30% of our cost of sales in our Power Systems Division for the fiscal year 2007.
Lead market prices averaged $0.41 per pound in fiscal year 2005, $0.45 per pound
in fiscal year 2006 and $0.60 per pound in fiscal year 2007. Lead traded as high
as $0.93 per pound on April 10, 2007. The increase in lead market price has
negatively impacted our financial results in recent years. 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 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 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.
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 shortages 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. We may not undertake any specific strategic
alternative or transaction involving our Power Electronics Division, and we do
not know of the terms or timing of any such action. With any strategic
alternative, including a sale of the Division, there are risks that future
operating results could be unfavorably impacted if we do not achieve targeted
objectives, such as cost savings, or if other business disruptions occur as a
result of implementing the strategic alternative or activities related to the
strategic alternative.
Lack of successful integration of acquired businesses or difficulties in
making acquisitions or forming strategic alliances could hinder our ability to
implement our business strategies.
In addition to our acquisitions of Celab, Datel and CPS during fiscal year
2005, we may continue to make acquisitions, and in the future, may make
divestitures and form strategic alliances, which may not be completed or be
beneficial to us. Acquisitions present significant challenges and risks relating
to the integration of the acquired business into our Company, including
substantial management time and financial and other resources, and we may not
manage acquisitions successfully. Our success in realizing the expected benefits
from past and any future acquisitions depends on a number of factors, including
retaining or hiring local management personnel, successful integration of the
operations, information technology ("IT") systems, customers, vendors and
partner relationships of the acquired companies and our ability to devote
capital and management attention to the newly acquired companies in light of
other operational needs. Also, the integration of the sales, accounting and
research and development personnel across several geographic areas is important
to the success of our strategy. Our efforts to implement our strategy could be
affected by a number of factors beyond our control, such as increased
competition and general economic conditions in the countries where newly
acquired companies operate. Any failure to effectively implement our strategy
could have a material adverse effect on our results of operations.
14
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 meet these financial provisions may be affected by events
beyond our control. Rising prices of lead and other commodities and other
circumstances have resulted in us obtaining amendments to our financial
covenants in the past.
Any breach of the covenants in our Credit Facility 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 we incur 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.
15
Recent changes in the tax legislation in the Peoples Republic of China may
impact our competitiveness and increase the cost basis of product manufactured
at our Shanghai facility.
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, these changes would impact profitability of our Shanghai facility
and may also impact the competitiveness of this operation versus alternative
manufacturing locations.
A substantial amount of our materials sourcing originates in China.
Enforcement of existing laws or contracts based on existing Chinese law may be
uncertain and sporadic, and it may be difficult to obtain swift and equitable
enforcement or to obtain enforcement of a judgment by a court of another
jurisdiction in China. The relative inexperience of China's judiciary in many
cases creates additional uncertainty as to the outcome of any litigation. In
addition, interpretation of statutes and regulations may be subject to
government policies reflecting domestic political changes.
We may face additional impairment charges if economic environments in
which our businesses operate and key economic and business assumptions
substantially change.
Assessment of the potential impairment of property, plant and equipment,
goodwill and other identifiable intangible assets is an integral part of our
normal ongoing review of operations. Testing for potential impairment of
long-lived assets is dependent on numerous assumptions and reflects our best
estimates at a particular point in time, which may vary from testing date to
testing date. The economic environments in which our businesses operate and key
economic and business assumptions with respect to projected product selling
prices and materials costs, market growth and inflation rates, can significantly
affect the outcome of impairment tests. Estimates based on these assumptions may
differ significantly from actual results. Changes in factors and assumptions
used in assessing potential impairments can have a significant impact on both
the existence and magnitude of impairments, as well as the time at which such
impairments are recognized. Future changes in the economic environment and the
economic outlook for the assets being evaluated could also result in additional
impairment charges. Any significant asset impairments would adversely impact our
financial results.
Adverse economic or market changes in certain market sectors in which we
conduct business could impact our results of operations.
Our results of operations could be adversely affected by conditions in the
domestic and global economies or the markets in which we conduct business, such
as telecommunications, UPS, cable television, switchgear and control, material
handling and military. Our products are principally used in connection with the
telecommunications and IT industries. Weakness in these markets, such as a
decline in consumer and business expenditures for IT and telecommunications may
lead to a decrease in the demand for our equipment or the prices that we can
charge. Any such decrease could adversely affect our operating results by
decreasing revenues and gross profit margins. For example, there were
significant declines in corporate telecommunications and IT capital expenditures
in recent years, and this negatively affected our results of operations.
We are subject to pricing pressure from our larger customers.
We face significant pricing pressures in all of our business segments from
our larger customers. Because of their purchasing size, our larger customers can
influence market participants to compete on price terms. Such customers also use
their buying power to negotiate lower prices. If we are not able to offset
pricing reductions resulting from these pressures by improved operating
efficiencies and reduced expenditures, those price reductions may have an
adverse impact on our financial results.
16
We operate in extremely competitive industries and are subject to
continual pricing pressure.
We compete with a number of major domestic and international manufacturers
and distributors of electrical storage and power conversion products, as well as
a large number of smaller, regional competitors. Due to excess capacity in some
sectors of our industries, consolidation and the financial difficulties being
experienced by several of our competitors, we have faced continual and
significant pricing pressures. These pricing pressures may prevent us from fully
recovering increased costs we might incur. We anticipate heightened competitive
pricing pressure as Chinese and other foreign producers, who are able to employ
labor at significantly lower costs than producers in the U.S. and Western
Europe, expand their export capacity and increase their marketing presence in
our major U.S. and European markets. Several of our competitors have stronger
technical, marketing, sales, manufacturing, distribution and other resources, as
well as more significant name recognition and established positions in the
market and longer-standing relationships with OEMs and other customers than we
do. In addition, certain of our competitors own lead smelting facilities which,
during periods of lead cost increases or price volatility, may provide a
competitive pricing advantage and reduce their exposure to volatile raw material
costs. Our ability to maintain and improve our competitive position has
depended, and continues to depend, on our ability to control and reduce our
costs in the face of these pressures.
Difficulties or delays in product development would hinder our financial
performance.
Our financial performance and our ability to compete are largely dependent
on our ability to renew our pipeline of new products and to bring these products
to market, including:
o introducing viable new products;
o successfully completing research and development projects or
integrating or otherwise capitalizing upon purchased or licensed
technology;
o obtaining adequate intellectual property protection;
o maintaining or improving product quality or reducing product costs
through continued product engineering; and
o utilizing or gaining market acceptance of new products.
To the extent our research and development initiatives are unsuccessful in
one or more of these pursuits, the market does not accept our new or improved
products or our sales force is unsuccessful in marketing such products, our
financial results will be negatively impacted. In addition, industry standards,
customer expectations, new technologies or other products may emerge that could
render one or more of our products less desirable or obsolete. Our financial
performance could also be affected by competitive products and technologies.
17
We are subject to risks associated with our foreign operations.
We have operations in Canada, China, England, Germany, Japan and Mexico,
either directly or through joint ventures. In our financial statements, we
translate local currency financial results into United States dollars based on
average exchange rates prevailing during a reporting period. Our most
significant foreign currency exposures are to the Canadian dollar, the British
pound, the Chinese RMB (Yuan) and the Euro. During times of a strengthening
United States dollar, our reported international revenue and earnings will be
reduced because the local currency will translate into fewer United States
dollars, in spite of our efforts to hedge against currency risk exposures. In
addition, we may face restrictions on our ability to repatriate funds from our
international operations.
Foreign operations are subject to risks that can materially increase the
cost of operating in foreign countries and thereby may reduce our overall
profitability. These risks include, but are not limited to:
o currency exchange rate fluctuations;
o increases in foreign tax rates and foreign earnings potentially
being subject to withholding requirements or the imposition of
tariffs, exchange controls or other restrictions;
o general economic and political conditions in countries where we
operate and/or sell our products, including inflation;
o the difficulties associated with managing an organization spread
throughout various countries;
o required compliance with a variety of foreign laws and regulations;
and
o limited protection of intellectual property in certain foreign
jurisdictions.
Our worldwide operations could be adversely impacted by political,
economic and social changes, or acts of terrorism or war.
Changes in the laws or policies of governmental and quasi-governmental
agencies, as well as social and economic conditions, in the countries in which
we operate (including the United States) could affect our business and our
results of operations. In addition, economic factors (including inflation and
fluctuations in interest rates and foreign currency exchange rates) and
competitive factors (such as price competition and business combinations or
reorganizations of competitors) or a decline in industry sales or cancelled or
delayed orders due to economic weakness or changes in economic conditions,
either in the United States or other countries in which we conduct business,
could negatively affect our results of operations. Terrorist acts or acts of
war, whether in the United States or abroad, could cause damage or disruption to
our operations, our suppliers, channels to market or customers, or could cause
costs to increase, or create political or economic instability, any of which
could have a material adverse effect on our results of operations.
We rely on third parties whose operations are outside our control.
We rely on arrangements with third-party shippers and carriers such as
independent shipping companies for timely delivery of our products to our
customers. As a result, we may be subject to carrier disruptions and increased
costs due to factors that are beyond our control, including labor strikes,
inclement weather, natural disasters and rapidly increasing fuel costs. If the
services of any of these third parties become unsatisfactory, we may experience
delays in meeting our customers' product demands and we may not be able to find
a suitable replacement on a timely basis or on commercially reasonable terms.
Any failure to deliver products to our customers in a timely and accurate manner
may damage our reputation and could cause us to lose customers.
We also utilize third party distributors and manufacturer's
representatives to sell, install and service certain of our products. While we
are selective in whom we choose to represent us, it is difficult for us to
ensure that our distributors and manufacturer's representatives consistently act
in accordance with the standards we set for them. To the extent any of our
end-customers have negative experiences with any of our distributors or
manufacturer's representatives; it could reflect poorly on us and damage our
reputation, thereby negatively impacting our financial results.
18
We also utilize contract manufacturers to manufacture certain of our Power
Electronics products. In some instances we are contractually obligated to use a
contract manufacturer for production of specific products for which we have
supply agreements at contractual rates. To the extent our manufacturing partners
have issues with product quality or timely delivery of products, it could impair
our relationships with our customers. Additionally, certain of our manufacturing
agreements may not provide us with sufficient flexibility to negotiate pricing
or to secure for ourselves some of the inputs for our products, which could
result in higher manufacturing costs. Any of these factors could impair our
financial results by reducing future revenue or increasing costs.
Maintaining our manufacturing operations requires significant capital
expenditures, and our inability or failure to maintain our operations would have
a material adverse impact on our market share and ability to generate revenue.
We had capital expenditures of approximately $25 million and $9 million in
fiscal years 2007 and 2006, respectively. We expect to spend approximately 3% to
4% of future revenues on capital expenditures in future periods, excluding the
construction of any new manufacturing facilities. We may incur significant
additional capital expenditures as a result of unanticipated expenses,
regulatory changes and other events that impact our business. If we are unable
or fail to adequately maintain our manufacturing capacity or quality control
processes, we could lose customers and there could be a material adverse impact
on our market share and our ability to generate revenue.
Our productivity initiatives, including rationalizations, relocations or
consolidations may not be sufficiently effective to improve our financial
performance or generate desired cost savings.
We have undertaken and may continue to undertake productivity initiatives,
including, among others, reorganizations, including the shut down or sale of
portions of our business, and facility rationalizations to improve performance
or generate cost savings. In addition, we may from time to time relocate or
consolidate one or more of our operations. We may not realize any planned
performance improvements or cost savings from such activities and delays or
other interruptions in production or delivery of products may occur as the
result of any rationalization, relocation or consolidation. A rationalization,
relocation or consolidation could also cause asset impairments and/or trigger
environmental remediation obligations. Further, we may not complete or derive
any benefit from these initiatives.
We are placing renewed emphasis on improving the quality of the products
we manufacture and on more timely delivery of our products. In Motive Power in
particular, we are working to improve our product portfolio, our manufacturing
processes and our sales channels including our relationships with manufacturers'
representatives and truck dealers. In Power Electronics, we are working to
improve our product fulfillment process and to more tightly integrate our
various operations to achieve desired revenue and expense synergies.
Additionally, we continue to work to optimize our manufacturing portfolio by
transitioning capacity to lower-cost regions and by selectively using contract
manufacturers for certain of our Power Electronics products. To the extent
management is unsuccessful at achieving the goals of any or all of these
initiatives, we will not be able to achieve our anticipated operating results.
Costs of complying with environmental laws and regulations and liabilities
that we may incur from fines and penalties, in the United States and
internationally, could adversely impact our financial results and condition.
Our facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations, as well as participation in voluntary programs, are significant and
will continue to be so for the foreseeable future. We are also subject to
potentially significant fines and penalties for non-compliance with applicable
laws and regulations. Our accruals for such costs and liabilities may not be
adequate because the estimates on which the accruals are based depend on a
number of factors including, but not limited to, the nature of the problem, the
complexity of the issues, the nature of the remedy, the outcome of discussions
with regulatory agencies and/or the government or third parties and, as
applicable, other PRPs at multiparty sites, the number and financial viability
of other PRPs and risks associated with litigation. These costs and liabilities
could adversely impact our financial results and condition.
19
In response to the European Union's "Restriction on Use of Hazardous
Substances in Electrical and Electronic Equipment," we established a schedule
for compliance for our Power Electronics division. We will continue to strive
for elimination of, and seek to have our component part suppliers eliminate,
prohibited hazardous substances consistent with legislative requirements. We
will continue to actively monitor decisions around environmental legislation and
align our compliance with those decisions and the needs of our customers. These
efforts may not be successful or completed on a timely basis, the failure of
either of which could have an adverse effect on our results of operations.
Our results may be adversely impacted by customers that become insolvent
or bankrupt.
We are exposed to the credit risk of our customers, including risk of
insolvency and bankruptcy. Although we have programs in place to monitor and
mitigate the associated risk, such programs may not be effective in reducing our
credit risks or risks associated with potential bankruptcy of our customers. To
the extent one or more of our customers becomes insolvent or seeks protection
from its creditors, we may not be able to collect money due to us and we could
incur write-downs to our accounts receivable balances. Additionally, the loss of
such customers could negatively impact our financial performance in future
periods.
Pending or future litigation could impact our financial results and
condition.
Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims adverse to us.
Types of potential litigation cases include: product liability, contract,
employment-related, labor relations, personal injury or property damage,
intellectual property, stockholder claims and claims arising from any injury or
damage to persons, property or the environment from hazardous substances used,
generated or disposed of in the conduct of our business (or that of a
predecessor to the extent we are not indemnified for those liabilities).
Our domestic business operations are dependent upon our ability to engage
in successful collective bargaining with our unionized workforce.
Currently, approximately 40% of our domestic workforce is unionized, and
we engage in collective bargaining negotiations with the unions that represent
them. If we are unable to reach agreement with any of our unionized work groups
in future negotiations regarding the terms of their collective bargaining
agreements, or if additional segments of our workforce become unionized, we may
be subject to work interruptions or stoppages. Strikes or labor disputes with
our employees may adversely affect our ability to conduct our business.
A change in our product mix may cause our results of operations to differ
substantially from the anticipated results in any particular period.
Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than anticipated. Our
profit margins vary among products, customers and geographic markets.
Consequently, if our mix of any of these is substantially different from what is
anticipated in any particular period, our profitability could be lower than
anticipated.
If customers fail to renew supply agreements on terms as favorable to us
as existing agreements, our financial results could be adversely impacted.
We supply products to certain of our customers pursuant to time-limited
supply agreements. These contracts may not be renewed or, if renewed, they may
not be renewed on as favorable terms to us as existing agreements, which could
adversely impact our financial results.
20
We may not be able to adequately protect our proprietary intellectual
property and technology.
We rely on a combination of copyright, trademark, patent and trade secret
laws, non-disclosure agreements and other confidentiality procedures and
contractual provisions to establish, protect and maintain our proprietary
intellectual property and technology and other confidential information. Despite
our efforts to protect our proprietary intellectual property and technology and
other confidential information, unauthorized parties may attempt to copy or
otherwise obtain and use our intellectual property and proprietary technologies,
which could adversely impact our competitive position and therefore our business
operations and financial results.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
Set forth below is certain information, as of March 31, 2007, with respect
to our principal properties.
Square
Location Footage Products Manufactured at or Use of Facility
- ------------------------------------------------------------------------------------------------------------
United States Properties:
Milwaukee, Wisconsin (1) 370,000 Small standby power batteries
Attica, Indiana (1) 295,000 Large standby power batteries
Leola, Pennsylvania (1) 240,000 Motive power batteries, Round Cell and battery R&D
laboratory
Mansfield, Massachusetts (1) 180,000 Power supplies, data acquisition and digital panel
meters, headquarters of Power Electronics Division
Conyers, Georgia (1) 161,000 Small standby power batteries
Dunlap, Tennessee (2) 72,000 Standby power and motive power electronics products and
electronics R&D laboratory
Blue Bell, Pennsylvania (2) 63,000 Corporate headquarters, Standby Power and Motive Power
divisional headquarters
Tucson, Arizona (2) 57,000 DC to DC converters and AC to DC power supplies
International Properties:
Shanghai, China (3) 775,000 Small standby power batteries
Reynosa, Mexico (1) 240,000 Large standby power batteries and motive power batteries
Nogales, Mexico (2) 81,000 DC to DC converters and AC to DC power supplies
Guangzhou, China (2) 46,000 DC to DC converters and wound magnetics
Bordon, United Kingdom (2) 42,000 Low voltage switchmode power supply units
Milton Keynes, United Kingdom (2) 33,000 DC to DC converters, wound magnetics and electronics R&D
laboratory
Romsey, United Kingdom (2) 21,000 Distribution center- standby power batteries
Mississauga, Canada (2) 20,000 Sales office and distribution center- motive and standby
power batteries
Markham, Canada (2) 17,000 Design and development of power supplies
(1) Property is owned by C&D.
(2) Property is leased by C&D.
(3) Building is owned by a joint venture, of which the Company owns 67%;
however, the land is leased under a 70-year agreement, of which 70 years remain.
21
Item 3. Legal Proceedings
We are involved in ordinary, routine litigation incidental to the conduct
of our business. None of this litigation, individually or in the aggregate, is
material or is expected to be material to our business, financial condition or
results of operations in any year. See Business - Environmental Regulations for
a description of certain legal proceedings in which we are involved.
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
engaged in negotiations with both the EPA and DOJ through March 2003 regarding a
potential resolution of this matter. On March 24, 2003, the government filed
suit against C&D in an action captioned United States of America v. C&D
Technologies, Inc., 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 $1,600,000. The Court entered the Consent Decree on
November 20, 2006. In addition to payment of 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 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. We do not expect that the Consent Decree
will have a material adverse effect on our business, financial condition or
results of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
22
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Our Common Stock is traded on The New York Stock Exchange under the symbol
CHP. There were 59 registered record holders of our Common Stock on March 31,
2007.
The following table sets forth, for the periods indicated, the high and
low sales prices for our Common Stock as reported by the New York Stock
Exchange. These prices represent actual transactions, but do not reflect
adjustment for retail markups, markdowns or commissions.
Years Ended January 31,
2007 2006
------------------------ ------------------------
Fiscal Quarter High Low High Low
- --------------------------------------------------------------------------------
First Quarter $ 9.55 $ 7.90 $ 15.23 $ 6.79
Second Quarter 8.24 6.15 10.70 6.16
Third Quarter 8.18 4.93 11.75 8.50
Fourth Quarter 5.50 3.80 10.42 6.80
Dividends. For the years ended January 31, 2007 and 2006, we declared
dividends per share as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
- --------------------------------------------------------------------------------
2007 $ 0.01375 $ -- $ -- $ --
2006 $ 0.01375 $ 0.01375 $ 0.01375 $ 0.01375
Our loan agreements permit dividends to be paid on our Common Stock, up to
$1,750,000 in any one calendar year, subject to certain restrictions, including
having excess availability of at least $30,000,000 for each of the thirty
consecutive days immediately prior to the date of the dividend. Subject to those
restrictions and the provisions of Delaware law, future dividends will depend on
our earnings, financial condition and other factors. (See Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources.)
On February 22, 2000, the Board of Directors of C&D declared a dividend of
one common stock purchase right ("Right") for each share of Common Stock
outstanding on March 3, 2000 to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
C&D and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder
Services, L.L.C.), as rights agent. On November 15, 2004, an amendment was
signed among C&D, Mellon Investor Services LLC and the Bank of New York whereby
Mellon Investor Services LLC resigned as rights agent effective as of 12:00
A.M., New York time, November 30, 2004. We appointed the Bank of New York as
successor rights agent effective as of 12:01 A.M., New York time, December 1,
2004. Upon the occurrence of certain events, each Right will entitle the
registered holder to purchase from C&D one one-hundredth of a share of Common
Stock at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of C&D, unless our Board of Directors acts
otherwise, each holder of a Right, other than Rights beneficially owned by the
acquiring company, will thereafter have the right to receive upon exercise: (i)
that number of shares of our common stock having a market value equal to two
times the purchase price of the Right or (ii) that number of shares of common
stock of the acquiring company that at the time of the transaction has a market
value of two times the exercise price of the Right.
Issuer Purchases of Equity Securities
There were no repurchases of the Company's common stock by C&D
Technologies, Inc. during the last three months ended January 31, 2007.
23
Item 6. Selected Financial Data
The following selected historical financial data for the periods indicated
have been derived from C&D's audited consolidated financial statements.
