UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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)
Delaware 13-3314599
(State of other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
(Address of principal executive office)
(Zip Code)
(215) 619-2700
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: YES |X| NO |_|
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accepted filer and large accelerated filer" in Rule 12b-2 of the Exchange Act
(Check one):
Large accelerated filer |_| Accelerated filer |X| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X|
Number of shares of the Registrant's Common Stock outstanding on April 30,
2007: 25,650,620
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - April 30, 2007 and January 31, 2007 3
Consolidated Statements of Operations - Three Months Ended
April 30, 2007 and 2006 5
Consolidated Statements of Cash Flows - Three Months Ended
April 30, 2007 and 2006 6
Consolidated Statements of Comprehensive Income -
Three Months Ended April 30, 2007 and 2006 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 21
Item 3 Quantitative and Qualitative Disclosures about Market Risk 26
Item 4 Controls and Procedures 26
Part II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 27
Item 4 Submission of Matters to a Vote of Security Holders 27
Item 6 Exhibits 28
SIGNATURES 29
EXHIBIT INDEX 30
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, January 31,
2007 2007
========================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 13,594 $ 12,596
Accounts receivable, less allowance for doubtful accounts
of $1,789 and $1,869 88,947 84,241
Inventories 83,169 88,229
Deferred income taxes 195 134
Prepaid taxes 2,527 2,634
Other current assets 6,921 7,082
- ----------------------------------------------------------------------------------------
Total current assets 195,353 194,916
Property, plant and equipment, net 97,405 100,815
Deferred income taxes 638 531
Intangible and other assets, net 36,483 35,429
Goodwill 68,692 68,520
- ----------------------------------------------------------------------------------------
TOTAL ASSETS $ 398,571 $ 400,211
========================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 6,289 $ 6,498
Accounts payable 54,124 54,215
Book overdrafts 1,828 2,310
Accrued liabilities 22,618 21,910
Other current liabilities 11,199 32,010
- ----------------------------------------------------------------------------------------
Total current liabilities 96,058 116,943
Deferred income taxes 10,502 9,155
Long-term debt 155,595 147,925
Other liabilities 36,073 34,750
- ----------------------------------------------------------------------------------------
Total liabilities 298,228 308,773
- ----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
April 30, January 31,
2007 2007
====================================================================================================
Commitments and contingencies (see Note 8)
Minority interest 12,150 7,548
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized;
29,042,467 and 29,040,960 shares issued; 25,650,620 and
25,649,424 shares outstanding, respectively 290 290
Additional paid-in capital 74,306 74,188
Treasury stock, at cost, 3,391,847 and 3,391,536 shares, respectively (47,111) (47,110)
Accumulated other comprehensive loss (13,944) (13,952)
Retained earnings 74,652 70,474
- ---------------------------------------------------------------------------------------------------
Total stockholders' equity 88,193 83,890
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 398,571 $ 400,211
====================================================================================================
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended
April 30,
2007 2006
================================================================================
NET SALES $ 130,809 $ 129,167
COST OF SALES 111,252 108,454
- --------------------------------------------------------------------------------
GROSS PROFIT 19,557 20,713
OPERATING EXPENSES:
Selling, general and administrative expenses 17,088 17,232
Research and development expenses 5,773 7,440
Gain on sale of Shanghai, China plant (15,162) --
- --------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 11,858 (3,959)
- --------------------------------------------------------------------------------
Interest expense, net 2,708 3,028
Other (income) expense, net (161) 315
- --------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 9,311 (7,302)
Provision for income taxes 2,209 1,570
- --------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 7,102 (8,872)
Minority interest 4,528 (214)
- --------------------------------------------------------------------------------
NET INCOME (LOSS) $ 2,574 $ (8,658)
================================================================================
Net Income (loss) per common share - basic $ 0.10 $ (0.34)
================================================================================
Net Income (loss) per common share - diluted $ 0.10 $ (0.34)
================================================================================
Dividends per share -- $ 0.01375
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Three months ended
April 30,
2007 2006
=========================================================================================
Cash flows from operating activities:
Net Income (loss) $ 2,574 $ (8,658)
Adjustments to reconcile net income (loss) to net cash used in
operating activities:
Minority interest 4,528 (214)
Share-based compensation 110 50
Depreciation and amortization 4,553 4,694
Amortization of debt acquisition costs 386 280
Deferred income taxes 1,190 1,218
Gain on disposal of assets (15,440) (11)
Changes in assets and liabilities:
Accounts receivable (7,241) (5,498)
Inventories 5,353 (2,741)
Other current assets (682) 3,306
Accounts payable (2,239) 567
Accrued liabilities 589 480
Income taxes payable (348) (567)
Other current liabilities (740) (268)
Other liabilities 1,663 3,701
Other long-term assets 154 (88)
Other, net (570) (1,567)
- -----------------------------------------------------------------------------------------
Net cash used in operating activities (6,160) (5,316)
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (2,039) (3,478)
Proceeds from disposal of property, plant and equipment 2,422 18
- -----------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 383 (3,460)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (221) (270)
Proceeds from new borrowings 7,597 8,507
(Decrease) increase in book overdrafts (482) 324
Financing cost of long term debt (313) (627)
Proceeds from exercise of stock options -- 695
Purchase of treasury stock (2) --
- -----------------------------------------------------------------------------------------
Net cash provided by financing activities 6,579 8,629
- -----------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 196 393
- -----------------------------------------------------------------------------------------
Increase in cash and cash equivalents 998 246
Cash and cash equivalents, beginning of period 12,596 25,693
- -----------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 13,594 $ 25,939
- -----------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Three months ended
April 30,
2007 2006
==============================================================================================
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in property, plant and equipment acquisitions in accounts payable $ 2,052 $ 220
Dividend declared, but not paid. $ -- $ 352
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(UNAUDITED)
Three months ended
April 30,
2007 2006
==============================================================================================
NET INCOME (LOSS) $ 2,574 $ (8,658)
Other comprehensive income (loss), net of tax:
Net unrealized loss on derivative instruments (734) (4,153)
Adjustment to recognize pension liability and net periodic pension cost