STATEMENT OF OPERATIONS DATA
(In thousands, except share and per share data)
Fiscal 2007 (1) 2006 (2) 2005 (3)(4) 2004 (5) 2003
- -----------------------------------------------------------------------------------------------------------------
NET SALES $ 524,580 $ 497,407 $ 414,738 $ 324,824 $ 335,745
- -----------------------------------------------------------------------------------------------------------------
COST OF SALES 450,995 414,499 348,080 248,145 257,046
- -----------------------------------------------------------------------------------------------------------------
GROSS PROFIT 73,585 82,908 66,658 76,679 78,699
OPERATING EXPENSES:
Selling, general and administrative expenses 60,907 61,812 47,480 40,459 34,647
Research and development expenses 27,302 25,128 18,641 9,542 9,509
Identifiable intangible assets impairment -- 20,045 464 -- --
Goodwill impairment 13,947 13,674 74,233 -- 489
- -----------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (28,571) (37,751) (74,160) 26,678 34,054
- -----------------------------------------------------------------------------------------------------------------
Interest expense, net 13,437 10,487 5,015 1,268 3,800
Other expense (income), net 1,245 (21) 1,612 1,641 1,457
- -----------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST (43,253) (48,217) (80,787) 23,769 28,797
Provision (benefit) for income taxes 4,094 12,362 (21,289) 8,795 9,414
- -----------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (47,347) (60,579) (59,498) 14,974 19,383
Minority interest (1,273) 83 (5) 83 91
- -----------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (46,074) $ (60,662) $ (59,493) $ 14,891 $ 19,292
=================================================================================================================
Net (loss) income per common share - basic (6) $ (1.80) $ (2.39) $ (2.35) $ 0.58 $ 0.75
=================================================================================================================
Net (loss) income per common share - diluted (7) $ (1.80) $ (2.39) $ (2.35) $ 0.58 $ 0.74
=================================================================================================================
Dividends per common share $ 0.01375 $ 0.055 $ 0.055 $ 0.055 $ 0.055
=================================================================================================================
BALANCE SHEET DATA
Working capital $ 77,973 $ 96,750 $ 115,897 $ 64,005 $ 53,776
Total assets 400,211 418,419 480,923 385,950 382,156
Short-term debt 6,498 1,038 1,389 -- 14,062
Long-term debt 147,925 133,067 135,004 19,620 25,857
Stockholders' equity 83,890 130,817 209,328 269,533 258,274
(1) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2007: Cost of Sales includes non-cash fixed
asset impairment charges totaling $985 and $763 relating to environmental clean
up charges in our Standby Power Division. Operating expenses include a non-cash
goodwill impairment charge of $13,947, relating to the Power Electronics
Division.
(2) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2006: Cost of Sales includes non-cash fixed
asset impairment charges at our Tucson, Arizona, facility totaling $2,161 and
non-cash fixed asset impairment charges at our Huguenot, New York, facility
totaling $2,641. Cost of Sales also includes the reversal of $3,504 of
environmental reserves as a result of revised estimates associated with two of
our facilities. Operating expenses include non-cash goodwill and intangible
asset impairment charges of $13,674 and $20,045, respectively, relating to the
Power Electronics Division.
24
(3) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2005: Cost of sales includes non-cash fixed
asset impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602; environmental clean-up charges at these two
facilities in the amount of $3,881; and rigging, transportation and severance
costs related to the transfer of production to our Reynosa, Mexico, facility of
$1,426. Operating expenses include non-cash goodwill and intangible asset
impairment charges of $74,233 and $464, respectively, relating to the Power
Electronics Division.
(4) On May 27, 2004, we acquired Celab Limited, based in Hampshire,
United Kingdom, a provider of power conversion products, predominately sold into
military, CATV and telecommunications applications in Europe. On June 30, 2004,
we acquired Datel Holding Corporation and its subsidiaries, a Mansfield,
Massachusetts-based manufacturer of primarily DC to DC converters, with
additional product offerings in data acquisition components and digital panel
meters. On September 30, 2004, we acquired the Power Systems division of
Celestica, Inc., which we now operate as CPS, a Toronto, Ontario-based company.
CPS develops DC to DC converters and AC to DC power supplies which are sold on a
direct basis to large computing and communications OEMs. For reporting purposes,
these three acquisitions are included in the Power Electronics Division.
(5) On September 25, 2003, we and our wholly owned Mexican subsidiary, C&D
Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery
Industrial Corporation of America, and its Mexican subsidiary, Matsushita
Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in
Reynosa, Mexico, and the equipment in that facility historically used for the
manufacture of large, VRLA batteries for standby power applications. In
addition, we entered into a worldwide technology license agreement with
Matsushita Battery Industrial Co. Ltd. of Japan for selected patents and
know-how relating to the manufacturing technology for the aforementioned
products. For reporting purposes, the acquisition of the Reynosa facility and
associated operating results are included in both the Motive Power and Standby
Power divisions.
(6) Based on 25,590,448, 25,379,717, 25,349,488, 25,536,628 and
25,818,024, weighted average shares outstanding - basic, for fiscal years 2007,
2006, 2005, 2004 and 2003, respectively.
(7) Based on 25,590,448, 25,379,717, 25,349,488, 25,731,961 and
26,025,179, weighted average shares outstanding - diluted, for fiscal years
2007, 2006, 2005, 2004 and 2003, respectively.
25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts in this Item 7 are in thousands, except per share
amounts and per pound lead amounts.
The following discussion and analysis of our results of operations and
financial condition for the fiscal years ended January 31, 2007 and 2006 should
be read in conjunction with Selected Consolidated Financial Data and our audited
consolidated financial statements and the notes to those statements. Our
discussion contains forward-looking statements based upon current expectations
that involve risks and uncertainties, such as our plans, objectives, opinions,
expectations, anticipations and intentions and beliefs. Actual results and the
timing of events could differ materially from those anticipated in those
forward-looking statements as a result of a number of factors. See "Cautionary
Note Regarding Forward-Looking Statements" and "Risk Factors" elsewhere in this
Report on Form 10-K.
Impact of Economy and Shift in Customer Demand and results
During fiscal year 2007, our Standby and Motive Power divisions
experienced stable demand for products sold, both domestically and
internationally, while demand for our Power Electronics Division products
softened.
Over the last three fiscal years, the costs of our raw materials, of which
lead is our primary material, have risen significantly from an annual average of
$0.41 per pound in 2005 to $0.60 per pound in 2007. We have implemented a series
of selling price increases and a surcharge mechanism for some of our customers,
to partially offset some of the impact of these rising commodity costs. Certain
of our customer contracts currently provide for fixed pricing agreements;
accordingly, such pricing measures do not fully recover higher commodity costs.
Raw Material Pricing and Productivity
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of our industrial batteries and electronics
products and, accordingly, represent a significant portion of our materials
costs. During fiscal years 2007, 2006 and 2005, the average London Metals
Exchange ("LME") price per pound of lead was as follows:
Fiscal Year 2007 2006 2005
- ------------------------------------------------------------------------------------
Average annual LME price per pound of lead $ 0.60 $ 0.45 $ 0.41
Lowest average monthly LME price per pound of lead $ 0.44 $ 0.39 $ 0.34
Highest average monthly LME price per pound of lead $ 0.78 $ 0.57 $ 0.44
26
Lead represented approximately 30% of our Standby Power and Motive Power
divisions cost of good sold for the fiscal year 2007. Lead traded as high as
$0.93 per pound on April 10, 2007. The increase in lead market price has
negatively impacted our financial results in recent periods. We historically
have not been able to fully offset the effects of higher costs of raw materials
through price increases to customers or by way of productivity improvements. We
estimate that a variation of $0.01 per pound of lead changes materials costs by
approximately $1,500 for our Standby Power and Motive Power divisions.
Inflation
The cost to C&D of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. All of our raw materials
prices, including lead, steel, copper and resins, as well as fuel costs,
continued to rise in fiscal year 2007. We generally have not been able to fully
offset these higher prices through our pricing actions.
We believe that, over recent years, we have been able to offset
inflationary cost increases on most items other than lead by:
o effective raw materials purchasing programs;
o increases in labor productivity;
o improvements in overall manufacturing efficiencies; and
o selective price increases of our products.
Results of Operations
The following table sets forth selected items in C&D's consolidated
statements of operations as a percentage of sales for the periods indicated.
Fiscal 2007 2006 2005
- --------------------------------------------------------------------------------
NET SALES 100.0% 100.0% 100.0%
- --------------------------------------------------------------------------------
COST OF SALES 86.0% 83.3% 83.9%
- --------------------------------------------------------------------------------
GROSS PROFIT 14.0% 16.7% 16.1%
OPERATING EXPENSES:
Selling, general and administrative expenses 11.6% 12.4% 11.5%
Research and development expenses 5.2% 5.1% 4.5%
Identifiable intangible asset impairment 0.0% 4.0% 0.1%
Goodwill impairment 2.6% 2.8% 17.9%
- --------------------------------------------------------------------------------
OPERATING LOSS (5.4)% (7.6)% (17.9)%
- --------------------------------------------------------------------------------
Interest expense, net 2.6% 2.1% 1.2%
Other expense, net 0.2% 0.0% 0.4%
- --------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (8.2)% (9.7)% (19.5)%
Provision (benefit) for income taxes 0.8% 2.5% (5.2)%
- --------------------------------------------------------------------------------
NET LOSS BEFORE MINORITY INTEREST (9.0)% (12.2)% (14.3)%
Minority interest (0.2)% 0.0% 0.0%
- --------------------------------------------------------------------------------
NET LOSS (8.8)% (12.2)% (14.3)%
- --------------------------------------------------------------------------------
27
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and
results of operations are based upon the Company's Consolidated Financial
Statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these
financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the related disclosure of contingent assets and liabilities. On an ongoing
basis, the Company evaluates its estimates based on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
The Company believes the following critical accounting policies and
estimates affect the preparation of its Consolidated Financial Statements.
Revenue Recognition
The Company recognizes revenue when the earnings process is complete. This
occurs when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past. Periodically, the Company enters into prepayment contracts with
various customers and receives advance payments for product to be delivered in
future periods. These advance payments are recorded as deferred revenue and are
included in other current liabilities and other liabilities on the Consolidated
Balance Sheet. Revenue associated with advance payments is recognized as
shipments are made and title, ownership and risk of loss pass to the customer.
Amounts billed to customers for shipping and handling fees are included in Net
Sales and costs incurred by the Company for the delivery of goods are classified
as Cost of Sales in the Consolidated Statements of Operations. Taxes on revenue
producing transactions are excluded from Net Sales.
Allowance for Doubtful Accounts
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience by industry and regional economic data. The Company reviews
its allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All
other balances are reviewed on a pooled basis by age and type of receivable.
Account balances are charged off against the allowance when the Company believes
it is probable the receivable will not be recovered. The Company does not have
any off-balance-sheet credit exposure related to its customers.
Inventory Reserves
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for all inventories. The Company
adjusts the value of its obsolete and unmarketable inventory to the estimated
market value based upon assumptions of future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Market value for raw materials
is based on replacement cost and for work-in-process and finished goods on net
realizable value.
Valuation of Long-lived Assets
The Company performs periodic evaluations of the recoverability of the
carrying amount of long-lived assets (including property, plant and equipment,
and intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. Events or changes in circumstances are evaluated based on a number
of factors including operating results, business plans and forecasts, general
and industry trends and, economic projections and anticipated cash flows.
Impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. The Company periodically evaluates the estimated
useful lives of all long-lived assets and periodically revises such estimates
based on current events.
28
Impairment of Goodwill
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill is not amortized and is
subject to impairment tests. Goodwill is tested for impairment on an annual
basis or upon the occurrence of certain circumstances or events. The Company
determines the fair value of its reporting units using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to the Company's overall market
capitalization. The fair value of the reporting units is compared to the
carrying value of the reporting units to determine if an impairment loss should
be calculated. If the book value of a reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the implied fair value of the goodwill to the book value of the
goodwill. If the book value of the goodwill exceeds the fair value of the
goodwill, an impairment loss is recorded. The implied fair value of goodwill is
determined by subtracting the fair value of the identifiable assets of a
reporting unit from the fair value of the reporting unit.
Employee Benefit Plans
The Company's pension plans and postretirement benefit plans are accounted
for using actuarial valuations required by Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions", SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" as
amended by SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R)". The Company considers accounting for employee benefit plans critical
because management is required to make significant subjective judgments about a
number of actuarial assumptions, including discount rates, compensation growth,
long-term return on plan assets, retirement, turnover, health care cost trend
rates and mortality rates. Depending on the assumptions and estimates used, the
pension and postretirement benefit expense could vary within a range of outcomes
and have a material effect on reported results. In addition, the assumptions can
materially affect accumulated benefit obligations and future cash funding.
Deferred Tax Valuation Allowance
The Company records a valuation allowance to reduce its deferred tax
assets to amounts that are more likely than not to be realized. While the
Company has considered future taxable income and ongoing prudent and feasible
tax planning strategies in assessing the need for the valuation allowances, if
the Company were to determine that it would be able to realize its deferred tax
assets in the future in excess of the Company's net recorded amount, an
adjustment to the deferred tax asset would increase income in the period that
such determination was made. Likewise, should the Company determine that it
would not be able to realize all or part of its net deferred tax assets in the
future, an adjustment to the deferred tax asset would decrease income in the
period such determination was made. The Company regularly evaluates the need for
valuation allowances against its deferred tax assets.
Warranty Reserves
The Company provides for the estimated cost of product warranties at the
time revenue is recognized. While we engage in extensive product quality
programs and processes, including actively monitoring and evaluating the quality
of our suppliers' products and processes, C&D's warranty obligation is affected
by product failure rates, warranty replacement costs and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
warranty replacement costs or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be made.
29
Litigation and Environmental Reserves
The Company is involved in litigation in the ordinary course of business,
including personal injury, property damage and environmental litigation. We also
expend funds for environmental remediation of both company-owned and third-party
locations. In accordance with SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," we record a
loss and establish a reserve for litigation or remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonably estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other PRPs, their ability to contribute and
prior experience. These judgments are reviewed quarterly as more information is
received and the amounts reserved are updated as necessary. However, the
reserves may materially differ from ultimate actual liabilities if the loss
contingency is difficult to estimate or if management's judgments turn out to be
inaccurate. If management believes no best estimate exists, the minimum loss is
accrued.
Fiscal 2007 Compared to Fiscal 2006
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal year 2007 increased $27,173 or 5% to $524,580 from
$497,407 in fiscal year 2006. This increase resulted from higher sales in the
Standby Power Division and Motive Power Division while sales were flat in the
Power Electronics Division. Sales in the Standby Power Division increased
$22,854 or 9%. Motive Power Division sales increased $3,875 or 7%. Sales
increases in the Standby Power and Motive Power divisions are primarily due to
increased pricing. Sales in the Power Electronics Division increased $444 or
0.2% compared to fiscal year 2006.
Gross profit for fiscal 2007 decreased $9,323 or 11% to $73,585 from
$82,908. Margins decreased to 14.0% from 16.7% in fiscal year 2006. Gross profit
in the Standby Power Division decreased $8,304 with margins decreasing from
16.8% to 12.5%. 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 45 cents per pound in fiscal year 2006 to 60 cents per pound
in fiscal 2007. Fiscal year 2007 results included severance related to our
Shanghai, China facility of $2,387 and costs associated with the closure of the
division's Conyers, Georgia facility of $1,993. Gross profit in the Motive Power
Division increased $2,186, with margins increasing from 2.0% to 5.5%. 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 our Huguenot, New York facility and the transfer of production to our
Reynosa, Mexico, facility. Prior year results included charges for fixed asset
impairments of $2,641, related to our Huguenot, New York facility. Gross profit
in the Power Electronics Division decreased $3,205, with margins decreasing from
20.8% to 19.0%. Margins in the division have been negatively impacted by
unfavorable product mix and pricing changes, costs associated with the Company's
transfer of production to new Asian contract manufacturers and general increases
in raw material and component costs. Fiscal year 2007 results included charges
associated with the closure of the division's Milwaukie, Oregon facility of
$1,588. Prior year results included charges of $2,161 related to fixed asset
impairments at the Division's Tucson, Arizona facility coupled with $2,684 in
charges and expenses resulting from compliance with the European Union's RoHS
legislation.
Selling, general and administrative expenses for fiscal year 2007
decreased $905 or 1% to $60,907 from $61,812. This decrease was primarily due to
lower salary and fringe costs in the amount of $1,079, lower fees for outside
professional services in the amount of $2,366 and lower amortization expense of
$966. These decreases were partially offset by higher warranty expense of $867,
as well as higher selling commissions of $1,655 and higher travel costs of $494.
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 and audit related expenses. The decrease in amortization was
primarily due to the intangible asset impairments which took place during fiscal
year 2006. Increased commissions are the result of the increase in sales
described above. Higher warranty costs principally reflect experience changes in
the Motive Power Division and an unusually high charge in the Standby Power
Division in fiscal year 2006.
Research and development expenses for fiscal 2007 increased $2,174 or 9%
to $27,302 from $25,128. As a percentage of sales, research and development
expenses increased from 5.1% in fiscal year 2006 to 5.2% in fiscal year 2007.
Fiscal year 2007 expenses include severance costs of $426 associated with the
closure of the Company's design facility in Milwaukie, 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.
30
During fiscal years 2007, the Company recorded impairments to goodwill and
fixed assets of $13,947 and $985, respectively. During fiscal year 2006, the
Company recorded impairments to goodwill, identifiable intangible assets and
fixed assets in the amount of $13,674, $20,045 and $4,802, respectively.
The Company had an operating loss in fiscal year 2007 of $28,571 as
compared to $37,751 in fiscal year 2006.
Analysis of Change in Operating (Loss) Income
Standby Power Motive
Power Electronics Power
Fiscal Year 2007 vs. 2006 Division Division Division Consolidated
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) - fiscal 2006 $ 12,640 $ (40,521) $ (9,870) $ (37,751)
Lead- increased costs (19,729) -- (1,354) (21,083)
Lead- hedge income 5,840 -- 305 6,145
Fiscal 2006- fixed asset impairment -- 2,161 2,641 4,802
Fiscal 2006- intangible asset impairment -- 20,045 -- 20,045
Fiscal 2006- goodwill impairment -- 13,674 -- 13,674
Fiscal 2007- goodwill impairment -- (13,947) -- (13,947)
Fiscal 2006- management changes - --
severance/executive search fees 1,528 1,353 499 3,380
Fiscal 2006- environmental liability estimate change (2,481) -- (1,023) (3,504)
Fiscal 2007- management severance (1,025) (246) (333) (1,604)
Fiscal 2007- Milwaukie, Oregon closure costs -- (1,588) -- (1,588)
Fiscal 2006- RoHS compliance -- 2,684 -- 2,684
Fiscal 2007- RoHS compliance -- (704) -- (704)
Fiscal 2006- PED assimilation charges -- 770 -- 770
Fiscal 2007- contract manufacturer transition costs -- (1,929) -- (1,929)
Fiscal 2007- Huguenot, New York closure costs -- -- (2,690) (2,690)
Fiscal 2007- gain on sale of Huguenot, New York facility -- -- 409 409
Fiscal 2007- Shanghai, China severance (2,387) -- -- (2,387)
Fiscal 2007- Conyers Georgia closure costs (1,993) -- -- (1,993)
Pricing/Volume/mix 15,100 (5,800) 4,600 13,900
Decrease/(increase) in warranty expense 1,527 153 (2,547) (867)
Decrease in Sarbanes-Oxley costs 749 562 211 1,522
Decrease in amortization expense 173 1,351 -- 1,524
Other- principally other material costs (6,179) (42) (1,158) (7,379)
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) fiscal 2007 $ 3,763 $ (22,024) $ (10,310) $ (28,571)
================================================================================================================
Interest expense net for fiscal year 2007 increased $2,950 or 28% to
$13,437 from $10,487 in fiscal year 2006, primarily due to higher debt levels,
coupled with a higher effective interest rate. Additionally, $964 of unamortized
debt discount related to the Company's term loan which was repaid in November
2006 was charged against interest expense during fiscal year 2007. The Company
also incurred a $500 pre payment penalty related to the early payment of our
Term Loan.
Other expense was $1,245 in fiscal year 2007 compared to other income of
$21 in fiscal year 2006. The increase in expense was primarily due to $325 of
foreign exchange losses in fiscal year 2007 compared to $550 of foreign exchange
gains in fiscal year 2006.
Income tax expense of $4,094 was recorded in fiscal year 2007, compared to
$12,362 in fiscal year 2006. Tax expense in fiscal year 2007, is primarily due
to a combination of tax expense in certain profitable foreign subsidiaries
principally in the United Kingdom, and the impact of losses for which no tax
benefit is recognized under SFAS No. 109. In fiscal year 2006, 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 years ended January 31,
2006 and 2005.
31
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 fiscal year 2007, the joint venture had minority interest of $(1,273)
compared to a minority interest of $83 in fiscal year 2006. Approximately, $788
of the decrease in minority interest was the result of approximately $2,387 of
severance recorded at the joint venture in fiscal year 2007 due to a workforce
reduction.
As a result of the above, a net loss of $46,074 was recorded as compared
to a net loss of $60,662 in the prior year. On a per share basis, the net loss
was $1.80 in fiscal year 2007 compared to $2.39 in fiscal year 2006.
Other Comprehensive Loss
Other comprehensive loss decreased from $77,813 in fiscal year 2006 to
$43,691 in fiscal year 2007. This decrease was primarily due to a decrease in
net loss from $60,662 to $46,074 coupled with a minimum pension liability
adjustment which was $(24,661) in fiscal year 2006 as compared to $3,124 in
fiscal year 2007. This was partially offset by an unrealized loss on derivative
instruments of $1,441 in fiscal year 2007 as compared to an unrealized gain of
$7,813 in fiscal year 2006.
Fiscal 2006 Compared to Fiscal 2005
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal year 2006 increased $82,669 or 20% to $497,407 from
$414,738 in fiscal year 2005. This increase resulted primarily from the
acquisitions of Celab, Datel and CPS, for which a full year of sales was
recorded in fiscal year 2006. Sales of the Power Electronics Division increased
$74,759 or 67%, primarily due to the acquisitions. In the prior fiscal year, C&D
owned Celab for eight months, Datel for seven months and CPS for four months.
Sales by the Standby Power Division increased $10,478 or 4%, primarily due to
increased sales in the telecom market, partially offset by lower sales to the
UPS market. Motive Power divisional sales decreased $2,568 or 4%, primarily due
to lower sales of both batteries and chargers.
Gross profit for fiscal year 2006 increased $16,250 or 24% to $82,908 from
$66,658. Margins increased to 16.7% from 16.1% in the prior year. Gross profit
in the Power Electronics Division increased $7,921, primarily due to the results
of the prior year acquisitions, partially offset by the current year charges for
fixed asset impairments. Gross profit in the Standby Power and Motive Power
divisions increased $5,774 and $2,555, respectively. These variances are due
primarily to the fixed asset impairments and environmental clean-up charges
incurred in the prior year, coupled with the re-evaluation of those
environmental clean-up charges in the current year. The benefit of these prior
year charges was partially offset by an increase in the cost of lead of
approximately $9,697 and fixed asset impairments in the Motive Power Division.
Selling, general and administrative expenses for fiscal year 2006
increased $14,332 or 30%. This increase was primarily due to increased selling
and general and administrative expenses of $6,770 due to the acquisitions,
increased severance and related costs of $3,380, higher Sarbanes-Oxley
compliance costs of $918, principally attributable to the Company's fiscal 2005
acquisitions, and higher warranty expenses of $2,253 in the Standby and Motive
Power divisions.
Research and development expenses for fiscal year 2006 increased $6,487 or
35%. As a percentage of sales, research and development expenses increased from
4.5% during fiscal year 2005 to 5.1% during fiscal year 2006. The increase was
primarily due to the full year impact of the Celab, Datel and CPS acquisitions.
32
During the third quarter of the year, the Company conducted impairment
tests of its goodwill and intangible assets, due to the existence of recurring
realized and anticipated operating results below forecasted results in the Power
Electronics Division. As a result of the impairment test performed during the
third quarter of fiscal year 2006, the Company recorded charges to expense for
impairments of intangible assets and goodwill of $20,045 and $13,674,
respectively. The prior impairment test was the result of our annual assessment
conducted in the fourth quarter of fiscal year 2005, and resulted in a goodwill
impairment charge of $74,233 and an intangible asset impairment charge of $464.
Operating loss for fiscal year 2006 decreased $36,409 or 49% to an
operating loss of $37,751 from an operating loss of $74,160 in fiscal year 2005.
Below is a summary of key items affecting operating (loss) income for fiscal
year 2006:
Analysis of Change in Operating (Loss) Income
Standby Power Motive
Power Electronics Power
Fiscal Year 2006 vs. 2005 Division Division Division Consolidated
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) - fiscal 2005 $ 9,211 $ (71,703) $ (11,668) $ (74,160)
Lead - increased costs (7,764) -- (1,933) (9,697)
Fiscal 2006 fixed asset impairment -- (2,161) (2,641) (4,802)
Fiscal 2005 fixed asset impairment 6,407 -- 3,195 9,602
Fiscal 2006 intangible asset impairment -- (20,045) -- (20,045)
Fiscal 2005 intangible asset impairment -- 464 -- 464
Fiscal 2006 goodwill impairment -- (13,674) -- (13,674)
Fiscal 2005 goodwill impairment -- 74,233 -- 74,233
Fiscal 2006 environmental liability estimate change 2,481 -- 1,023 3,504
Fiscal 2005 environmental accrual 2,481 -- 1,400 3,881
Fiscal 2006 management changes - --
severance/executive search fees (1,528) (1,353) (499) (3,380)
Sarbanes-Oxley costs - decrease (increase) 56 (997) 23 (918)
Increase in Standby and Motive warranty expense (1,201) -- (1,052) (2,253)
Fiscal 2006 - RoHS compliance -- (2,684) -- (2,684)
Fiscal 2006 - PED assimilation charges -- (770) -- (770)
Fiscal 2005 Reynosa transition costs 599 -- 827 1,426
Pricing, volume, mix and other 1,898 (1,831) 1,455 1,522
- ----------------------------------------------------------------------------------------------------------------
Operating income (loss) fiscal 2006 $ 12,640 $ (40,521) $ (9,870) $ (37,751)
================================================================================================================
Interest expense, net, increased $5,472 in fiscal year 2006, primarily due
to higher debt levels resulting from fiscal year 2005 acquisitions and
refinancing activities that occurred during the year, resulting in higher
interest rates compared to the prior fiscal year.
33
Income tax expense of $12,362 was recorded in fiscal year 2006, compared
to an income tax benefit of $21,289 in fiscal year 2005. The increase income tax
expense in fiscal year 2006 is primarily due to the following items:
o The valuation allowance related to domestic, state and foreign
deferred tax assets increased by an additional $13,411 in fiscal
year 2006 compared to fiscal year 2005;
o The $8,614 write-off of deferred tax assets related to C&D's
investment in several foreign subsidiaries;
o The reduction of $2,154 in the tax benefit related to foreign tax
credits taken in prior years due to the current year domestic net
operating loss;
o An increase in tax expense of $2,212 due to a combination of
domestic losses for which no tax benefit is recorded and tax expense
in certain profitable foreign jurisdictions, along with the lack of
foreign tax credits related to current year repatriated earnings due
to the domestic net operating loss; and
o An increase of $11,882 in tax expense due to the lower pre-tax book
loss in fiscal year 2006.
These items are partially offset by a $2,731 decrease in the tax effect of
the impairments of goodwill and intangible assets in certain jurisdictions.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by C&D. In the
current year, the joint venture had minority interest of $83 at the Shanghai
facility compared to a minority interest of $(5) in fiscal year 2005.
As a result of all of the above, a net loss was recorded of $60,662
compared to a net loss of $59,493 in the prior year. On a per share basis, net
loss was $2.39 compared to a net loss of $2.35 - basic and fully diluted for
fiscal years 2006 and 2005, respectively.
Other Comprehensive Loss
Other comprehensive loss increased from $57,477 in fiscal year 2005 to
$77,813 in fiscal year 2006, primarily due to the recording of a minimum pension
liability adjustment of $24,661, partially offset by an unrealized gain on
derivative instruments of $7,813 related to lead hedges.
Future Outlook
The Company considers the following, among other matters, to be key
elements of focus for its underlying business plans and strategies for fiscal
year 2008. Any failures in effectively implementing these strategies and actions
would impact our performance and results of operations.
Lead and Commodity Costs and Pricing
Over the last three fiscal years, the costs of our raw materials, of which
lead is our primary material, have risen significantly from an annual average of
$0.41 cent per pound in 2005 to $0.60 cent per pound in 2007. One of the most
important initiatives that the Company has implemented over the last year has
been our effort to drive pricing in the Industrial Battery business. Over the
last 18 months, the Company has announced three separate general price
increases, and, in addition to these base-price increases, during the fourth
quarter of fiscal year 2007, the Company introduced a new lead surcharge
mechanism to more directly tie product pricing to the cost of lead. As a result
of these efforts, we believe there has been more rationale pricing in the
marketplace. In addition, the Company utilizes a number of mechanisms to manage
the impact of higher lead costs, including contractual arrangements with our
customers, longer term supply agreements with our lead suppliers, hedging
programs and the use of tolling or recycling of lead with third party providers.
Certain of our customer contracts currently provide for fixed pricing
agreements; accordingly, such pricing measures cannot fully recover higher
commodity costs.
34
Manufacturing Moves
On April 3, 2006, we announced changes to our contract manufacturing
arrangements for our Power Electronics business involving the termination of
existing manufacturing agreements with Celestica. Wind down of these operations
and transfer to other manufacturers was completed in March 2007. These changes
are expected to drive our ability to meet customer needs and improve our cost
structure.
On April 6, 2006, we announced further actions associated with the
revitalization of our Motive Power Products business. These actions include
launching new products to open access to several unaddressed markets, the
planned closure of our Huguenot, New York facility and relocation of production
to Reynosa, Mexico and the establishment of new distribution centers to service
our customer base. The closure of this facility was completed by October 2007.
The construction of a new manufacturing facility by our joint venture in
Shanghai, China was completed during the first quarter of fiscal year 2008. This
facility was built due to the relocation of our old facility as required by the
Chinese Government. Production has commenced during the first quarter of fiscal
year 2008.
These manufacturing moves all required significant inventory builds during
transition/relocation to other operations which adversely impacted our working
capital requirements, principally during fiscal year 2007. We expect these
inventory builds to be temporary in nature with a return to historical working
capital levels by the end of fiscal year 2008.
On April 16, 2007, the Company announced the closure of its Standby Power
manufacturing facility in Conyers, Georgia and the relocation of its production
to Leola, Pennsylvania.
Cost Management, Quality and Six Sigma
The Company is expanding its efforts to reduce costs and improve customer
service and satisfaction through enhanced quality and delivery focus and goals.
These strategies are being supported by lean supply chain initiatives and Six
Sigma methodologies and tools. Through our Six Sigma and lean manufacturing
initiatives, we have identified and are taking actions to drive cost reductions
that should significantly improve our performance in the Power System Division.
The company has identified, evaluated and implemented, with a formal
selection and approval process, several cost saving projects. However, in order
to realize cost saving benefits for these initiatives, costs may be incurred
either in the form of capital expenditures or current period expenses.
Liquidity and Capital Resources
The decrease in net cash from operating activities is primarily due to an
increase in our net loss (after adjusting for non-cash impairment charges)
compared to fiscal 2006 mainly as a result of i) higher lead and other raw
material costs in our Power Systems Division not recovered through pricing
actions and ii) pricing and mix pressures in our Power Electronics Division.
Additionally, the increase in our accounts payable in fiscal year 2006 generated
a significant source of operating cash flow.
Net cash used by investing activities increased $14,960 to $23,660 in the
fiscal year 2007 as compared to $8,700 in the prior fiscal year, primarily due
to the construction of the new battery manufacturing facility in Shanghai,
China.
We had net cash provided by financing activities of $21,087 in fiscal year
2007 as compared to net cash used by financing activities of $13,648 in the
prior fiscal year. Current year financing activities included $72,480 of
proceeds from new borrowings, representing a $54,500 convertible notes offering
and net incremental borrowings under the Company's credit facility, partially
used to repay prior debt agreements of $51,042. Other activities included an
increase in book overdrafts and the payment of financing costs related to the
new debt agreements.
On April 13, 2007, the Company executed a fourth amendment to its Credit
Facility. The amendment enhanced the Company's borrowing capacity and resultant
availability through changes and modifications of previously excluded
collateral. In addition, the amendment provided for a reduction in the
availability block to $10,000, a reset of fixed coverage ratio covenants, which
are only tested on a going forward basis to the extent excess availability falls
below a defined threshold of $10,000, previously $15,000 and an increase in the
permitted foreign indebtedness basket. In consideration of these changes the
Company paid fees of approximately $240. Based upon these changes the Company
estimates that maximum availability calculated under these new borrowing base
provisions would increase availability by approximately $20,000 from that
reported as of January 31, 2007.
35
Cash from operations and availability under the amended Credit Facility is
expected to be sufficient to meet our ongoing cash needs for working capital
requirements, restructuring, capital expenditures and debt service for at least
the next twelve months. Capital expenditures during fiscal year 2007 were
primarily for the construction of our new Shanghai joint-venture facility which
was completed during the first quarter of fiscal year 2008. We estimate capital
spending for fiscal year 2008 to be in the range of $15,000 to $18,000,
including funding for cost reduction opportunities in the Standby Power and
Motive Power Divisions. As of January 31, 2007, the maximum availability
calculated under the borrowing base was $47,093, of which $24,836 was funded,
and $5,195 was utilized for letters of credit. As provided under the Credit
Facility, excess borrowing capacity will be available for future working capital
needs and general corporate purposes.
On January 18, 2007, the Company entered into a six month non-revolving
line of credit facility in China. Under the terms of the China Line of Credit,
the Company may borrow up to 40 million RMB (approximately $5,100) with an
interest rate of 5.58%. This credit line was established to provide our Joint
Venture in China the flexibility needed to finalize the construction of its new
manufacturing facility which was completed in March 2007.
Pension Costs
The Company has various non contributory defined benefit pension plans,
which cover certain employees in the United States. Certain employees of the
Japanese subsidiary of Datel, Inc. are also covered by a defined benefit pension
plan.
Accounting for pensions requires the use of estimates and assumptions
regarding numerous factors, including discount rates, rates of return on plan
assets, compensation increases, mortality and employee turnover. Independent
actuaries, in accordance with accounting principles generally accepted in the
United States of America, perform the required calculations to determine expense
and liabilities for pension benefits. Actual results that differ from our
actuarial assumptions are generally accumulated and amortized over future
periods.
Assumptions used to determine periodic pension costs and benefit
obligations for the Company's defined benefit pension plans were:
Pension Benefits
---------------------------
Fiscal Year 2007 2006 2005
--------------------------------------------------------------------------
Weighted-average assumptions
used to determine benefit
obligation as of January 31*:
Discount rate 5.82% 5.52% 5.67%
Rate of compensation increase*** 4.36% 4.36% 4.36%
Weighted-average assumptions
used to determine net cost for
the periods ended January 31**:
Discount rate 5.52% 5.67% 5.92%
Expected long-term
rate of return on plan assets 7.90% 8.12% 8.36%
Rate of compensation increase*** 4.36% 4.36% 4.39%
The fiscal year 2007 assumptions used to determine net periodic benefit
costs differed from the fiscal year 2006 assumptions used to determine the
benefit obligations for the defined benefit pension plans as a result of the
curtailment of the U.S. and one of our non-U.S. defined benefit pension plans in
fiscal 2007. Within any given fiscal year, significant differences may arise
between the actual return and the expected return on plan assets. The value of
plan assets, used in the calculation of pension expense, is determined on a
calculated method that recognizes the difference between the actual fair value
of assets and the expected calculated method. Gains and losses resulting from
differences between actual experience and the assumptions are determined at each
measurement date. The rate of increase in compensation levels is reviewed at
each measurement date based on the long-term estimate of yearly compensation
level increases given to employees.
36
Estimated sensitivities to the net periodic pension cost for the U.S.
pension plans are as follows:
o a 25 basis point change in the discount rates from those used
would have changed fiscal 2007 pension expense by
approximately $575,000
o a 25 basis point change in the expected rates of return from
those used would have changed fiscal 2007 pension expense by
approximately $152,000; and
o a 25 basis point change in compensation levels from those used
would have no material impact on fiscal year 2007 pension
expense as a result of the frozen and non-pay related plans.
In fiscal years 2007 and 2006, the accumulated benefit obligation exceeded
the plan assets by $14,191 and $14,660, respectively. Consequently, the Company
recognized an additional minimum pension liability of $3,124 in fiscal year 2007
in its accumulated other comprehensive loss, primarily because of a reduction in
the discount rate used to measure the plan assets as of December 31, 2006
compared to December 31, 2005.
On December 31, 2006 the Company adopted SFAS No. 158 and recorded a one
time charge of $4,459 which is included in the stockholders' equity and
accumulated other comprehensive loss.
The Pension Protection Act of 2006 (the "Act") was signed into law in the
U.S. in August 2006. The Act introduces new funding requirements for defined
pension plans, provides guidelines for measuring pension plan assets and pension
obligations for funding purposes, introduces benefit limitations for certain
underfunded plans and raises tax deduction limits for contributions to
retirement plans. The new funding requirements become effective for plan years
beginning after December 31, 2007.
In fiscal years 2007 and 2006, the Company contributions to its plan were
$59 and $894, respectively. The Company expects to make required contributions
totaling approximately $1,917 to one of its domestic plans, $63 to its Japanese
plan and $259 to its postretirement Medical plan in fiscal year 2008.
37
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of January 31, 2007:
Payments Due by Period
------------------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 year years years 5 years
- ----------------------------------------------------------------------------------------------
Notes $ 129,500 $ -- $ -- $ -- $129,500
Interest payable on notes 134,763 6,935 13,870 13,870 100,088
Credit facility 24,837 -- -- 24,837 --
Operating leases 20,432 4,793 8,525 4,003 3,111
Mortgage 4,946 4,946 -- -- --
Lead commitments 4,700 4,700 -- -- --
Inventory 1,643 1,643 -- -- --
Capital leases 265 265 -- -- --
- ----------------------------------------------------------------------------------------------
Total contractual cash obligations $ 321,086 $ 23,282 $ 22,395 $ 42,710 $232,699
==============================================================================================
Amount of Commitment Expiration per Period
------------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After
Other Commercial Commitments Committed 1 year years years 5 years
- ----------------------------------------------------------------------------------------------
Standby letters of credit $ 8,764 $ 8,206 $ -- $ 558 $ --
- ----------------------------------------------------------------------------------------------
Total commercial commitments $ 8,764 $ 8,206 $ -- $ 558 $ --
==============================================================================================
Off-Balance Sheet Arrangements
Other than certain elements of our standby letters of credits
arrangements, we have no off-balance sheet arrangements at January 31, 2007.
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 No. 140. 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 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.
38
In June 2006, the FASB issued FASB Interpretation No. 48, ("FIN No. 48")
"Accounting for Uncertainty in Income Taxes", an interpretation of SFAS No. 109,
"Accounting for Income Taxes". 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 year 2008. Prior to the adoption of FIN No. 48, the Company
used a different measurement attribute for uncertainty in income taxes. The
Company is still evaluating the impact of adoption FIN No. 48 on its
consolidated financial position and results of operations.
In June 2006, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF 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"
which establishes a framework for measuring fair value in generally accepted
accounting principles, 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 does not expect the
adoption of SFAS No. 157 to have a material impact on its financial position and
results of operations.
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. Consequently in
fiscal year 2007, the Company adopted SFAS No. 158 and recognized in its
statement of financial position the funded status of its defined benefit
postretirement plans and included in Accumulated other comprehensive loss a pre-
tax charge of $4,459.
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 adoption of SAB No. 108
did not have a material impact on the Company's financial position and results
of operations.
39
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115". The Statement permits entities to choose, at specified
election dates, to measure many financial instruments and certain other items at
fair value that are not currently measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected would be
reported in earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements in order to facilitate
comparisons between entities choosing different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect existing
accounting requirements for certain assets and liabilities to be carried at fair
value. This statement is effective for reporting periods beginning after
November 15, 2007. The Company is evaluating the requirements of SFAS No. 159
and have not yet determined the impact on the financial statements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
All dollar amounts in this Item 7A are in thousands.
Market Risk Factors
We are exposed to various market risks. The primary financial risks
include fluctuations in the price of raw materials, interest rates and changes
in currency exchange rates.
To assist in management of these risks, on occasion we use derivative
instruments. We do not invest in derivative securities for speculative purposes,
but do enter into hedging arrangements in order to reduce our exposure to
fluctuations in interest rates as well as to fluctuations in exchange rates.
Our financial instruments that are subject to interest rate risk include
our mortgage, capital leases, revolving credit facilities and our convertible
notes. The net market value of our debt instruments (excluding capital leases)
was 165,820 and $145,456 at January 31, 2007 and 2006, respectively. According
to our established policies, we maintain certain ratios of fixed versus variable
rate debt in order to mitigate our risk to changes in interest rates. We utilize
interest rate swaps when necessary to further manage this risk.
A 1% increase in interest rates from their year end levels would result in
an increase of $248 in interest expense on an annualized basis, with all other
variables held constant. A 1% decrease in interest rates from their year end
levels would result in a decrease of $248 in interest expense on an annualized
basis, with all other variables held constant.
We use currency forwards and swaps to hedge anticipated cash flows in
foreign currencies. The exposures currently hedged are the British Pound, Euro,
Japanese Yen, Canadian Dollar and Mexican Peso. These financial instruments
represent a net market value of $117 and $(38) at January 31, 2007 and 2006,
respectively. Foreign exchange forwards are used to hedge our firm and
anticipated foreign currency cash flows. There is either a balance sheet or cash
flow exposure related to all of the financial instruments in the above
sensitivity analysis for which the impact of a movement in exchange rates would
be in the opposite direction and substantially equal to the impact on the
instruments in the analysis.
To monitor our currency exchange rate risk, we use sensitivity analysis to
measure the impact on earnings in the case of a 10% change in exchange rates.
The sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables being held
constant. At January 31, 2007 and 2006, a 10% strengthening of the US Dollar
versus these currencies would result in an increase of the net market value of
the forwards of $3,539 and $2,772, respectively. At January 31, 2007 and 2006, a
10% weakening of the US Dollar versus these currencies would result in a
decrease in the net market value of the forwards of $3,539 and $2,903,
respectively.
The market value of the instruments was determined by taking into
consideration the contracted interest rates and foreign exchange rates versus
those available for similar maturities in the market at January 31, 2007 and
2006, respectively.
On occasion we enter into non-deliverable forward contracts with certain
financial counterparties to hedge our exposure to the fluctuations in the price
of lead, the primary raw material component used in our Power Systems Division.
We employ hedge accounting in the treatment of these contracts. Changes in the
value of the contracts are marked to market each month and the gains and losses
are recorded in other comprehensive income (loss) until they are released to the
income statement through cost of sales in the same period as is the hedged item
(lead).
40
As of January 31, 2007 and 2006 we had hedged approximately 17.6 and 51.1
million pounds of lead at an average price of $0.526 and $0.454 per pound,
respectively. The Company has not entered into any additional lead forward
contracts since January 31, 2007. Effective February 23, 2006, one of the
Company's financial counterparties exercised its right to terminate 25.6 million
pounds of lead forward contracts, representing approximately $10,375 in lead.
This settlement resulted in cash proceeds of $3,099. The settlement did not
change the hedge accounting for these forward contracts, with the gain in
comprehensive (loss) income continuing to be released to earnings during fiscal
2007 in the month in which the hedged item was recognized in cost of sales.
The net market value of our lead contracts was $4,890 and $6,507 at
January 31, 2007 and 2006, respectively. At January 31, 2007 and 2006, a 10%
change in the price of lead would result in a $1,400 and $1,770 change in the
market value of the lead contract, respectively.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in Item 15(a)(1)
hereof are incorporated herein by reference and are filed as part of this report
immediately following the signature page of this Form 10-K.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures:
The Chief Executive Officer and the Chief Financial Officer of C&D have
concluded, based on their evaluation as of January 31, 2007, that C&D's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are effective to ensure
that information required to be disclosed by C&D in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and include controls and procedures designed to
ensure that information required to be disclosed by C&D in such reports is
accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control:
There were no changes in C&D's internal control over financial reporting
that occurred during the fourth quarter of fiscal year 2007 that have materially
affected, or are reasonably likely to materially affect, C&D's internal control
over financial reporting.
Management's Report on Internal Control over Financial Reporting:
Management's report on internal control over financial reporting and the
attestation report of C&D's independent registered public accounting firm are
included in C&D's Financial Statements under the captions entitled "Management's
Report on Internal Control over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm" located in Item 15.
Item 9B. Other Information
On April 13, 2007, the Company executed a fourth amendment to its Credit
Facility. See Note 6, Debt, for a discussion of the amendment.
41
PART III
Item 10. Directors and Executive Officers and Corporate Governance
The information required by this Item 10 is incorporated by reference to
the information under the captions "Election of Directors," "Current Executive
Officers" and "Compliance with Section 16(a)" of the Securities Exchange Act of
1934" included in C&D's Proxy Statement for our 2007 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in C&D's
Proxy Statement for our 2007 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to
the information under the captions "Principal Stockholders," "Beneficial
Ownership of Management" and "Equity Compensation Plan Information" included in
C&D's Proxy Statement for our 2007 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions and Director
Independence
Information with respect to the Company's policy and procedures for
review, approval or ratification of transactions with related persons is
incorporated by reference herein to the Proxy and is included in the section
entitled "Review and Approval of Transactions with Related Persons, Policies and
Procedures". Information with respect to director independence is incorporated
by reference herein to the Proxy Statement for our 2007 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission, and is
included in the section entitled "Board of Directors and Corporate Governance"
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference to
the information under the caption "Fees of Independent Registered Public
Accounting Firm" included in C&D's Proxy Statement for our 2007 Annual Meeting
of Stockholders to be filed with the Securities and Exchange Commission.
42
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) The following financial statements are included in this report on
Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2007 and 2006
Consolidated Statements of Operations for the years ended January
31, 2007, 2006 and 2005
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows for the years ended January
31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Loss for the years ended
January 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in this
report on Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES for the years ended January
31, 2007, 2006 and 2005
II. Valuation and Qualifying Accounts
(3) Exhibits:
43
INDEX TO EXHIBITS
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
3.1 Restated Certificate of Incorporation of C&D, as 8-K 06/30/98 3.1 &
amended 3.2
3.2 Amended and Restated By-laws of C&D 10-Q 10/31/02 3.1
4.1 Rights Agreement dated as of February 22, 2000, 10-Q 10/31/04 10.3
between C&D and Mellon Investor Services, LLC
(formerly ChaseMellon Shareholder Services,
L.L.C.), as rights agent, which includes as
Exhibit B thereto the form of rights certificate;
Amendment to Rights Agreement
4.2 Purchase Agreement dated November 16, 2005, among 10-K 01/31/06 4.2
C&D, Credit Suisse First Boston LLC and Wachovia
Capital Markets, LLC
4.3 Registration Rights Agreement dated November 21, 10-K 01/31/06 4.3
2005, among C&D, Credit Suisse First Boston LLC
and Wachovia Capital Markets, LLC
4.4 Indenture, dated as of November 21, 2005, between 10-K 01/31/06 4.4
C&D and Bank of New York, as trustee
4.5 Form of C&D Technologies, Inc. 5.25% Convertible 10-K 01/31/06 4.5
Senior Notes due 2025
4.6 Purchase Agreement dated November 15, 2006 8-K 11/15/06 10.1
between C&D and the several named purchasers
named in schedule A thereto
4.7 Registration Rights Agreement dated November 21, 10-K 1/31/07 4.7
2006, between C&D and the several purchasers
named in Schedule I thereto
4.8 Indenture, dated as of November 21, 2006, between 10-K 1/31/07 4.8
C&D and the Bank of New York, as trustee
4.9 Form of C&D Technologies, Inc. 5.50% Convertible 10-K 1/31/07 4.9
Senior Notes due 2026
5 Consent and Amendment No. 3 to Loan and Security 8-K 12/21/06 10.1
Agreement dated December 17, 2005
10.1 Purchase Agreement dated November 27, 1985, S-1 1/28/87 10.1
between Allied, Allied Canada Inc. and C&D;
Amendments thereto dated January 28 and October
8, 1986
44
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.2 Agreement dated December 15, 1986, between C&D S-1 1/28/87 10.2
and Allied
10.3 Lease Agreement dated February 15, 1994, by and 10-K 01/31/04 10.3
between Sequatchie Associates, Incorporated and
C&D Charter Power Systems, Inc. (which has since
been merged into C&D); Extension and Modification
Agreement effective December 19, 2003
10.4 Purchase and Sale Agreement, dated as of November 8-K 03/01/99 2.1
23, 1998, among Johnson Controls, Inc. and its
subsidiaries as Seller and C&D and C&D
Acquisition Corp. as Purchaser
10.5 Amended and Restated Credit Agreement dated as of 10-Q 07/31/04 10.5
June 30, 2004, among C&D Technologies, Inc. and 10-K 1/31/05 10.5
Certain of its Subsidiaries as the Borrowers, the 10-K 1/31/05 10.5
Subsidiaries identified herein as the Guarantors, 10-K 1/31/05 10.5
Citizens Bank as Syndication Agent, LaSalle 8-K 11/16/05 10.1
National Bank National Association as Co-Agent,
Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer and the Other
Lenders Party Hereto Arranged By Banc of America
Securities LLC as Sole Lead Arranger and Sole
Book Manager, First Amendment thereto dated as
of December 9, 2004, Second Amendment thereto
dated as of April 21, 2005, Third Amendment
thereto dated as of April 29, 2005, Fourth
Amendment and Waiver thereto dated as of
November 8, 2005
10.6 Security Agreement dated April 21, 2005, among 10-K 01/31/05 10.6
C&D Technologies, Inc., C&D International
Investment Holdings Inc., C&D Charter Holdings,
Inc., C&D Technologies (Datel), Inc., Datel
Systems, Inc., C&D Dynamo Corp., Dynamo
Acquisition Corp., C&D Technologies (CPS) LLC and
Datel Holding Corporation as Grantors, and the
Bank of America, N.A., in its capacity as
administrative agent for the holders of the
Secured Obligations
10.7 Uncommitted loan facility dated June 5, 2001, 10-Q 04/30/01 10.2
between C&D Holdings Limited and ABN Amro Bank
N.V.
10.8 Asset Purchase Agreement among Matsushita Battery 8-K 09/25/03 10.1
Industrial Corporation of America, Matsushita
Battery Industrial de Mexico, S.A. de C.V., C&D
Technologies, Inc. and C&D Technologies Reynosa,
S. de R.L. de C.V., dated as of August 27, 2003
45
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.9 Agreement for Manufacture between Dynamo Power 10-Q 10/31/04 10.2
System (USA) LLC and Celestica Hong Kong Limited
and C&D Technologies, Inc., dated September 30,
2004. Portions of this exhibit have been deleted
pursuant to the Company's Application Requesting
Grant of Confidential Treatment under the Exchange
Act and pursuant to the Rule 12b-24 promulgated
thereunder
10.10 Assignment and Assumption dated as of August 3, 10-Q 07/31/04 10.2
2004, by and between Bank of America, N.A. and
Sovereign Bank
10.11 Lender Joinder Agreement dated as of August 3, 10-Q 07/31/04 10.3
2004, among C&D Technologies, Inc. and Certain of
its subsidiaries as the Borrowers and Calyon New
York Branch as the New Lender and Bank of
America, N.A., as Administrative Agent
10.12 Lender Joinder Agreement dated as of August 3, 10-Q 07/31/04 10.4
2004, among C&D Technologies, Inc. and Certain of
its subsidiaries as the Borrowers and Sovereign
Bank as the New Lender and Bank of America, N.A.,
as Administrative Agent
10.13 LLC Interest Purchase Agreement between Celestica 8-K 09/30/04 2.1
Corporation, Celestica Inc. and C&D Technologies,
Inc., dated September 23, 2004
10.14 Share Purchase Agreement between Celestica 8-K 09/30/04 2.2
International Inc., Celestica Inc., C&D Power
Systems (Canada) ULC and C&D Technologies, Inc.,
dated September 23, 2004
10.15 Asset Purchase Agreement between Celestica 8-K 09/30/04 2.3
International Inc., Celestica Corporation,
Celestica (Thailand) Limited, Dynamo Acquisition
Corp., Celestica Inc. and C&D Technologies, Inc.,
dated September 23, 2004
10.16 Asset Purchase Agreement between Celestica 8-K 09/30/04 2.4
Electronics (Shanghai) Co. Ltd., Datel Electronic
Technology (Shanghai) Co., Ltd., Celestica Inc.
and C&D Technologies, Inc., dated September 23,
2004
10.17 Inventory Purchase Agreement between Celestica 8-K 09/30/04 2.5
Suzhou Technology Ltd., Dynamo Acquisition Corp.,
Celestica Inc. and C&D Technologies, Inc., dated
September 23, 2004
46
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.18 Purchase Price Adjustment Agreement between 8-K 09/30/04 2.6
Celestica International Inc., Celestica
Corporation, Celestica (Thailand) Limited,
Celestica Electronics (Shanghai) Co. Ltd.,
Celestica Suzhou Technology Ltd., Celestica Inc.,
C&D Power Systems (Canada) ULC, C&D Technologies,
Inc., Dynamo Acquisition Corp., and Datel
Electronic Technology (Shanghai) Co., Ltd., dated
September 23, 2004
10.19 Merger Agreement dated as of June 10, 2004, among 8-K 09/30/04 10.1
C&D Technologies, Inc., CLETADD Acquisition
Corporation and Datel Holding Company
10.20 Loan and Security Agreement dated December 7, 10-K 1/31/06 10.2
2005 by and among C&D Technologies, Inc., C&D 8-K 04/05/06 10.1
Technologies (Datel), Inc., C&D Technologies
(CPS) LLC, as Borrowers and C&D Charter Holdings,
Inc., C&D Dynamo Corp., Dynamo Acquisition Corp.,
C&D International Investment Holdings Inc. and
Datel Holding Corporation, as Guarantors, and
Ableco Finance LLC, as Agent.; Amendment No. 1
thereto dated March 30, 2006
10.21 Loan and Security Agreement dated December 7, 10-K 01/31/06 10.21
2005 by and among C&D Technologies, Inc., C&D 8-K 03/31/06 10.2
Technologies (Datel), Inc., C&D Technologies 8-K 12/21/06 10.1
(CPS) LLC, as Borrowers and C&D Charter Holdings, X
Inc., C&D Dynamo Corp., Dynamo Acquisition Corp.,
C&D International Investment Holdings Inc. and
Datel Holding Corporation, as Guarantors, and
Wachovia Bank National Association, as
Administrative Agent and Wachovia Capital
Markets, LLC as Sole Lead Arranger, Manager and
Bookrunner.; Amendment No. 1 thereto dated March
30, 2006.; Amendment No. 3 thereto dated December
21, 2006.; Amendment No. 4 thereto dated April
13, 2007
10.22 Agreement for Termination of Manufacturing 10-Q 4/30/06 10.9
Agreement and Transfer of Manufacturing
Operations between C&D Technologies (CPS), LLC,
C&D Technologies, Inc. and Celestica Hong Kong
Limited dated April 3, 2006
10.23 Form of C&D Technologies, Inc. 5.5% Convertible
Senior Notes due 2026 8-K 11/15/06 10.1
Management Contracts or Plans
47
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.24 Charter Power Systems, Inc. 1996 Stock Option 10-Q 7/31/96 10.1
Plan, First Amendment to C&D Technologies, Inc. 10-Q 7/31/99 10.3
1996 Stock Option Plan (formerly known as the
Charter Power Systems, Inc. 1996 Stock Option
Plan) dated April 27, 1999
10.25 C&D Technologies, Inc. Amended and Restated 1998 10-K 1/31/01 10.7
Stock Option Plan
10.26 C&D Technologies, Inc. Savings Plan as restated 10-K 7/31/02 10.9
and amended , First Amendment thereto dated June 10-Q 10/31/02 10.10
12, 2002 , Second Amendment thereto dated 10-Q 10/31/02 10.11
November 20, 2002 ; Third Amendment thereto dated 10-Q 7/31/03 10.1
June 18, 2003
10.27 C&D Technologies, Inc. Pension Plan for Salaried 10-K 7/31/02 10.10
Employees as amended and restated ; First 10-Q 4/30/03 10.3
Amendment thereto dated June 12, 2002 ; Second 10-Q 4/30/03 10.4
Amendment thereto dated September 25, 2002 ; 10-K 1/31/04 10.11
Third Amendment thereto dated March 19, 2004
10.28 Supplemental Executive Retirement Plan compiled 10-K 1/31/04 10.12
as of February 27, 2004, to reflect all 10-Q 4/30/05 10.1
amendments ; Amendment thereto dated May 6, 2005
10.29 C&D Technologies, Inc. Management Incentive Bonus 8-K 3/2/05 10.1
Plan Policy
10.30 Employment Agreement dated November 28, 2000, 10-Q 10/31/00 10.1
between Wade H. Roberts, Jr. and C&D
10.31 Release Agreement dated March 24, 2005, between 10-K 1/31/05 10.27
C&D Technologies, Inc. and Wade H. Roberts, Jr.
10.32 Employment Agreement dated March 31, 2000, 10-K 1/31/00 10.14
between Stephen E. Markert, Jr. and C&D
10.33 Release Agreement dated December 14, 2005, 10-K 1/31/06 10.31
between C&D Technologies, Inc. and Stephen E.
Markert, Jr.
10.34 Employment Agreement dated March 31, 2000, 10-K 1/31/00 10.18
between Charles R. Giesige, Sr. and C&D; letter 10-K 1/31/04 10.17
dated January 27, 2004 to Charles R. Giesige, Sr.
amending Employment Agreement dated March 31,
2000
10.35 Employment Agreement dated February 1, 2006, 10-K 1/31/06 10.34
between Charles R. Giesige and C&D
48
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.36 Release Agreement dated March 2, 2006, between 10-K 1/31/06 10.35
C&D Technologies, Inc. and Charles R. Giesige
10.37 Employment Agreement dated February 1, 2006, 10-K 1/31/06 10.36
between James D. Dee and C&D
10.38 Employment Agreement dated February 1, 2006, 10-K 1/31/06 10.37
between Ian J. Harvie and C&D
10.39 Employment Agreement dated February 1, 2006, 10-K 1/31/06 10.38
between William E. Bachrach and C&D
10.40 Indemnification Agreement dated as of November 10-Q 1/31/02 10.2
19, 2002, by and between C&D Technologies, Inc.
and William Harral, III
10.41 Indemnification Agreement dated as of November 10-Q 1/31/02 10.5
19, 2002, by and between C&D Technologies, Inc.
and Kevin P. Dowd
10.42 Indemnification Agreement dated as of November 10-Q 1/31/02 10.6
19, 2002, by and between C&D Technologies, Inc.
and Robert I. Harries
10.43 Indemnification Agreement dated as of November 10-Q 1/31/02 10.7
19, 2002, by and between C&D Technologies, Inc.
and Pamela S. Lewis
10.44 Indemnification Agreement dated as of November 10-Q 1/31/02 10.8
19, 2002, by and between C&D Technologies, Inc.
and George MacKenzie
10.45 Indemnification Agreement dated as of November 10-Q 1/31/02 10.9
19, 2002, by and between C&D Technologies, Inc.
and John A. H. Shober
10.46 Indemnification Agreement dated as of February 10-K 1/31/03 10.33
24, 2003, by and between C&D Technologies, Inc.
and Stanley W. Silverman
10.47 C&D Technologies, Inc. Nonqualified Deferred S-8 7/24/00 4
Compensation Plan
10.48 C&D Technologies, Inc. Approved Share Option Plan S-8 9/11/01 4
10.49 C&D Technologies, Inc. Management Compensation 8-K 3/1/05 10.1
Plan Policy for Fiscal Year 2006
49
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
10.50 C&D Technologies, Inc. Board of Directors 8-K 3/1/05 10.2
Nominating/Corporate Governance Committee Charter
As Amended Effective as of March 1, 2005
10.51 Employment Agreement dated June 21, 2005, between 10-Q 7/31/05 10.1
C&D Technologies, Inc. and Dr. Jeffrey A. Graves
10.52 Amendment dated February 1, 2006, to the 10-K 1/31/06 10.51
Employment Agreement between C&D Technologies and
Dr. Jeffrey A. Graves dated June 21, 2005
10.51 C&D Technologies, Inc. 2007 Stock Incentive Plan Proxy 1/31/06 Proxy
10.52 Indemnification Agreement dated May 31, 2006 8-K 5/31/06 10.2
between C&D Technologies, Inc. and Ellen C. Wolf
10.53 Employment Agreement dated June 5, 2006, between 8-K 5/31/06 10.3
C&D Technologies, Inc. and Leonard Kiely
10.54 Employment Retention Agreement dated February 20, 8-K 2/20/07 10.1
2007, between C&D Technologies, Inc and William
E. Bachrach
10.55 Agreement dated the 1st day of February, 2007, by 8-K 2/1/07 10.1
and among C&D Technologies, Inc., a Delaware
corporation (the "Company"), SCSF Equities, LLC, a
Delaware limited liability company, Sun Capital
Securities Offshore Fund, Ltd., a Cayman Islands
corporation, Sun Capital Securities Fund, LP, a
Delaware limited partnership, Sun Capital
Securities Advisors, LP, a Delaware limited
partnership, Sun Capital Securities, LLC, a
Delaware limited liability company, and Rodger R.
Krouse (collectively, the "Sun Parties")
10.56 Performance Share Award Grant Agreement dated X
March 12, 2007
10.57 Restricted Stock Award Grant Agreement dated X
March 12, 2007
14 Code of Ethics 10-K 1/31/04 14
21 Subsidiaries of C&D X
23 Consent of Independent Registered Public X
Accounting Firm
31.1 Rule 13a-14(a)/15d-14(a) Certification of the X
President and Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
50
Incorporated by Reference
--------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- ----------------------------------------------------------------------------------------------------------------------
31.2 Rule 13a-14(a)/15d-14(a) Certification of the X
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 X
Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Section 1350 Certification of the Vice President X
and Chief Financial Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
C&D TECHNOLOGIES, INC.
April 16, 2007 By: /s/ Jeffrey A. Graves
-----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Jeffrey A. Graves President, Chief Executive April 16, 2007
- ------------------------------- Officer and Director
Jeffrey A. Graves (Principal Executive Officer)
/s/ Ian J. Harvie Vice President and April 16, 2007
- ------------------------------- Chief Financial Officer
Ian J. Harvie (Principal Financial Officer)
/s/ Neil E. Daniels Vice President, Corporate Controller April 16, 2007
- ------------------------------- And Treasurer
Neil E. Daniels (Principal Accounting Officer)
/s/ William Harral, III Director, Chairman April 16, 2007
- -------------------------------
William Harral, III
Director April 16, 2007
- -------------------------------
Kevin P. Dowd
/s/ Robert I. Harries Director April 16, 2007
- -------------------------------
Robert I. Harries
/s/ Michael H. Kalb Director April 16, 2007
- -------------------------------
Michael H. Kalb
/s/ Pamela S. Davies Director April 16, 2007
- -------------------------------
Pamela S. Davies
/s/ George MacKenzie Director April 16, 2007
- -------------------------------
George MacKenzie
/s/ John A. H. Shober Director April 16, 2007
- -------------------------------
John A. H. Shober
/s/ Stanley W. Silverman Director April 16, 2007
- -------------------------------
Stanley W. Silverman
/s/ Ellen C. Wolf Director April 16, 2007
- -------------------------------
Ellen C. Wolf
52
(This page intentionally left blank)
53
INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of January 31, 2007 and 2006 F-5
Consolidated Statements of Operations for the years ended January 31, 2007, 2006 and 2005 F-6
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2007, 2006 and 2005 F-7
Consolidated Statements of Cash Flows for the years ended January 31, 2007, 2006 and 2005 F-8
Consolidated Statements of Comprehensive Loss for the years ended January 31, 2007,
2006 and 2005 F-10
Notes to Consolidated Financial Statements F-11
FINANCIAL STATEMENT SCHEDULE
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
For the years ended January 31, 2007, 2006 and 2005
Schedule II. Valuation and Qualifying Accounts S-1
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Generally Accepted Accounting
Principles ("GAAP"). It includes policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of C&D Technologies, Inc. ("C&D");
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of management and
directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control over
financial reporting as of January 31, 2007, based on the criteria established in
a report entitled Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based
on such evaluation and the criteria in the COSO framework, we have concluded
that our internal control over financial reporting was effective as of January
31, 2007.
Our management's assessment of the effectiveness of C&D's internal control
over financial reporting as of January 31, 2007, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on the following page.
/s/ Jeffrey A. Graves /s/ Ian J. Harvie
- -------------------------------- -----------------------------
Jeffrey A. Graves Ian J. Harvie
President, Chief Executive Vice President and
Officer and Director Chief Financial Officer
April 16, 2007
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of C&D Technologies, Inc:
We have completed integrated audits of C&D Technologies, Inc. consolidated
financial statements and of its internal control over financial reporting as of
January 31, 2007, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of C&D Technologies, Inc. and its subsidiaries (the
"Company") at January 31, 2007 and 2006, and the results of their operations and
their cash flows for each of the three years in the period ended January 31,
2007 in conformity with accounting principles generally accepted in the United
States of America. In addition, in our opinion, the financial statement schedule
listed in the index appearing under Item 15(a)(2) presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements. These financial statements
and financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit of financial
statements includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing herein that the Company
maintained effective internal control over financial reporting as of January 31,
2007 based on criteria established in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2007,
based on criteria established in Internal Control - Integrated Framework issued
by the COSO. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management's assessment and on the effectiveness of
the Company's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the
F-3
company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
- ----------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
April 16, 2007
F-4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JANUARY 31,
(Dollars in thousands, except per share data)
2007 2006
- ------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 12,596 $ 25,693
Accounts receivable, less allowance for doubtful accounts
of $1,869 in 2007 and $2,889 in 2006 84,241 78,420
Inventories 88,229 83,803
Deferred income taxes 134 3,430
Prepaid taxes 2,634 6,838
Other current assets 7,082 8,892
- ------------------------------------------------------------------------------------------
Total current assets 194,916 207,076
Property, plant and equipment, net 100,815 91,041
Deferred income taxes 531 401
Intangible and other assets, net 35,429 38,450
Goodwill 68,520 81,451
- ------------------------------------------------------------------------------------------
TOTAL ASSETS $ 400,211 $ 418,419
==========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 6,498 $ 1,038
Accounts Payable 54,215 50,199
Book overdrafts 2,310 71
Accrued liabilities 21,910 23,440
Other current liabilities 32,010 35,578
- ------------------------------------------------------------------------------------------
Total current liabilities 116,943 110,326
Deferred income taxes 9,155 11,660
Long-term debt 147,925 133,067
Other liabilities 34,750 24,051
- ------------------------------------------------------------------------------------------
Total liabilities 308,773 279,104
- ------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 9)
Minority interest 7,548 8,498
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 29,040,960 and 28,828,428
shares issued in 2007 and 2006, respectively 290 288
Additional paid-in capital 74,188 72,599
Treasury stock, at cost, 3,391,536 and
3,380,102 shares in 2007 and 2006, respectively (47,110) (47,094)
Accumulated other comprehensive loss (13,952) (11,876)
Retained earnings 70,474 116,900
- ------------------------------------------------------------------------------------------
Total stockholders' equity 83,890 130,817
- ------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 400,211 $ 418,419
==========================================================================================
See notes to consolidated financial statements.
F-5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended JANUARY 31,
(Dollars in thousands, except per share data)
2007 2006 2005
- ---------------------------------------------------------------------------------------------
NET SALES $ 524,580 $ 497,407 $ 414,738
- ---------------------------------------------------------------------------------------------
COST OF SALES 450,995 414,499 348,080
- ---------------------------------------------------------------------------------------------
GROSS PROFIT 73,585 82,908 66,658
OPERATING EXPENSES:
Selling, general and administrative expenses 60,907 61,812 47,480
Research and development expenses 27,302 25,128 18,641
Identifiable intangible asset impairment -- 20,045 464
Goodwill impairment 13,947 13,674 74,233
- ---------------------------------------------------------------------------------------------
OPERATING LOSS (28,571) (37,751) (74,160)
- ---------------------------------------------------------------------------------------------
Interest expense, net 13,437 10,487 5,015
Other expense (income), net 1,245 (21) 1,612
- ---------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (43,253) (48,217) (80,787)
- ---------------------------------------------------------------------------------------------
Provision (benefit) for income taxes 4,094 12,362 (21,289)
- ---------------------------------------------------------------------------------------------
LOSS BEFORE MINORITY INTEREST (47,347) (60,579) (59,498)
- ---------------------------------------------------------------------------------------------
Minority interest (1,273) 83 (5)
- ---------------------------------------------------------------------------------------------
NET LOSS $ (46,074) $ (60,662) $ (59,493)
=============================================================================================
Net loss per common share - basic and diluted $ (1.80) $ (2.39) $ (2.35)
=============================================================================================
See notes to consolidated financial statements.
F-6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended JANUARY 31, 2007, 2006 and 2005
(Dollars in thousands, except per share data)
Accumulated
Additional Other Total
Common Stock Paid-In Treasury Stock Comprehensive Retained Stockholders'
Shares Amount Capital Shares Amount Income /(Loss) Earnings Equity
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2004 28,605,747 $ 286 $ 70,619 (3,196,508) $ (44,481) $ 3,259 $239,850 $ 269,533
Net loss (59,493) (59,493)
Dividends to
stockholders,
$.055 per share (1,396) (1,396)
Tax effect relating to
stock options
exercised 264 264
Foreign currency
translation
adjustment 1,511 1,511
Unrealized gain on
derivative
instruments 505 505
Purchase of common stock (163,700) (2,543) (2,543)
Deferred compensation
plan (14) (8,468) (127) (141)
Issuance of common stock 9,627 156 156
Stock options exercised 99,599 1 931 932
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2005 28,714,973 287 71,956 (3,368,676) (47,151) 5,275 178,961 209,328
Net loss (60,662) (60,662)
Dividends to
stockholders,
$0.055 per share (1,399) (1,399)
Foreign currency
translation
adjustment (303) (303)
Unrealized gain on
derivative
instruments 7,813 7,813
Deferred compensation
plan (138) (11,426) 57 (81)
Issuance of common stock 28,155 198 198
Stock options exercised 85,300 1 583 584
Minimum pension
liability
adjustment (24,661) (24,661)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2006 28,828,428 288 72,599 (3,380,102) (47,094) (11,876) 116,900 130,817
Net loss (46,074) (46,074)
Dividends to
stockholders,
$.01375 per share (352) (352)
Foreign currency
translation
adjustment 700 700
Unrealized loss on
derivative
instruments (1,441) (1,441)
Deferred compensation
plan (68) (11,434) (16) (84)
Issuance of common stock 32,682 224 224
Stock options exercised 179,850 2 1,208 1,210
Stock options issued 225 225
Adjustment to initially
apply defined benefit
plan standard (4,459) (4,459)
Minimum pension
liability
adjustment 3,124 3,124
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2007 29,040,960 $ 290 $ 74,188 (3,391,536) $ (47,110) $ (13,952) $ 70,474 $ 83,890
- -----------------------------------------------------------------------------------------------------------------------------------
See notes to consolidated financial statements.
F-7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended JANUARY 31,
(Dollars in thousands)
2007 2006* 2005*
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (46,074) $ (60,662) $ (59,493)
Adjustments to reconcile net loss to net cash (used in) provided by
by operating activities:
Minority interest (1,273) 83 (5)
Stock option issued 225 -- --
Depreciation and amortization 18,337 21,843 24,668
Amortization of debt acquisition costs 2,207 1,779 207
Impairment of fixed assets 985 4,802 9,602
Impairment of goodwill 13,947 13,674 74,233
Impairment of identifiable intangible assets -- 20,045 464
Purchased in-process research and development -- -- 780
Deferred income taxes 1,212 10,649 (19,416)
(Gain) loss on disposal of assets (365) 234 215
Annual retainer to Board of Directors paid by the issuance of common stock 224 198 156
Changes in assets and liabilities, net of effects from businesses acquired:
Accounts receivable (4,656) (5,092) 3,994
Inventories (3,575) (6,765) (1,288)
Other current assets (519) 290 (2)
Accounts payable 3,881 15,467 2,797
Accrued liabilities (2,956) (39) (623)
Income taxes payable 4,348 (958) (5,449)
Other current liabilities (1,347) 4,848 (4,475)
Other liabilities 4,857 (2,721) 6,450
Other long-term assets (68) 1,624 (2,667)
Other, net (1,027) 1,519 43
- ---------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (11,637) 20,818 30,191
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- -- (128,429)
Acquisition of property, plant and equipment (25,385) (8,773) (11,865)
Proceeds from disposal of property, plant and equipment 1,725 73 15,685
- ---------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (23,660) (8,700) (124,609)
- ---------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (51,042) (131,079) (775)
Proceeds from new borrowings 72,480 133,142 110,176
Increase (decrease) in book overdrafts 2,239 (8,603) 3,753
Financing cost of long term debt (3,326) (6,130) (768)
Proceeds from issuance of common stock, net 1,210 584 932
Purchase of treasury stock (122) (163) (3,023)
Common stock dividends paid (352) (1,399) (1,396)
Payment of minority interest dividends -- -- (10)
- ---------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 21,087 (13,648) 108,889
- ---------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 1,113 368 78
- ---------------------------------------------------------------------------------------------------------------------------
(Decrease) increase in cash and cash equivalents (13,097) (1,162) 14,549
Cash and cash equivalents, beginning of fiscal year 25,693 26,855 12,306
- ---------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of fiscal year $ 12,596 $ 25,693 $ 26,855
===========================================================================================================================
* Reclassified for comparative purposes
See notes to consolidated financial statements.
F-8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended JANUARY 31,
(Dollars in thousands)
2007 2006 2005
- -----------------------------------------------------------------------------------------------
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid during the year for:
Interest paid, net $ 12,646 $ 9,316 $ 4,362
Income taxes (received) paid, net $ (1,408) $ 2,271 $ 4,417
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquired businesses:
Estimated fair value of assets acquired $ -- $ -- $ 75,697
Goodwill -- -- 48,885
Identifiable intangible assets -- -- 44,989
Purchased in-process research and development -- -- 780
Cash paid, net of cash acquired -- -- (128,429)
- -----------------------------------------------------------------------------------------------
Liabilities $ -- $ -- $ 41,922
===============================================================================================
See notes to consolidated financial statements.
F-9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
for the years ended JANUARY 31,
(Dollars in thousands)
2007 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (46,074) $ (60,662) $ (59,493)
Other comprehensive loss, net of tax:
Net unrealized (loss) gain on derivative instruments, less tax expense of $17,
$258, $337 and for 2007, 2006, and 2005, respectively (1,441) 7,813 505
Foreign currency translation adjustments, less tax expense of $0, $0,
and $316 for 2007, 2006 and 2005, respectively 700 (303) 1,511
Minimum pension liability adjustment 3,124 (24,661) --
- ---------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (43,691) $ (77,813) $ (57,477)
===========================================================================================================================
See notes to consolidated financial statements.
F-10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of C&D
Technologies, Inc., its wholly owned subsidiaries and a 67% owned joint venture
(collectively the "Company"). All inter-company accounts, transactions and
balances have been eliminated.
The Company produces, markets and distributes systems for the conversion
and storage of electrical power, including industrial batteries and electronics.
The Company's reportable business segments consist of the Standby Power
Division, the Power Electronics Division and the Motive Power Division.
Accounting Estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In addition, financial projections and estimates
are required in the Company's annual impairment assessment of goodwill. Actual
results could differ from those estimates.
Foreign Currency Translation:
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date. Revenue
and expenses are translated at the average rate of exchange for the period.
Gains and losses on foreign currency transactions are included in other
expenses, net. Gains and losses on foreign currency translation are included in
other comprehensive (loss) income.
Derivative Financial Instruments:
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. SFAS No. 133 establishes accounting and reporting standards for
derivative instruments. Specifically, SFAS No. 133 requires an entity to
recognize all derivatives as either assets or liabilities in the statement of
financial position and to measure those instruments at fair value. Additionally,
the fair value adjustments will affect either stockholders' equity as
accumulated other comprehensive (loss) income or net (loss) income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity.
In the ordinary course of business, the Company may enter into a variety
of contractual agreements, such as derivative financial instruments, primarily
to manage and to hedge its exposure to currency exchange rate and interest rate
risk. All derivatives are recognized on the balance sheet at fair value and are
reported in either other current assets or accrued liabilities. To qualify for
hedge accounting, the instruments must be effective in reducing the risk
exposure that they are designed to hedge. For instruments that are associated
with the hedge of an anticipated transaction, hedge effectiveness criteria also
require that it be probable that the underlying transaction will occur.
Instruments that meet established accounting criteria are formally designated as
hedges at the inception of the contract. These criteria demonstrate that the
derivative is expected to be highly effective at offsetting changes in fair
value of the underlying exposure both at inception of the hedging relationship
and on an ongoing basis. The assessment for effectiveness is formally documented
at hedge inception and reviewed at least quarterly throughout the designated
hedge period.
The Company has entered into lead hedge contracts to manage risk of the
cost of lead. The agreements are with major financial institutions with
maturities generally less than one year. These market instruments are designated
as cash flow hedges. The mark-to-market gain or loss on qualifying commodity
hedges is included in other comprehensive income to the extent effective, and
reclassified into cost of goods sold in the period during which the hedge
transaction affects earnings.
F-11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Hedge accounting is discontinued when it is determined that a derivative
instrument is not highly effective as a hedge. Hedge accounting is also
discontinued when: (1) the derivative instrument expires, is sold, terminated or
exercised; or is no longer designated as a hedge instrument because it is
unlikely that a forecasted transaction will occur; (2) a hedged firm commitment
no longer meets the definition of a firm commitment; or (3) management
determines that designation of the derivative as a hedging instrument is no
longer appropriate.
When hedge accounting is discontinued, the derivative instrument will be
either terminated, continue to be carried on the balance sheet at fair value, or
redesignated as the hedging instrument, if the relationship meets all applicable
hedging criteria. Any asset or liability that was previously recorded as a
result of recognizing the value of a firm commitment will be removed from the
balance sheet and recognized as a gain or loss in current period earnings. Any
gains or losses that were accumulated in other comprehensive loss from hedging a
forecasted transaction will be recognized immediately in current period
earnings, if it is probable that the forecasted transaction will not occur.
Cash and Cash Equivalents:
The Company considers all highly liquid instruments purchased with an
initial maturity of three months or less to be cash equivalents. The Company's
cash management program utilizes zero balance accounts.
Revenue Recognition:
The Company recognizes revenue when the earnings process is complete. This
occurs when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past. Periodically, the Company enters into prepayment contracts with
various customers and receives advance payments for product to be delivered in
future periods. These advance payments are recorded as deferred revenue and are
included in other current liabilities and other liabilities on the Consolidated
Balance Sheet. Revenue associated with advance payments is recognized as
shipments are made and title, ownership and risk of loss pass to the customer.
Amounts billed to customers for shipping and handling fees are included in Net
Sales and costs incurred by the Company for the delivery of goods are classified
as Cost of Sales in the Consolidated Statements of Operations. Taxes on revenue
producing transactions are excluded from Net Sales.
Accounts Receivable and Allowance for Doubtful Accounts:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience by industry and regional economic data. The Company reviews
its allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All
other balances are reviewed on a pooled basis by age and type of receivable.
Account balances are charged off against the allowance when the Company believes
it is probable the receivable will not be recovered. The Company does not have
any off-balance-sheet credit exposure related to its customers.
F-12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Receivables consist of the following at January 31, 2007 and 2006.
Years Ended January 31, 2007 2006
- --------------------------------------------------------------------------------
Trade receivables $ 80,025 $ 75,018
Notes receivables 212 216
Other 5,873 6,075
Allowance for doubtful accounts (1,869) (2,889)
- --------------------------------------------------------------------------------
Total receivables $ 84,241 $ 78,420
================================================================================
Following are the changes in the allowance for doubtful accounts during
the periods ended:
Years Ended January 31, 2007 2006
- --------------------------------------------------------------------------------
Balance at beginning of period $ 2,889 $ 2,018
(Reductions)/additions (295) 1,027
Translation adjustment 31 6
Write-offs net of recoveries (756) (162)
- --------------------------------------------------------------------------------
Balance at end of period $ 1,869 $ 2,889
================================================================================
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
by the last-in, first-out ("LIFO") method for all inventories. The Company
adjusts the value of its obsolete and unmarketable inventory to the estimated
market value based upon assumptions of future demand and market conditions. If
actual market conditions are less favorable than those projected by management,
additional inventory write-downs may be required. Market value for raw materials
is based on replacement cost and for work-in-process and finished goods on net
realizable value.
Property, Plant and Equipment:
Property, plant and equipment purchased are recorded at cost. Property,
plant and equipment acquired as part of a business combination are recorded at
fair market value at the time of acquisition. Property, plant and equipment,
including capital leases, are depreciated on the straight-line method for
financial reporting purposes over estimated useful lives or lease terms,
whichever is shorter, which range from 3 to 10 years for machinery and
equipment, and 10 to 40 years for buildings and improvements.
The Company capitalizes interest on borrowings during the active
construction period of major capital projects. Capitalized interest is added to
the cost of the underlying assets and is depreciated over the useful lives of
assets.
The cost of maintenance and repairs is charged to expense as incurred.
Expenditures that increase the value or productive capacity of assets are
capitalized. Upon retirement or other disposition of property, plant and
equipment, the cost and related accumulated depreciation are removed from the
accounts and any gain or loss is included in operations.
The Company capitalizes purchased software, including certain costs
associated with its installation. The cost of software capitalized is amortized
over its estimated useful life, ranging from 3 to 5 years, using the
straight-line method.
F-13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Identifiable Intangible Assets, Net:
Acquisition-related intangible assets are amortized on a straight-line
basis over their estimated useful lives, which range from 5 to 25 years.
Intellectual property assets are amortized over the periods of benefit, ranging
from 2 to 11 years, on a straight-line basis. All identifiable intangible assets
are classified within intangible and other assets, net on the balance sheet.
Long-Lived Assets:
The Company performs periodic evaluations of the recoverability of the
carrying amount of long-lived assets (including property, plant and equipment,
and intangible assets with determinable lives) whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be fully
recoverable. Events or changes in circumstances are evaluated based on a number
of factors including operating results, business plans and forecasts, general
and industry trends and, economic projections and anticipated cash flows. An
impairment is assessed when the undiscounted expected future cash flows derived
from an asset are less than its carrying amount. Impairment losses are measured
as the amount by which the carrying value of an asset exceeds its fair value and
are recognized in earnings. The Company also continually evaluates the estimated
useful lives of all long-lived assets and periodically revises such estimates
based on current events.
Goodwill:
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill is not amortized and is
subject to impairment tests. Goodwill is tested for impairment on an annual
basis or upon the occurrence of certain circumstances or events. The Company
determines the fair value of its reporting units using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to the Company's overall market
capitalization. The fair value of the reporting units is compared to the
carrying value of the reporting units to determine if an impairment loss should
be calculated. If the book value of a reporting unit exceeds the fair value of
the reporting unit, an impairment loss is indicated. The loss is calculated by
comparing the implied fair value of the goodwill to the book value of the
goodwill. If the book value of the goodwill exceeds the fair value of the
goodwill, an impairment loss is recorded. The implied fair value of goodwill is
determined by subtracting the fair value of the identifiable assets of a
reporting unit from the fair value of the reporting unit.
Employee Benefit Plans
The Company's pension plans and postretirement benefit plans are accounted
for using actuarial valuations required by Statement of Financial Accounting
Standards ("SFAS") No. 87, "Employers' Accounting for Pensions", SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" as
amended by SFAS No. 158 "Employers' Accounting for Defined Benefit Pension and
Other Postretirement Plans an amendment of FASB Statements No. 87, 88, 106 and
132(R)". The Company considers accounting for employee benefit plans critical
because management is required to make significant subjective judgments about a
number of actuarial assumptions, including discount rates, compensation growth,
long-term return on plan assets, retirement, turnover, health care cost trend
rates and mortality rates. Depending on the assumptions and estimates used, the
pension and postretirement benefit expense could vary within a range of outcomes
and have a material effect on reported results. In addition, the assumptions can
materially affect accumulated benefit obligations and future cash funding.
F-14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Other Current Liabilities and Other Liabilities
During fiscal year 2005, the Company received $15,547 (which is included
in other current liabilities at January 31, 2007 and 2006) from the Chinese
government as partial payment for the Company's old battery facility located in
Shanghai. The Company used these funds for the construction of a new battery
manufacturing facility in Shanghai, which was completed during the first quarter
of fiscal year 2008. This payment will be recognized as income, net of the book
value of assets disposed, when the old facility is transferred to the Chinese
government, which was also during the first quarter of fiscal year 2008.
Deferred revenue of $3,855 and $6,511 is included in other current
liabilities as of January 31, 2007 and 2006, respectively. Deferred revenue of
$5,816 and $580 is included in other liabilities as of January 31, 2007 and
2006, respectively.
Environmental Matters:
In accordance with SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," the Company
records a loss and establishes a reserve for the remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonable estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts existing and proposed technology,
the identification of other potentially responsible parties, their ability to
contribute and prior experience. These judgments are reviewed quarterly as more
information is received and the amounts reserved are updated as necessary.
However, the reserves may materially differ from ultimate actual liabilities if
the loss contingency is difficult to estimate or if management's judgments turn
out to be inaccurate. If management believes no best estimate exists, the
minimum loss is accrued. The liability for future environmental remediation
costs is evaluated on a quarterly basis by management.
Research and Development:
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development expenses.
Deferred Financing Costs:
Costs relating to obtaining debt are capitalized and amortized over the
term or the related debt using the effective interest rate method. When the debt
is paid in full, any unamortized financing costs are charged to interest
expense.
Advertising:
The Company expenses advertising costs as incurred. In fiscal years 2007,
2006 and 2005, the company incurred advertising costs of $1,670, $1,498 and
$1,493, respectively.
F-15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes:
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of events that have been included in the
financial statements or tax returns in accordance with SFAS No. 109 " Accounting
for Income Taxes", using tax rates in effect for the year in which the
differences are expected to reverse.
The Company is routinely audited by federal, state and local taxing
authorities. The outcome of these audits may result in the Company being
assessed taxes in addition to amounts previously paid. Accordingly, the Company
maintains tax contingency reserves for such potential assessments. The reserves
are determined based upon the Company's best estimate of possible assessments by
the Internal Revenue Service ("IRS") or other taxing authorities and are
adjusted, from time to time, based upon changing facts and circumstances.
Net Loss per 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 and other dilutive
securities were exercised. Weighted-average common shares and common shares -
diluted were as follows:
Years Ended January 31, 2007 2006 2005
- -------------------------------------------------------------------------------------
Weighted-average shares of common stock 25,590,448 25,379,717 25,349,488
- -------------------------------------------------------------------------------------
Weighted-average common shares - diluted 25,590,448 25,379,717 25,349,488
=====================================================================================
Due to net losses in fiscal years 2007 and 2006, 20,120,932 and 8,854,785,
respectively, of dilutive securities issuable in connection with convertible
bonds have been excluded from the diluted loss per share calculation for these
years because their effect would reduce the loss per share. Additionally, due to
net losses in fiscal years 2007, 2006 and 2005, 47,612, 100,242 and 134,295
respectively, of dilutive securities issuable in connection with stock plans
have been excluded from the diluted loss per share calculation for these years
because their effect would reduce the loss per share.
Stock-Based Compensation Plans:
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".
Effective February 1, 2006, the Company adopted SFAS No. 123 (revised
2004), "Share-Based Payment,". 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. Due to the Company's net operating
losses, no tax benefits have been realized from the exercises of options during
fiscal year 2007. As a result there is no cash flow impact related to tax
benefits realized from the exercises during fiscal year 2007.
F-16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
On March 1, 2005, the Company's Compensation Committee authorized the
vesting of all outstanding non-vested options then held by employees of the
Company and any of its subsidiaries, which were granted by the Corporation under
the 1996 and 1998 Stock Option Plans. In accordance with SFAS No. 123R, "Share
Based Payment," which is effective for the first annual period after December
15, 2005, the Company was required to apply the expense recognition provisions
under SFAS No. 123R beginning February 1, 2006. The reason that the Company
accelerated the vesting of the identified stock options was to reduce the
Company's compensation charge in periods subsequent to adoption of SFAS No.
123R.
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 consolidated balance sheet 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. 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 year 2008. Prior to the adoption of FIN No. 48, the Company
used a different measurement attribute for uncertainty in income taxes. The
Company is still evaluating the impact of adoption FIN No. 48 on its
consolidated balance sheet and results of operations.
In June 2006, the Emerging Issues Task Force ("EITF") reached a consensus
on EITF 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.
F-17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements"
("SFAS No. 157") which establishes a framework for measuring fair value in 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 does not expect the adoption of SFAS No. 157 to have a
material impact on its financial position and results of operations.
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 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. Consequently in fiscal year 2007, the Company adopted SFAS
No. 158 and recognized $4,459 in accumulated other comprehensive loss on the
Company's consolidated balance sheet.
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 adoption of SAB No. 108
did not have a material impact on the Company's financial position and results
of operations.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities -- Including an Amendment of FASB
Statement No. 115. The Statement permits entities to choose, at specified
election dates, to measure many financial instruments and certain other items at
fair value that are not currently measured at fair value. Unrealized gains and
losses on items for which the fair value option has been elected would be
reported in earnings at each subsequent reporting date. SFAS No. 159 also
establishes presentation and disclosure requirements in order to facilitate
comparisons between entities choosing different measurement attributes for
similar types of assets and liabilities. SFAS No. 159 does not affect existing
accounting requirements for certain assets and liabilities to be carried at fair
value. This statement is effective for reporting periods beginning after
November 15, 2007. The Company is evaluating the requirements of SFAS No. 159
and have not yet determined the impact on the financial statements.
F-18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
2. ACQUISITIONS
There were no acquisitions in fiscal years 2007 and 2006. In fiscal 2005
the Company made three acquisitions.
On May 27, 2004, the Company acquired Celab Limited ("Celab") for
approximately $10,500 net of approximately $4,700 in cash acquired, plus
additional acquisition costs of approximately $400, primarily related to legal
fees and due diligence. Celab is a provider of power conversion products,
predominantly sold into military, CATV and telecommunications applications in
Europe.
On June 30, 2004, the Company acquired Datel Holding Corporation and its
subsidiaries ("Datel") for approximately $74,800 plus acquisition costs of
approximately $800, primarily related to legal fees, audit fees, due diligence
and appraisals. The purchase price consisted of approximately $66,400 as well as
the assumption of approximately $8,400 in debt. Cash acquired in the Datel
acquisition was approximately $3,100. Datel is a Mansfield, Massachusetts-based
manufacturer of primarily DC to DC converters, with additional product offerings
in data acquisition components and digital panel meters. The appraisal of the
acquired Datel tangible and intangible assets included technology of $11,200
with an 11 year expected useful life, customer relationships of $8,900 with a 20
year expected useful life, trade names of $2,400 with a 25 year expected useful
life, and acquired in-process research and development of $440, which was
expensed in the year ended January 31, 2005.
On September 30, 2004, the Company acquired the Power Systems division of
Celestica, Inc., which the Company now operates as "CPS", a Toronto,
Ontario-based manufacturer, for approximately $52,400 plus additional
acquisition related costs of approximately $1,050, primarily related to legal
fees, consulting fees, audit fees, due diligence and appraisals. CPS develops DC
to DC converters and AC to DC power supplies which are sold on a direct basis to
large computing and communications original equipment manufacturers ("OEMs").
The appraisal of the acquired CPS tangible and intangible assets included
technology of $3,760 with a weighted average 5-year expected useful life,
customer relationships of $18,500 with a 20-year expected useful life, and
acquired in-process research and development of $340, which was expensed in the
year ended January 31, 2005.
For the in-process research and development acquired in the Datel and CPS
acquisitions, the technological feasibility of the in-process technology had not
been established as of the acquisition date and the technology had no alternate
future use.
The results of operations of these businesses are included within the
Power Electronics Division in the Company's consolidated financial statements
from their respective dates of acquisition.
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill:
Standby Power Motive
Power Electronics Power Total
- --------------------------------------------------------------------------------------------------
Goodwill, January 31, 2005 $ 59,711 $ 37,536 $ -- $ 97,247
Purchase accounting adjustment -- (803) -- (803)
Effect of exchange rate changes on goodwill (37) (1,282) -- (1,319)
Impairment of goodwill -- (13,674) -- (13,674)
- --------------------------------------------------------------------------------------------------
Goodwill, January 31, 2006 59,674 21,777 -- 81,451
Effect of exchange rate changes on goodwill 59 957 -- 1,016
Impairment of goodwill -- (13,947) -- (13,947)
- --------------------------------------------------------------------------------------------------
Goodwill, January 31, 2007 $ 59,733 $ 8,787 $ -- $ 68,520
==================================================================================================
See Note 14, Asset Impairments, for a discussion of the impairments to
goodwill recognized during the fiscal years ended January 31, 2007, 2006 and
2005.
F-19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS (continued)
Identifiable Intangible Assets:
Identifiable intangible assets as of January 31, 2007, consisted of the
following:
Gross Accumulated
January 31, 2007 Assets Amortization Net
- --------------------------------------------------------------------------------
Trade names $ 20,240 $ (7,310) $ 12,930
Intellectual property 21,283 (9,344) $ 11,939
Customer relationships 8,900 (1,150) $ 7,750
Other 1,461 (329) $ 1,132
- --------------------------------------------------------------------------------
Total intangible assets $ 51,884 $ (18,133) $ 33,751
================================================================================
Identifiable intangible assets as of January 31, 2006, consisted of the
following:
Gross Accumulated
January 31, 2006 Assets Amortization Net
- --------------------------------------------------------------------------------
Trade names $ 20,240 $ (6,322) $ 13,918
Intellectual property 22,444 (8,742) $ 13,702
Customer relationships 8,900 (704) $ 8,196
Other 1,872 (746) $ 1,126
- --------------------------------------------------------------------------------
Total intangible assets 53,456 (16,514) $ 36,942
================================================================================
Based on intangibles recorded at January 31, 2007, the annual amortization
expense is expected to be as follows (assuming current exchange rates):
Years Ended January 31, 2008 2009 2010 2011 2012
- ------------------------------------------------------------------------------------------
Trade names $ 988 $ 988 $ 988 $ 988 $ 988
Intellectual property 1,661 1,609 1,577 1,545 1,412
Customer relationships 445 445 445 445 445
Other 29 29 29 29 29
- ------------------------------------------------------------------------------------------
Total intangible assets $ 3,123 $ 3,071 $ 3,039 $ 3,007 $ 2,874
==========================================================================================
Amortization of identifiable intangibles was $3,179, $4,703 and $3,423 for
the years ended January 31, 2007, 2006 and 2005, respectively.
See Note 14, Asset Impairments, for a discussion of the impairments to
identifiable intangible assets recognized during the fiscal years ended January
31, 2006 and 2005.
F-20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
4. INVENTORIES
Inventories consisted of the following:
Years Ended January 31, 2007 2006
- --------------------------------------------------------------------------------
Raw materials $ 34,189 $ 36,828
Work-in-process 16,089 13,993
Finished goods 37,951 32,982
- --------------------------------------------------------------------------------
Total $ 88,229 $ 83,803
================================================================================
If the first-in, first-out method of inventory accounting had been used
which approximates current cost, inventories would have been $100,006 and
$92,237 as of January 31, 2007 and 2006, respectively. There was no inventory
decrement in the years ended January 31, 2007 and 2006.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
Years Ended January 31, 2007 2006
- --------------------------------------------------------------------------------
Land $ 5,001 $ 4,991
Buildings and improvements 55,932 61,099
Furniture, fixtures and equipment 205,031 212,495
Construction in progress 26,620 8,748
- --------------------------------------------------------------------------------
292,584 287,333
Less accumulated depreciation 191,769 196,292
- --------------------------------------------------------------------------------
Total $ 100,815 $ 91,041
================================================================================
For the years ended January 31, 2007, 2006 and 2005, depreciation charged
to operations, including property under capital leases, amounted to $15,115,
$17,093 and $21,238; and capitalized interest amounted to $741, $32 and $152,
respectively.
Included in Construction in progress as of January 31, 2007 and 2006 was
$24,619 and $7,360, respectively, related to our joint venture, primarily due to
our new manufacturing facility in Shanghai, China, which was completed in the
first quarter of fiscal year 2008.
See Note 14, Asset Impairments, for a discussion of the impairments to
fixed assets recognized during the fiscal years ended January 31, 2007, 2006 and
2005.
F-21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT
Debt consisted of the following:
Years Ended January 31, 2007 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Line of Credit Facility, maximum commitment of $75,000 at January 31, 2007 and 2006; availability is
determined by a borrowing base calculation (effective rate on a weighted-average basis
was 7.38% and 6.21% as of January 31, 2007 and 2006, respectively). Net of unamortized debt
costs of $1,807 and $2,130 as of January 31, 2007 and 2006, respectively $ 23,030 $ 6,013
Term Loan (effective rate on a weighted-average basis was 11.18% as of January 31, 2006)
Net of unamortized debt costs of $534 as of January 31, 2006 -- 49,466
Convertible Senior Notes 2005; due 2025, bears interest at 5.25%. Net of unamortized debt costs
of $2,102 and $2,628 as of January 31, 2007 and 2006, respectively 72,898 72,372
Convertible Senior Notes 2006; due 2026, bears interest at 5.5%. Net of unamortized debt costs of
$2,502 as of January 31, 2007; 51,998 --
8.4% mortgage payable in monthly installments of $59 payable through July 2007 with a final
installment of $4,861 due in August 2007 collateralized by the Company's Mansfield, Massachusetts,
manufacturing facility 4,946 5,230
China Line of Credit; Maximum commitment of 40 million RMB (approximately $5,100) at January 31, 2007
(effective rate of 5.58% as of January 31, 2007) 1,286 --
Obligations under capital leases with interest rates ranging from 8.1% to 9.2% collateralized
by equipment 265 1,024
- ------------------------------------------------------------------------------------------------------------------------------------
Total debt 154,423 134,105
Less current portion 6,498 1,038
- ------------------------------------------------------------------------------------------------------------------------------------
Total long-term portion $ 147,925 $ 133,067
====================================================================================================================================
On December 7, 2005, the Company closed on $125,000 of credit facilities,
consisting of (i) a $75,000 principal amount Line of Credit Facility ("Credit
Facility") and (ii) a $50,000 Term Loan facility ("Term Loan"). The Term Loan
was paid in full on November 22, 2006 using the proceeds received from the
issuance of the $54,500 Convertible Senior Notes due 2026 ("2006 Notes")
described below.
The Credit Facility consists of a five-year senior revolving line of
credit. The availability under the Credit Facility is determined by a borrowing
base, is collateralized by a first lien on certain assets and initially bore
interest at LIBOR plus 1.75% or Prime plus .25%. The spread increased to LIBOR
plus 2.00% or Prime plus 0.50% as of July 1, 2006 based on the Excess
Availability for the previous calendar quarter on average decreasing below
$35,000. As of January 31, 2007, the maximum availability calculated under the
borrowing base was $47,093, of which $24,836 was funded, and $5,195 was utilized
for letters of credit. As provided under the Credit Facility, excess borrowing
capacity will be available for future working capital needs and general
corporate purposes.
As of January 31, 2007, and January 31, 2006, the Company was in
compliance with its financial covenants. 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 Line of Credit facility lenders. The Company agreed to grant a security
interest in its Leola, Pennsylvania battery plant and its Mansfield,
Massachusetts, electronics plant. The Company also agreed to an increase in the
interest rate for the benefit of the Term Loan lenders of .25% until such time
as the leverage ratio falls below 3.0 as defined in the amended Term Loan
agreement.
F-22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
On June 14, 2006, the Company executed a second amendment to the Credit
Facility and the Term Loan which allowed for the sale of real property owned by
one of the Company's subsidiaries in the United Kingdom. In consideration for
allowing for the sale the Company agreed to have the net proceeds from the sale
included in the availability block and to extend the block to December 31, 2006.
There were no fees paid for this amendment.
On December 21, 2006, the Company executed a third amendment to the Credit
Facility which allowed for the Company's Chinese Joint Venture to issue a
guarantee to their Joint Venture partner to support a credit facility ("China
Line of Credit") obtained through a local Chinese bank not to exceed 40 million
RMB (approximately $5,100), permitted for the sale of the Company's Huguenot,
New York facility, and modified the availability block and extended it to June
30, 2007. The Company incurred $38 of fees in connection with this amendment.
The Credit Facility includes a minimum fixed charge coverage ratio that is
measured only when the excess availability as defined in the agreement is less
than $15,000. The agreement restricts 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.
In connection with refinancing of the Company's credit facilities, the
Company incurred $2,755 in issuance costs which consisted primarily of
investment banker fees, legal and other professional fees. These costs are being
amortized to interest expense over the term of each facility. The unamortized
balance of $1,807 and $2,130 of these costs at January 31, 2007, and January 31,
2006, respectively, is included in the accompanying balance sheet.
On April 13, 2007, the Company executed a fourth amendment to its Credit
Facility. The amendment enhanced the Company's borrowing capacity and resultant
availability through changes and modifications of previously excluded
collateral. In addition, the amendment provided for a reduction in the
availability block to $10,000, a reset of fixed coverage ratio covenants, which
are only tested on a going forward basis to the extent excess availability falls
below a defined threshold of $10,000, previously $15,000 and an increase in the
permitted foreign indebtedness basket. In consideration of these changes the
Company paid fees of approximately $240. Based upon these changes the Company
estimates that maximum availability calculated under these new borrowing base
provisions would increase availability by approximately $20,000 from that
reported as of January 31, 2007.
As of January 31, 2007, 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.
On November 21, 2005, the Company completed the private placement of
$75,000 aggregate principal amount of 5.25% Convertible Senior Notes Due 2025
("2005 Notes"). The Company received net proceeds of approximately $72,300 after
the deduction of commissions and offering expenses. The Company used
substantially all of the net proceeds to reduce the balance of its former credit
agreement.
The 2005 Notes are unsubordinated unsecured obligations and rank equally
with 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 2005 Notes are not
guaranteed by, and are structurally subordinate in right of payment to, all
obligations of the Company's subsidiaries, except that those subsidiaries that
may in the future guarantee certain of the Company's other obligations will also
be required to guarantee the 2005 Notes.
The 2005 Notes require the semi-annual payment of interest on May 1 and
November 1 of each year beginning May 1, 2006, at 5.25% per annum on the
principal amount outstanding. The 2005 Notes will mature on November 1, 2025.
Prior to maturity the holders may convert their 2005 Notes into shares of the
Company's common stock under certain circumstances. The initial conversion rate
is 118.0638 shares per $1,000 principal amount of 2005 Notes, which is
equivalent to an initial conversion price of approximately $8.47 per share.
F-23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
At any time between November 1, 2010 and November 1, 2012, the Company may
at its option redeem the 2005 Notes, in whole or in part, for cash, at a
redemption price equal to 100% of the principal amount of 2005 Notes to be
redeemed, plus any accrued and unpaid interest, including additional interest,
if any, if in the previous 30 consecutive trading days ending on the trading day
before the date of mailing of the redemption notice the closing sale price of
the Common Stock exceeds 130% of the then effective conversion price of the 2005
Notes for at least 20 trading days. In addition, at any time after November 1,
2012, the Company may redeem the 2005 Notes, in whole or in part, for cash, at a
redemption price equal to 100% of the principal amount of the 2005 Notes to be
redeemed plus any accrued and unpaid interest, including additional interest, if
any. A holder of 2005 Notes may require the Company to repurchase some or all of
the holder's 2005 Notes for cash upon the occurrence of a fundamental change as
defined in the indenture and on each of November 1, 2012, 2015 and 2020 at a
price equal to 100% of the principal amount of the 2005 Notes being repurchased,
plus accrued interest, if any, in each case.
If applicable, the Company will pay a make-whole premium on 2005 Notes
converted in connection with any fundamental change that occurs prior to
November 1, 2012. 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
$7.00. 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 2005 Notes converted in
connection with the fundamental change.
The 2005 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. The
Company filed a shelf registration statement with the SEC on April 13, 2006 and
on March 9, 2007 the shelf registration became effective.
In connection with the issuance of the 2005 Notes, the Company incurred
$2,700 in issuance costs which primarily consisted of investment banker fees,
legal and other professional fees. These costs are being amortized to interest
expense over five years. The unamortized balance of $2,102 and $2,628 of these
costs at January 31, 2007, and January 31, 2006, respectively, is included in
the accompanying balance sheet.
On November 22, 2006, the Company completed the private placement of
$54,500 aggregate principal amount of 5.50% Convertible Senior Notes Due 2026.
The Company received net proceeds of approximately $51,900 after the deduction
of commissions and offering expenses. The Company used substantially all of the
net proceeds to pay off the Term Loan.
The 2006 Notes are unsubordinated unsecured obligations and rank equally
with 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 2006 Notes are not
guaranteed by, and are structurally subordinate in right of payment to, all
obligations of the Company's subsidiaries, except that those subsidiaries that
may in the future guarantee certain of the Company's other obligations will also
be required to guarantee the 2006 Notes.
F-24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
The 2006 Notes require the semi-annual payment of interest on May 1 and
November 1 of each year beginning May 1, 2007, at 5.50% per annum on the
principal amount outstanding. The 2006 Notes will mature on November 1, 2026.
Prior to maturity the holders may convert their 2006 Notes into shares of the
Company's common stock under certain circumstances. The initial conversion rate
is 206.7183 shares per $1,000 principal amount of 2006 Notes, which is
equivalent to an initial conversion price of approximately $4.84 per share.
At any time on and after November 15, 2011, the Company may at its option
redeem the 2006 Notes, in whole or in part, for cash, at a redemption price
equal to 100% of the principal amount of 2006 Notes to be redeemed, plus any
accrued and unpaid interest, including additional interest.
A holder of 2006 Notes may require the Company to repurchase some or all
of the holder's 2006 Notes for cash upon the occurrence of a fundamental change
as defined in the indenture and on each of November 1, 2011, 2016 and 2021 at a
price equal to 100% of the principal amount of the 2006 Notes being repurchased,
plus accrued interest, if any, in each case.
If applicable, the Company will pay a make-whole premium on 2006 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 2006 Notes converted in
connection with the fundamental change.
The 2006 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. The
Company filed a shelf registration statement with the SEC on February 16, 2007
which became effective on March 9, 2007.
In connection with the issuance of the 2006 Notes, the Company incurred
$2,586 in issuance costs which primarily consisted of investment banker fees,
legal and other professional fees. These costs are being amortized to interest
expense over five years. The unamortized balance of $2,502 of these costs at
January 31, 2007 is included in the accompanying balance sheet.
On January 18, 2007 the Company entered into a six month non-revolving
line of credit facility in China. Under the terms of the China Line of Credit
the Company may borrow up to 40 million RMB (approximately $5,100) with an
interest rate of 5.58%. This credit line was established to provide the Joint
Venture in China the flexibility needed to finalize the construction of its new
manufacturing facility, which was completed in March 2007 and to fund working
capital requirements. As of January 31, 2007, $1,286 was funded under this
facility.
F-25
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
6. DEBT (continued)
The maximum aggregate amount of loans outstanding under the Term Loan,
Credit Facility, 2005 Notes, 2006 Notes, China Line of Credit, and Former Credit
Agreement at any point during the year ended January 31, 2007, 2006 and 2005
were $162,888, $145,673 and $149,778, respectively. For the years ended January
31, 2007, 2006 and 2005, the outstanding loans under these credit agreements
computed on a monthly basis averaged $150,389, $134,902 and $80,314 at a
weighted-average interest rate of 7.81%, 6.03% and 4.64%, respectively.
The Company also has an uncommitted multi-currency overdraft facility.
This is a senior unsecured demand loan facility in the amount of 750 Pounds
Sterling. There was no balance on this facility during fiscal years 2007 and
2006.
As of January 31, 2007, the required minimum annual principal reduction of
long-term debt is as follows:
Year Ended January 31, Amount
- --------------------------------------------------------------------------------
2008 $ 6,498
2009 --
2010 --
2011 23,030
2012 --
Thereafter 124,895
- --------------------------------------------------------------------------------
Total $ 154,423
================================================================================
7. STOCK OPTION PLANS
The Company has three stock option plans under which it can currently
grant options; 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. Stock
can be granted to officers, directors, employees and consultants of the Company,
or an affiliate. In addition outstanding options remained from the 1996 Stock
Option Plan which 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.
F-26
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
7. STOCK OPTION PLANS (continued)
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 January 31, 2007, the
unamortized compensation for these options was $3, which is expected to be
recognized during first quarter of fiscal year 2008.
Under the provisions of SFAS No. 123R, the Company recorded $225 of stock
compensation related to stock option awards in its consolidated statement of
operations for the year ended January 31, 2007. The impact on earnings per share
for the year ended January 31, 2007 was less than $0.01. The Company granted
134,200 stock option awards during fiscal year 2007, of which 40,500 vested
immediately. Accordingly, compensation cost included $137 for these awards that
vested immediately. Based on the current awards outstanding, the estimated
remaining compensation expense is approximately $234, which is expected to be
recognized over the weighted average of approximately 15 months.
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. 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:
Years Ended January 31, 2006 2005
- --------------------------------------------------------------------------------------------------------------
Net loss - as reported $ (60,662) $ (59,493)
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effect 9,297 3,790
- --------------------------------------------------------------------------------------------------------------
Net loss - pro forma $ (69,959) $ (63,283)
==============================================================================================================
Net loss per common share - basic - as reported $ (2.39) $ (2.35)
Net loss per common share - basic - pro forma $ (2.76) $ (2.50)
Net loss per common share - diluted - as reported $ (2.39) $ (2.35)
Net loss per common share - diluted - pro forma $ (2.76) $ (2.50)
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 disclosures') for the period prior
to its adoption.
The following tables summarize activity under all stock option plans for
the respective periods:
Years Ended January 31, 2007 2006 2005
- ------------------------------------------------------------------------------------------------------
Weighted-average fair value of options granted during the year $ 3.51 $ 3.66 $ 9.05
Intrinsic value of options exercised $ 297 $ 156 $ 659
Cash received from option exercises $ 1,210 $ 584 $ 932
F-27
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
7. STOCKHOLDERS' EQUITY (continued)
Beginning Granted Exercised Cancelled Ending
Balance During During During Balance
Outstanding Year Year Year Outstanding Exercisable
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY
31, 2005
Number of shares 2,741,506 681,702 99,599 191,241 3,132,368 2,018,039
Weighted-average
option price per share $ 21.47 $ 18.60 $ 9.36 $ 23.64 $ 21.10 $ 22.70
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY
31, 2006
Number of shares 3,132,368 1,467,701 85,300 440,771 4,073,998 4,053,900
Weighted-average
option price per share $ 21.10 $ 7.75 $ 6.83 $ 20.84 $ 16.62 $ 16.62
- --------------------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY
31, 2007
Number of shares 4,073,998 134,200 179,850 1,504,055 2,524,293 2,423,753
Weighted-average
option price per share $ 16.62 $ 6.71 $ 6.73 $ 18.74 $ 15.53 $ 15.88
- --------------------------------------------------------------------------------------------------------------------
The aggregate intrinsic values on this table were calculated based on the
difference between the closing price of our common stock and the exercise price
of the underlying options on January 31, 2007, 2006 and 2005, respectively.
The following table summarizes information about the stock options
outstanding at January 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- --------------------------------------
Weighted-
Average Weighted- Weighted Weighted-
Remaining Average Average Average
Range of Number Contractual Exercise Number Contractual Exercise
Exercise Prices Outstanding Life Price Exercisable Life Price
- -----------------------------------------------------------------------------------------------------
$4.89 - $ 7.21 433,160 8.6 Years $ 6.73 349,960 8.4 Years $ 6.83
$7.81 - $ 9.18 578,985 9.0 Years $ 8.06 568,485 9.0 Years $ 8.06
$9.80 - $ 14.50 245,624 5.6 Years $ 11.35 245,624 5.6 Years $ 11.35
$14.94 - $ 22.31 987,544 5.4 Years $ 18.81 980,704 5.4 Years $ 18.82
$26.76 - $ 37.28 229,830 4.1 years $ 33.02 229,830 4.1 Years $ 33.02
$48.44 - $ 55.94 49,150 3.5 Years $ 54.42 49,150 3.5 Years $ 54.42
- -----------------------------------------------------------------------------------------------------
Total 2,524,293 6.6 Years $ 15.53 2,423,753 6.5 Years $ 15.88
- -----------------------------------------------------------------------------------------------------
There were 2,929,588 and 449,469 shares available for future grants of
options under the Company's stock option plans as of January 31, 2007 and 2006,
respectively.
F-28
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
7. STOCKHOLDERS' EQUITY (continued)
A summary of the status of the Company's non-vested stock options as of
January 31, 2007, and changes during the year ended January 31, 2007, 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 134,200 $3.51
Vested (53,758) $4.57
- --------------------------------------------------------------------------------
Non-vested at January 31, 2007 100,540 $3.94
- --------------------------------------------------------------------------------
The fair value of stock options granted during fiscal year 2007, 2006 and
2005 was estimated on the grant date using the Black-Scholes option pricing
model with the following average assumptions.
Years Ended January 31, 2007 2006 2005
--------------------------------------------------------------------------
Risk-free interest rate 4.57% - 5.03% 3.73% - 4.45% 2.35% - 3.97%
Dividend yield 0.0% - 0.643% 0.52% - 0.81% 0.29% - 0.34%
Volatility factor 47.31% - 54.25% 49.81% - 55.06% 51.68% - 57.69%
Expected lives 5 Years 5 Years 4-6 Years
Rights Plan:
In February 2000, the Company's Board of Directors declared a dividend of
one common stock purchase right ("Right") for each share of Common Stock
outstanding on March 3, 2000, to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and Mellon Investor Services LLC, as rights agent. In fiscal year
2005, an amendment was signed among the Company, Mellon Investor Services LLC
and the Bank of New York whereby Mellon Investor Services LLC resigned as rights
agent. The Company appointed the Bank of New York as successor rights agent.
Upon the occurrence of certain events, each Right will entitle the registered
holder to purchase from the Company one one-hundredth of a share of Common Stock
at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of the Company, unless the Company's Board
of Directors acts otherwise, each holder of a Right, other than Rights
beneficially owned by the acquiring company, will thereafter have the right to
receive upon exercise: (i) that number of shares of the Company's common stock
having a market value equal to two times the purchase price of the Right or (ii)
that number of shares of common stock of the acquiring company that at the time
of the transaction has a market value of two times the exercise price of the
Right.
F-29
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
8. INCOME TAXES
The components of loss before income taxes and minority interest were as
follows:
Years Ended January 31, 2007 2006 2005
- -----------------------------------------------------------------------------------------
Domestic $ (51,544) $ (36,851) $ (41,704)
Foreign 8,291 (11,366) (39,083)
- -----------------------------------------------------------------------------------------
Loss before income taxes and minority interest $ (43,253) $ (48,217) $ (80,787)
=========================================================================================
The provision (benefit) for income taxes as shown in the accompanying
consolidated statements of operations consisted of the following:
Years Ended January 31, 2007 2006 2005
- --------------------------------------------------------------------------------
Current:
Federal $ 45 $ (3,449) $ (337)
State (721) (318) (46)
Foreign 3,489 3,740 1,213
- --------------------------------------------------------------------------------
2,813 (27) 830
- --------------------------------------------------------------------------------
Deferred:
Federal 1,264 10,731 (21,352)
State 81 2,065 (1,134)
Foreign (64) (407) 367
- --------------------------------------------------------------------------------
1,281 12,389 (22,119)
- --------------------------------------------------------------------------------
Total $ 4,094 $ 12,362 $ (21,289)
================================================================================
- --------------------------------------------------------------------------------
Effective income tax rate 9.5% 25.6% (26.4)%
================================================================================
F-30
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
8. INCOME TAXES (continued)
The components of the deferred tax asset and liability as of January 31,
2007 and 2006 were as follows:
Years Ended January 31, 2007 2006*
- --------------------------------------------------------------------------------
ASSETS
Vacation and compensation accruals 4,486 4,882
Bad debt, inventory and return allowances 6,162 7,739
Warranty reserves 3,028 2,822
Postretirement benefits 1,731 1,684
Net operating losses 19,001 2,527
Foreign tax credits 1,162 --
Environmental reserves 745 836
Other accruals 1,522 1,382
Other losses 51 --
Pension obligation 5,398 3,732
Tax credits 1,643 809
- --------------------------------------------------------------------------------
Total deferred tax assets 44,929 26,413
- --------------------------------------------------------------------------------
LIABILITIES
Depreciation and amortization (8,916) (7,200)
Derivatives (2,274) (2,853)
Unrepatriated earnings (2,208) (1,610)
- --------------------------------------------------------------------------------
Total deferred tax liability (13,398) (11,663)
- --------------------------------------------------------------------------------
Valuation allowance (40,833) (22,817)
- --------------------------------------------------------------------------------
Net deferred tax (liability) asset $ (9,302) $ (8,067)
================================================================================
* Reclassified for comparative purposes
The Company's effective income tax rate is lower than what would be
expected if the federal statutory rate were applied to income before income
taxes primarily because of certain expenses deductible for financial reporting
purposes that are not deductible for tax purposes, the impairment of
non-deductible tax goodwill for financial statement purposes, tax-exempt
interest income, research and development tax credits, the increase in the
company's valuation allowance related to recurring net operating losses
carryforwards from fiscal years 2007, 2006 and 2005 that are more likely than
not to not be realized.
8.
Consistent with Company policy, the Company evaluates the realizability of
all of its tax assets each quarter. As a result of this review, the Company
increased the overall valuation allowance by $18,016 during fiscal year 2007.
The year end valuation allowance of $40,833 was made up of the following
components:
Fiscal Year 2007
--------------------------------------------------------------------------
US federal and state valuation allowance $ 36,002
China Joint Venture valaution allowance 893
Canada valuation allowance 3,888
Other 50
--------------------------------------------------------------------------
Total $ 40,833
==========================================================================
F-31
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
8. INCOME TAXES (continued)
In fiscal year 2007, the Company established a valuation allowance against
certain deferred tax assets related to the company's joint venture in China in
the amount of $893 based on negative evidence regarding the realizability of
these assets.
As a result of amended income tax returns filed with the Internal Revenue
Service for fiscal years 2002 through 2004, as well as the significant federal
net operating loss generated in the fiscal year 2006, the Company has recorded a
prepaid tax asset of $1,732 and $3,381 in fiscal years 2007 and 2006,
respectively. The prepaid asset relates to the estimated cash refund resulting
from the carry back of the loss generated in fiscal years 2004 through 2006 as
well as the amendments to the federal returns in fiscal years 2002 through 2004.
During fiscal year 2007, the Company received a refund from the Internal Revenue
Service of approximately $4,000 representing a majority of the refund related to
the carryback of fiscal year 2006 net operating loss.
As of January 31, 2007 the Company had federal net operating loss
carryforwards of approximately $43,998, state net operating loss carryforwards
of $66,702 and foreign net operating loss carryforwards of $4,436. These losses
and credits begin to expire in varying amounts from December 31, 2009 to January
31, 2027. In addition, as of January 31, 2007 the Company has U.S alternative
minimum tax credits carryfowards, research and development tax credits
carryfowards and foreign tax credits carryforwards in the amount of $307, $1,336
and $1,162, respectively.
Reconciliations of the provision (benefit) for income taxes at the U.S.
statutory rate to the (benefit) provisions for income taxes at the effective tax
rates for the years ended January 31, 2007, 2006 and 2005, respectively, are as
follows:
Years Ended January 31, 2007 2006 2005
- ------------------------------------------------------------------------------------------------------------------
U.S. statutory income tax $ (14,706) $ (16,394) $ (28,276)
Effect of:
State tax, net of federal income tax benefit (1,936) (1,863) (1,018)
Write off of deferred tax asset related to the investment in foreign
subsidiaries -- 8,614 --
Tax effect of foreign operations (561) 2,149 (63)
In-process research and development -- -- 154
Goodwill and intangible asset impairment 4,666 4,415 7,146
Research and development tax credits (614) (513) --
Change in valuation allowance 17,356 14,265 854
Deduction of prior year foreign tax credits -- 2,154 --
Other (111) (465) (86)
- ------------------------------------------------------------------------------------------------------------------
Total provision (benefit) for income taxes at the effective rate $ 4,094 $ 12,362 $ (21,289)
==================================================================================================================
F-32
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES
(A) Operating Leases:
The Company leases certain manufacturing and office facilities and certain
equipment under operating lease agreements in accordance with SFAS No. 13
"Accounting for leases". Certain leases contain renewal options and some have
purchase options and generally provide that the Company shall pay for insurance,
taxes and maintenance. As of January 31, 2007, the Company had future minimum
annual lease obligations, net of sublease income, under leases with
noncancellable lease terms in excess of one year as follows:
Years Ended January 31, Amount
- --------------------------------------------------------------------------------
2008 4,793
2009 4,467
2010 4,058
2011 2,977
2012 1,026
Thereafter 3,111
- --------------------------------------------------------------------------------
Total $ 20,432
================================================================================
Total rent expense, net of sublease income, for all operating leases for
the years ended January 31, 2007, 2006 and 2005, was $7,533, $6,236 and $4,957,
respectively.
(B) Contingent Liabilities:
Legal
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 the Company 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 payment of 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. The Company does not expect that the Consent Decree will have a
material adverse effect on its business, financial condition or results of
operations.
F-33
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
Environmental
The Company is subject to extensive and evolving environmental laws and
regulations regarding the clean-up and protection of the environment, worker
health and safety and the protection of third parties. These laws and
regulations include, but are not limited to (i) requirements relating to the
handling, storage, use and disposal of lead and other hazardous materials in
manufacturing processes and solid wastes; (ii) record keeping and periodic
reporting to governmental entities regarding the use and disposal of hazardous
materials; (iii) monitoring and permitting of air emissions and water discharge;
and (iv) monitoring worker exposure to hazardous substances in the workplace and
protecting workers from impermissible exposure to hazardous substances,
including lead, used in our manufacturing process.
Notwithstanding the Company's efforts to maintain compliance with
applicable environmental requirements, if injury or damage to persons or the
environment arises from hazardous substances used, generated or disposed of in
the conduct of the Company's business (or that of a predecessor to the extent
the Company is not indemnified therefor), the Company may be held liable for
certain damages, the costs of investigation and remediation, and fines and
penalties, which could have a material adverse effect on the Company's business,
financial condition, or results of operations. However, under the terms of the
purchase agreement with Allied Corporation ("Allied") for the acquisition (the
"Acquisition") of the Company (the "Acquisition Agreement"), Allied was
obligated to indemnify the Company for any liabilities of this type resulting
from conditions existing at January 28, 1986, that were not disclosed by Allied
to the Company in the schedules to the Acquisition Agreement. These obligations
have since been assumed by Allied's successor in interest, Honeywell
("Honeywell").
C&D is participating in the investigation of contamination at several lead
smelting facilities ("Third Party Facilities") to which C&D allegedly made scrap
lead shipments for reclamation prior to the date of the acquisition.
Pursuant to a 1996 Site Participation Agreement, as later amended in 2000,
the Company and several other potentially responsible parties ("PRP"s) 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, Inc. ("NL") 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 the Company, for which
the Company'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 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 has completed 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 the 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., and in December 2006, the parties executed a settlement
agreement which provides for a cost sharing arrangement with Avnet bearing a
majority of the future costs associated with the investigation and remediation
of the lagoon-related contamination.
F-34
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
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
("CVOC"s) in groundwater.
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 Company's Attica, Indiana, property is the source of elevated levels of
trichloroethylene detected in two city wells downgradient of the Company's
property. EPA advised that it believes the former landfill is subject to
remediation under the RCRA corrective action program. The Company conducted
testing in accordance with an investigation work plan and submitted the test
results to EPA. EPA thereafter notified the Company that EPA also wanted it to
embark upon a more comprehensive RCRA investigation to determine whether there
have been any releases of other hazardous waste constituents from its Attica
facility and, if so, to determine what corrective measure may be appropriate. In
January 2007, the Company agreed to an Administrative Order on Consent with EPA
to investigate, and remediate if necessary, site conditions at the facility. The
scope of any potential exposure is not defined at this time.
The Company has conducted site investigations at its Conyers, Georgia
facility, and has detected chlorinated solvents in groundwater and lead in soil
both onsite and offsite. The Company has recently initiated remediation of the
chlorinated solvents in accordance with a Corrective Action Plan, which was
approved by the Georgia Department of Natural Resources in January 2007.
Additionally, the Company has recently initiated remediation of lead impacted
soils identified in the site investigations. In September 2005, an adjoining
landowner filed suit against the Company alleging, among other things, that it
was allowing lead contaminated stormwater runoff to leave its property and
contaminate the adjoining property. The parties settled the litigation in March
2007 with the Company agreeing to purchase a parcel of land between its property
and plaintiff's property and to use the transferred parcel to construct a
bioremediation area to prevent potential future lead contamination to
plaintiff's property.
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 January 31, 2007, accrued
environmental reserves totaled $2,192 consisting of $1,469 in other current
liabilities and $723 in other liabilities. 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.
F-35
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
9. COMMITMENTS AND CONTINGENCIES (continued)
(C) Purchase Commitments:
Periodically the Company enters into purchase commitments pertaining to
the purchase of certain raw materials with various suppliers. The Company
entered into a lead commitment contract for a twelve-month period ending in
December 2007 with 50% of the lead at market rates and the other 50% at
conversion rates (tolled) resulting in an estimated commitment of $4,700. No
other significant purchase commitments existed at January 31, 2007, and none are
expected to exceed usage requirements.
10. MAJOR CUSTOMER
No single customer of the Company amounted to 10% or more of the Company's
consolidated net sales for the years ended January 31, 2007, 2006 and 2005.
11. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to potential concentration
of credit risk consist principally of trade receivables and temporary cash
investments. The Company places its temporary cash investments with various
financial institutions and, generally, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited by a large customer base and its geographic
dispersion. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, in
certain circumstances.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Company's financial instruments at
January 31, 2007 and 2006, were as follows:
2007 2006
----------------------- -------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents $ 12,596 $ 12,596 $ 25,693 $ 25,693
Debt (excluding capital lease obligations) 154,158 165,820 133,081 145,456
Commodity hedges 4,890 4,890 6,507 6,507
Foreign exchange hedges 117 117 (38) (38)
- ------------------------------------------------------------------------------------------------
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents - the carrying amount approximates fair value
because of the short maturity of these instruments.
The fair value of accounts receivable, accounts payable and accrued
liabilities consistently approximate the carrying value due to the short term
maturity of these instruments and are excluded from the above table.
Long term debt (excluding capital lease obligations) - the fair value of
the Notes was determined using quoted market prices at the balance sheet date.
The carrying value of the Company's remaining long-term debt, including the
current portion, approximates fair value based on the incremental borrowing
rates currently available to the Company for loans with similar terms and
maturity.
F-36
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Hedging instruments - the estimated fair value of the interest rate swaps
and foreign exchange contracts are based on market prices or current rates
offered for interest rate swaps and foreign exchange contracts with similar
terms and maturities. The ultimate amounts paid or received under these interest
rate swaps and foreign currency contracts, however, depend on future interest
rates and exchange rates.
The Company uses derivative instruments according to a financial risk
management policy in order to manage its exposure to changes in certain
commodity prices and exchange rates. The Company applies hedge accounting by
documenting the relationships of the derivatives to the hedged items and
continuously evaluates their effectiveness.
The Company applies hedge accounting in accordance with SFAS No. 133 as
amended, whereby the Company designates each derivative as a hedge of (i) the
fair value of a recognized asset or liability or of an unrecognized firm
commitment (fair value hedge); or (ii) the variability of anticipated cash flows
of a forecasted transaction or the cash flows to be received or paid related to
a recognized asset or liability (cash flow hedge). From time to time, however,
the Company may enter into derivatives that economically hedge certain of its
risks, even though hedge accounting is not allowed by SFAS No. 133 or is not
applied by the Company. In these cases, there generally exists a natural hedging
relationship in which changes in fair value of the derivative, which are
recognized currently in earnings, act as an economic offset to changes in the
fair value of the underlying hedged item(s). The Company did not apply hedge
accounting to currency forward contracts with a combined fair value of $117 and
$(38) as of January 31, 2007 and 2006, respectively. Changes in the fair value
of these currency forward contracts are recorded in other expense, net.
Changes in the value of a derivative that is designated as a fair value
hedge, along with offsetting changes in fair value of the underlying hedged
exposure, are recorded in operations each period. Changes in the fair value of a
derivative that is designated as a cash flow hedge are recorded in accumulated
other comprehensive loss. When operations are affected by the variability of the
underlying cash flow, the applicable amount of the gain or loss from the
derivative that is deferred in stockholders' equity is released to operations.
When the terms of an underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of the instrument are
included in operations each period until the instrument matures. Derivatives
that are not designated as hedges, as well as the portion of a derivative
excluded from the effectiveness assessment and changes in the value of the
derivatives which do not offset the underlying hedged item throughout the
designated hedge period, are recorded in other expense, net each period.
The Company does not use derivatives for speculative purposes, nor is it a
party to leveraged derivatives. The Company is exposed to credit risk related to
its financial instruments in the event of non-performance by the counterparties.
As such, the Company has a policy of only entering into contracts with major
financial institutions. When viewed in conjunction with the underlying and
offsetting exposure that the derivatives are designed to hedge, the Company has
not sustained a material loss from these instruments nor does it anticipate any
material adverse effect on its net income or financial position in the future
from the use of derivatives.
Interest rate risk - The Company may from time to time use interest rate
swaps to maintain certain proportions of fixed versus variable rate debt per
policy. The Company did not have any interest rate swaps outstanding as of
January 31, 2007 and 2006.
F-37
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
Commodity risk - On occasion, the Company enters into financial
instruments hedges with counterparties to mitigate its exposure to the
volatility of the price of lead, which is the primary raw material component of
its Power Systems Division. 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). The notional
amount of the lead forward contracts as of January 31, 2007 and 2006 was $9,273
and $23,204, respectively. At January 31, 2007 and 2006, these forward contracts
had a market value of $4,890 and $6,507, respectively, which was recorded in
accumulated other comprehensive loss. During fiscal year 2007 and 2006 the
Company settled lead forward contracts for cash proceeds of $7,117 and $1,201,
respectively, which was either recorded as a reduction of cost of goods sold to
the extent that Inventory was sold; otherwise, it was deferred in accumulated
other comprehensive loss. Effective February 23, 2006, one of the Company's
financial counterparties exercised its right to terminate 25.6 million pounds of
lead forward contracts, representing approximately $10,375 in notional value
lead forward contracts. This settlement resulted in cash proceeds of $3,099. The
settlement did not change the hedge accounting for these forward contracts, with
the gain in comprehensive loss continuing to be released to earnings during
fiscal 2007, in the month in which the hedged item was recognized in cost of
sales.
Commodity and interest rate derivatives are designated as cash flow hedges
of anticipated lead purchases and scheduled interest payments, respectively. The
fair values of these derivatives are accumulated in other comprehensive loss in
Stockholders' Equity and are released to earnings during the period in which the
hedged items impact earnings.
Foreign exchange risk - The Company uses currency forwards or options to
hedge certain foreign currency denominated receivables or payables, primarily in
Canadian Dollars, Pounds Sterling, Euros, Yen and Mexican Pesos. These hedges
offset the changes in the underlying assets or liabilities until the items are
relieved from the balance sheet.
Foreign exchange derivatives have been designated as fair value hedges.
The changes in the fair value of the hedges are recorded in earnings immediately
and offset a comparable gain or loss in an underlying asset or liability.
The notional values of the foreign exchange contracts are as follows:
Currency, at January 31 2007 2006
- --------------------------------------------------------------------------------
Pounds Sterling $ 34,049 $ 23,072
Canadian Dollars 1,744 4,321
Euros 1,712 953
Yen -- 1,011
Mexican Pesos -- 87
F-38
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS
The Company has various noncontributory defined benefit pension plans,
which cover certain employees in the United States. Certain employees of the
Japanese subsidiary of Datel, Inc., acquired on June 30, 2004, are also covered
by a defined benefit pension plan.
Effective for fiscal year 2007, the Company adopted the provisions of SFAS No.
158. SFAS No. 158 requires that the funded status of defined benefit
postretirement plans be recognized on the Company's consolidated balance sheets,
and the changes in the funded status be reflected in comprehensive income. The
incremental effect of applying SFAS No. 158 on individual line items on the
consolidated balance sheet as of January 31, 2007 was as follows:
Before After
Application of Application of
SFAS No. 158 Adjustments SFAS No. 158
- --------------------------------------------------------------------------------
Deferred tax liability $ (9,367) 65 $ (9,302)
Other current liabilities 31,751 259 32,010
Other long-term liabilities 30,430 4,320 34,750
Accumulated other
comprehensive loss $ (9,493) (4,459) $ (13,952)
The Company's funding policy for the domestic plans is to make
contributions in accordance with U.S. laws and regulations. Pension benefits for
the Company's defined benefit plans are generally based on employees' years of
service and qualifying compensation during the years of employment. Plan assets
are invested in commingled trust funds consisting primarily of equity and U.S.
Government securities. The Company's funding policy for the Japanese plan is to
make contributions in accordance with Japanese laws and regulations. The
Japanese plan is qualified under Japanese income tax regulations, and the
related contributions and premiums are tax deductible.
The Company also provides certain health care and life insurance benefits
for retired employees who meet certain service requirements (postretirement
benefits) through two plans. One of these plans was amended on April 1, 2005 to
decrease the life insurance benefits for retirees.
Benefit payments for the Company's domestic and foreign pension and post
retirement plans are expected to be paid as follows:
Pension Postretirement
Years Ended January 31, Plans Plans
- --------------------------------------------------------------------------------
2008 $ 3,358 $ 259
2009 3,591 287
2010 3,764 315
2011 3,967 368
2012 4,268 380
2013 - 2017 $ 25,933 $ 1,963
F-39
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
The tables that follow provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended January
31, 2007 and 2006, and a statement of the funded status as of January 31, 2007
and 2006. The measurement dates are December 31, 2006 and 2005.
Pension Benefits Postretirement Benefits
-------------------------- --------------------------
2007 2006 * 2007 2006
- ------------------------------------------------------------------------------------------------------------------------
Change in benefit obligation:
Benefit obligation at beginning of year $ 77,720 $ 72,650 $ 4,508 $ 4,554
Service cost 1,841 1,805 178 195
Interest cost 4,219 4,088 246 253
Plan amendments -- -- -- (653)
Actuarial (gain) loss (2,463) 2,638 (9) 517
Curtailments -- -- (36) --
Exchange rate adjustment (46) (194) -- --
Benefits paid (3,643) (3,267) (319) (358)
- ------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 77,628 $ 77,720 $ 4,568 $ 4,508
========================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year 63,060 64,551 -- --
Actual return on plan assets 3,986 1,002 -- --
Employer contributions 59 894 319 358
Exchange rate adjustment (25) (120) -- --
Benefits paid (3,643) (3,267) (319) (358)
- ------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 63,437 $ 63,060 $ -- $ --
========================================================================================================================
Reconciliation of funded status:
Funded status (14,191) (14,660) (4,568) (4,508)
Unrecognized actuarial loss 25,941 29,670 215 248
Unrecognized prior service cost 53 80 (75) (122)
Contributions made after measurement date
but before the end of the fiscal year 5 5 -- --
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized
at measurement date at end of year $ 11,808 $ 15,095 $ (4,428) $ (4,382)
========================================================================================================================
Amounts recognized in the statement of financial position
consist of:
Intangible asset -- 80 -- --
Accumulated other comprehensive Income 25,994 24,661 139 --
Contributions made after measurement date 5 5 -- --
but before the end of the fiscal year
Accrued benefit liability (14,191) (9,651) (4,567) (4,382)
- ------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of fiscal year* $ 11,808 $ 15,095 $ (4,428) $ (4,382)
========================================================================================================================
* Reclassified for comparative purposes
F-40
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
Pension Benefits Postretirement Benefits
--------------------------------------- --------------------------------------
2007 2006 2005 2007 2006 2005
- ---------------------------------------------------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1,841 $ 1,805 $ 1,759 $ 178 $ 195 $ 158
Interest cost 4,219 4,088 3,912 246 253 207
Expected return on plan assets (4,853) (5,141) (4,886) -- -- --
Amortization of prior service costs 15 14 18 (27) 8 920
Recognized actuarial loss/(gain) 2,112 1,766 1,488 4 -- (2)
Curtailment 12 29 -- (36) -- --
Special termination benefit -- -- 3 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 3,346 $ 2,561 $ 2,294 $ 365 $ 456 $ 1,283
=================================================================================================================================
Weighted-average assumptions
used to determine benefit
obligation as of January 31*:
Discount rate 5.82% 5.52% 5.67% 5.90% 5.60% 5.75%
Rate of compensation increase*** 4.36% 4.36% 4.36% N/A N/A N/A
Weighted-average assumptions
used to determine net cost for
the periods ended January 31**:
Discount rate 5.52% 5.67% 5.92% 5.60% 5.75% 6.00%
Expected long-term
rate of return on plan assets 7.90% 8.12% 8.36% N/A N/A N/A
Rate of compensation increase*** 4.36% 4.36% 4.39% 4.45% 4.45% 4.45%
* Determined as of the end of the year.
** Determined as of the beginning of the year.
*** Rate relates to certain employees. Some covered employees have benefits
unrelated to rate of pay.
The Company considered various corporate bond indices rated "Aa" or higher
with a duration that is consistent with the plans' liabilities to determine the
discount rates at each measurement date. The change in the discount rate is
consistent with the changes in the benchmarks considered for the same periods.
To develop the expected long-term rate of return on plan assets
assumption, the Company considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolio and the payment of plan expenses from the
pension trust. This resulted in the selection of the 8% expected long-term rate
of return on plan assets assumption for domestic plans and .5% for the Japanese
plan.
The Company sponsors two postretirement benefit plans for certain employees in
the United States; the Company contributions to one of them are fixed so there
is no material trend rate assumption. The other plan has a cap on benefits in
place. The impact of a change in the assumed health care cost trend rate is zero
as the per capita claims costs have exceeded the cap since 2004. The reported
postretirement benefit obligation does not reflect the effect of the Medicare
Prescription Drug Improvement and Modernization Act of 2003. C&D provides
prescription drug benefits to some Medicare-eligible retirees, but is not
expected to qualify for the tax-free federal subsidy.
F-41
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
For fiscal year 2007, the accumulated benefit obligation exceeded the plan
assets for the four domestic plans and the Japanese plan. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
these plans were $77,628, $71,707 and $63,437, respectively for fiscal year
2007.
For fiscal year 2006, the accumulated benefit obligation exceeded the plan
assets for the four domestic plans and the Japanese plan. The projected benefit
obligation, accumulated benefit obligation, and fair value of plan assets for
these plans were $77,720, $71,259 and $63,060, respectively for fiscal year
2006.
The pension plans, domestic and Japanese, have the following asset
allocations guidelines, as of their measurement dates:
Actual Percentage of Plan
Assets at December 31,
-------------------------
2006 2005
- --------------------------------------------------------------------------------
ASSET CATEGORY
Equity Securities -- Domestic 30.50% 30.90%
Equity Securities -- International 10.90% 10.70%
- --------------------------------------------------------------------------------
Total 41.40% 41.60%
================================================================================
Debt Securities 49.40% 49.30%
Other 9.20% 9.10%
- --------------------------------------------------------------------------------
Total 100.00% 100.00%
================================================================================
The Pension Plans' investment policy includes the following asset
allocations guidelines:
Domestic Japanese
Plans Plans
Policy Policy
Target * Target **
- --------------------------------------------------------------------------------
ASSET CLASS
Fixed Income 51.00% 0.00%
Domestic Income 31.00% 0.00%
International Equity 10.00% 0.00%
Other * 8.00% 100.00%
* A small percentage of the largest pension plan assets are invested in a
broadly diversified alternative investment which consists of 30-40 hedge funds
of different styles and asset types (equity long/short, sovereign debt and
mortgage hedging, etc.).
** The plan assets of the Japanese pension plan are invested in the
general assets of a Japanese insurance company. The investment profile of the
Japanese insurance company is 60% to 80% debt securities, 5% to 20% equity
securities, a maximum of 10% real estate and a maximum of 30% other.
The asset allocation policy was developed in consideration of the
long-term investment objective of ensuring that there is an adequate level of
assets to support benefit obligations to plan participants. A secondary
objective is minimizing the impact of market fluctuations on the value of the
plans' assets. Equity securities - Domestic include Company common stock in the
amounts of $1,258 (2.0% of total domestic plan assets) and $2,023 (3.3% of total
domestic plan assets) at December 31, 2006 and 2005, respectively.
In fiscal year 2008 the Company expects to make required contributions
totaling approximately $1,917 to one of its domestic pension plans and to make
contributions of approximately $63 to the Japanese plan.
F-42
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
13. EMPLOYEE BENEFIT PLANS (continued)
In addition to the broad asset allocation described above, the following
policies apply to individual asset classes for the domestic plans:
Fixed income investments for the domestic plans are oriented toward
investment grade securities rated "Baa" or higher, with a small exposure
to high yield and emerging markets debt. They are diversified among
individual securities and sectors. The average maturity is similar to that
of the broad U.S. bond market. For the Japanese plan, fixed income
investments held by the Japanese insurance company are principally in Yen
denominated bonds of high quality ratings.
Equity investments for the domestic plans are diversified among individual
securities, industries and economic sectors. International equity
investments are also diversified by country. Most securities held are
issued by companies with large market capitalizations. Investment in the
Company's stock is permissible up to a maximum of 10% at the time of
investment. For the Japanese plan, a majority of the equity securities
held by the Japanese insurance company are invested in mature industries
and companies with long operating histories and with market capitalization
of at least $1,000. Only securities traded on national public markets in
industrial nations are eligible for the Japanese plan.
Certain employees are eligible to participate in various defined
contribution retirement plans. The Company's contributions under the plans are
based on either specified percentages of employee contributions or specified
percentages of the employees' earnings. The Company's expense was $1,382, $1,490
and $1,577 for the years ended January 31, 2007, 2006 and 2005, respectively.
The Company has Supplemental Executive Retirement Plans ("SERP"s) that
cover certain executives. The SERPs are non-qualified, unfunded deferred benefit
compensation plans. Expenses related to these SERPs, which were actuarially
determined, were $424, $389 and $767 for the years ended January 31, 2007, 2006
and 2005, respectively. The liability for these plans was $4,140 and $3,873 as
of January 31, 2007 and 2006, respectively, and was included in other
liabilities.
The Company has a Deferred Compensation Plan that covers certain senior
management employees and non-employee members of the Company's Board of
Directors. With the exception of administration costs, which are paid by the
Company, this non-qualified plan is funded entirely by participants through
voluntary deferrals of compensation. Income deferrals made by participants under
this plan are deposited in individual trust (known under current tax law as a
`rabbi trust') accounts. The Company follows the provisions of EITF 97-14,
"Accounting for Deferred Compensation Arrangement Where Amounts Earned Are Held
in a Rabbi Trust and Invested." The EITF requires (i) the accounts of the rabbi
trust be consolidated with the accounts of the Company; (ii) the Company stock
be classified and accounted for in equity, in a manner similar to the way in
which treasury stock is accounted for; (iii) the diversified assets be accounted
for in accordance with GAAP for the particular asset; and (iv) the deferred
compensation obligation be classified as a liability and adjusted with a
corresponding charge (or credit) to compensation cost, to reflect changes in the
fair value of the amount owed to the participant. At January 31, 2007 and 2006,
the liability for the Company's Deferred Compensation Plan was $700 and $718,
respectively, and was included in other liabilities.
F-43
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
14. GOODWILL AND ASSET IMPAIRMENTS
During the fiscal years 2007, 2006 and 2005, the Company identified facts
suggesting that long-lived assets and goodwill within each of its operating
divisions may be impaired. As a result, in accordance with SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," the Company
first completed an assessment of its long-lived assets within the various asset
groupings and determined that the carrying value of its long-lived assets within
those identified asset groupings exceeded their fair values. The fair value of
these asset groupings was determined based upon the cost and income approach,
respectively. Upon completion of the long-lived asset impairment analysis, the
Company assessed the carrying value of its goodwill by division using the
two-step, fair-value based test in accordance with SFAS No. 142, "Goodwill and
Other Intangible Assets." The first step compared the fair value of the
reporting unit to its carrying amount, including goodwill. As the carrying
amount of the reporting unit exceeded its fair value, the second step was
performed to determine if the implied fair value of the goodwill was less than
the carrying amount. An income approach was utilized to determine the fair value
of the reporting unit.
The following table summarizes goodwill and asset impairments, by
division, for fiscal years 2007, 2006 and 2005.
Standby Power Motive
Power Electronics Power Total
- ---------------------------------------------------------------------------------------
Fiscal Year 05
- ---------------------------------------------------------------------------------------
Asset impairment $ 6,407 $ -- $ 3,195 $ 9,602
Impairment of intangible assets -- 464 -- 464
Impairment of goodwill 74,233 -- 74,233
- ---------------------------------------------------------------------------------------
$ 6,407 $ 74,697 $ 3,195 $ 84,299
=======================================================================================
Fiscal Year 06
- ---------------------------------------------------------------------------------------
Asset impairment $ -- $ 2,161 $ 2,641 $ 4,802
Impairment of intangible assets -- 20,045 -- 20,045
Impairment of goodwill -- 13,674 -- 13,674
- ---------------------------------------------------------------------------------------
$ -- $ 35,880 $ 2,641 $ 38,521
=======================================================================================
Fiscal Year 07
- ---------------------------------------------------------------------------------------
Asset impairment $ 985 $ -- $ -- $ 985
Impairment of goodwill - 13,947 -- 13,947
- ---------------------------------------------------------------------------------------
$ 985 $ 13,947 $ -- $ 14,932
=======================================================================================
During fiscal years 2007, 2006 and 2005 the Company identified
circumstances suggesting that goodwill within the Power Electronics Division may
be impaired. Consequently, the Company recorded pre-tax charges of $13,947,
$13,674 and $74,233 in fiscal years 2007, 2006 and 2005, respectively.
During the fourth quarter of fiscal year 2007, the company recorded a
pre-tax impairment charge within the Standby Power Division of $985 related to
one of its manufacturing facilities. The impairment charge resulted from the
Company's decision to close the facility and the identification of equipment
which would not be relocated to other facilities. These charges were included in
the cost of sales on the consolidated statement of operations.
During fiscal years 2005 and 2006, the Company recorded pre-tax impairment
charges within the Motive Power Division, related to its Huguenot, New York
Facility, of $3,195 and $2,641, respectively. These charges were included in the
cost of sales on the Consolidated Statement of Operations. During fiscal year
2005, the Company recorded pre-tax impairment charges within the Standby Power
Division of $6,407. These charges were included in the cost of sales on the
consolidated statement of operations. These impairment charges were primarily
related to the equipment associated with the HD product line in Leola and the
V-Line products manufactured in Huguenot. In general, older, excess and/or
immovable manufacturing equipment was replaced by more modern production
equipment located in the Company's Reynosa, Mexico facility. The Leola
impairment charge also included certain equipment related to the Round Cell
product line, for which sales have declined as a result of being displaced by
the Company's other flooded products manufactured at another facility.
F-44
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
14. GOODWILL AND ASSET IMPAIRMENTS (continued)
In fiscal year 2006, the Company recorded a pre-tax charge of $2,161
related to the fixed assets at its Tucson location and $20,045 of intangible
assets for PED. The charges were included in cost of sales and operating
expenses, respectively.
In fiscal year 2005, it was determined that an impairment existed with
respect to certain intellectual property of the Power Electronics Division, due
to a decline in financial projections of certain products. As a result, the
Company recorded a pre-tax non-cash impairment charge of $464, included in
research and development expense in fiscal year 2005.
15. RESTRUCTURING
During fiscal year 2007, the Company has initiated and implemented
organizational and operational changes to streamline and rationalize its
structure in an effort to simplify the organization and eliminate redundant
costs.
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 decision, the Company recorded severance
accruals in fiscal years 2007 and 2006 of $441 and $168, respectively, in its
consolidated statements of operations. These charges relate to work force
reductions of approximately 136 employees.
On October 31, 2006, the Company announced the closure of its Power
Electronic Division design facility in Milwaukie, Oregon, and the centralization
of its activities into the Company's operations in Mansfield, Massachusetts, and
Toronto, Canada. The Company recognized severance charges of $714 in fiscal year
2007. These charges relate to work force reductions of approximately 80
employees. As a result of this decision, the Company abandoned its design
facility in Milwaukie, Oregon, during the fourth quarter of fiscal year 2007 and
has no plans to occupy this facility in the foreseeable future. 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 $600, until March 31, 2010. In
accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities," the Company recorded a charge to earnings to recognize the
costs of exiting this facility of $874, which equal to the total amount of rent
and other direct costs, net of estimated sub-lease income, for the remaining
period of the lease.
During the fourth quarter of fiscal year 2007, the Company recorded
severance charges of $2,387 in its financial statements within its Standby Power
Division. These charges relate to workforce reduction of approximately 223
employees at our joint venture in China.
On April 16, 2007 the Company announced its decision to close its Standby
Power Division manufacturing facility in Conyers, Georgia and the transfer of
its production to Leola, Pennsylvania. As a result of this action, the Company
recorded severance charges of $245 in its financial statements for fiscal year
2007. These charges were included in the cost of sales on the consolidated
statement of operations. Additional severance costs associated with this action
are expected to be recorded during fiscal year 2008.
A reconciliation of the beginning and ending liability and related
activity is shown below.
Balance at Balance at
January 31, Provision January 31,
2006 Additions Expenditures 2007
- --------------------------------------------------------------------------------
Severance $ 168 4,537 3,968 $ 737
Other employee costs -- 63 63 --
Closure costs -- 886 12 874
- --------------------------------------------------------------------------------
Total $ 168 $ 5,486 $ 4,043 $ 1,611
================================================================================
F-45
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
16. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly financial data for the years ended January 31, 2007 and 2006,
follow:
First Second Third Fourth
Year Ended January 31, 2007 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
Net sales $ 129,167 $ 132,430 $ 130,707 $ 132,276
Gross profit 18,677 23,651 18,012 13,245
Operating (loss) income (3,959) 633 (17,486) (7,759)
Net loss (8,658) (3,607) (21,701) (12,108)
Net loss per common share - basic and diluted (0.34) (0.14) (0.85) (0.47)
During the fourth quarter of fiscal year 2007, the Company recorded
severance, environmental and other closure costs of approximately $1,900
associated with exiting its manufacturing facility in Conyers, Georgia. The
Company recorded a charge to earnings of $874 to recognize the costs of exiting
its manufacturing facility in Milwaukie, Oregon. Additionally, the Company
recorded severance charges of $2,387 related to its manufacturing facilities in
Shanghai, China, due to workforce reductions. These charges were included in the
cost of goods sold in its consolidated financial statements of operations.
During the third quarter of fiscal year 2007, 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.
First Second Third Fourth
Year Ended January 31, 2006 Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------
Net sales $ 122,821 $ 123,076 $ 126,966 $ 124,544
Gross profit 21,751 23,437 17,799 19,921
Operating (loss) income (1,141) 2,781 (37,831) (1,560)
Net (loss) income (1,709) 1,050 (59,983) (20)
Net (loss) income per common share - basic and diluted (0.07) 0.04 (2.36) 0.00
The results for the third quarter of fiscal year 2006 included pre-tax
charges for impairment of identifiable intangible assets, goodwill and fixed
assets of $20,045, $13,674 and $2,161 due to the existence of recurring realized
and anticipated operating results below forecasted results in the PED. The
results for the fourth quarter of fiscal year 2006 included pre-tax charges for
impairment of fixed assets of $2,641 at the Company's Huguenot, New York
facilities, and a reversal of $3,504 for environmental reserves as a result of
revised estimates associated with two of its facilities that had been accrued in
the third quarter of fiscal year 2005.
F-46
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
17. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
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, 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 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 OEMs of telecommunications and networking equipment, as
well as office and industrial equipment. In addition, as a result of recent
acquisitions, the division also manufactures power conversion products sold into
military and CATV applications as well as digital panel meters and data
acquisition components.
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles and, to a lesser extent,
OEMs.
Summarized financial information related to the Company's business
segments for the years ended January 31, 2007, 2006 and 2005, is shown below:
Standby Power Motive
Year Ended January 31, 2007 Power Electronics Power Consolidated
- -------------------------------------------------------------------------------------------------
Net sales $ 279,126 $ 186,749 $ 58,705 $ 524,580
Gross profit $ 34,854 $ 35,473 $ 3,258 $ 73,585
Operating income (loss) $ 3,763 $ (22,024) $ (10,310) $ (28,571)
Year Ended January 31, 2006
- -------------------------------------------------------------------------------------------------
Net sales $ 256,272 $ 186,305 $ 54,830 $ 497,407
Gross profit $ 43,158 $ 38,678 $ 1,072 $ 82,908
Operating income (loss) $ 12,640 $ (40,521) $ (9,870) $ (37,751)
Year Ended January 31, 2005
- -------------------------------------------------------------------------------------------------
Net sales $ 245,794 $ 111,546 $ 57,398 $ 414,738
Gross profit $ 37,384 $ 30,757 $ (1,483) $ 66,658
Operating income (loss) $ 9,211 $ (71,703) $ (11,668) $ (74,160)
For the year ended January 31, 2007, PED recorded non-cash pre-tax charges
for impairment of goodwill of $13,947.
For the year ended January 31, 2006, PED recorded non-cash pre-tax charges
for impairment of identifiable intangible assts, goodwill and fixed assets of
$20,045, 13,674 and $2,161. Motive Power Division recorded an impairment of
fixed assets of $2,641.
F-47
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
17. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (continued)
For the year ended January 31, 2005, the Power Electronics Division
recorded a non-cash pre-tax goodwill impairment charge of $74,233 related to the
Company's completed annual impairment review.
Many of the Company's facilities manufacture products for more than one
segment. Therefore, it is not practicable to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
Long-lived assets are comprised of property, plant and equipment,
over-funded pensions, investments, deposits and notes receivable.
Summarized financial information related to the geographic areas in which
the Company operated at January 31, 2007, 2006 and 2005, and for each of the
years then ended is shown below:
Years Ended January 31, 2007 2006 2005
- --------------------------------------------------------------------------------
Net sales*:
United States $ 333,413 $ 331,081 $ 305,742
Other countries 191,167 166,326 108,996
- --------------------------------------------------------------------------------
Consolidated totals $ 524,580 $ 497,407 $ 414,738
================================================================================
Long-lived assets:
United States $ 52,855 $ 59,139 $ 93,796
China 31,398 15,627 14,862
Mexico 15,654 15,062 15,121
Other countries 2,586 2,721 2,732
- --------------------------------------------------------------------------------
Consolidated totals $ 102,493 $ 92,549 $ 126,511
================================================================================
* Net sales by geographic area is determined by the location of the customer.
18. 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:
Years Ended January 31, 2007 2006
- --------------------------------------------------------------------------------
Balance at beginning of year $ 7,630 $ 8,303
Current year provisions 7,296 6,429
Expenditures (6,908) (7,098)
Effect of foreign currency translation 15 (4)
- --------------------------------------------------------------------------------
Balance at end of year $ 8,033 $ 7,630
================================================================================
As of January 31, 2007, accrued warranty obligations of $8,033 include $
3,163 in current liabilities and $ 4,870 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.
F-48
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
19. ACCUMULATED OTHER COMPREHENSIVE LOSS
Years Ended January 31, 2007 2006
- -----------------------------------------------------------------------------------
Cumulative translation adjustment $ 6,058 $ 5,358
Accumulated net unrealized holding gain on derivatives 5,986 7,427
Adjustment to initially apply defined benefit plan standard (4,459) --
Minimum pension liability adjustment (21,537) (24,661)
- -----------------------------------------------------------------------------------
Total accumulated other comprehensive loss $(13,952) $(11,876)
===================================================================================
F-49
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 2007, 2006 and 2005
(Dollars in thousands)
Additions/(Reductions) Additions
Balance at Charged to Charged to Balance at
Beginning Costs & Other Translation Deductions End
of Period Expenses Accounts Adjustments (a) of Period
- ------------------------------------------------------------------------------------------------------------------------------------
Deducted from Assets
Valuation allowance for deferred
tax assets:
Year ended January 31, 2007 $ 22,817 $ 17,356 $ 1,147 $ (487) $ -- $ 40,833
Year ended January 31, 2006 1,538 14,265 7,014 (b) -- -- 22,817
Year ended January 31, 2005 1,097 855 -- -- 414 1,538
________________________
(a) Amounts written-off, net of recoveries and reserve reversals.
(b) Additions totaling $7,014 were charged to Other Comprehensive Income.
S-1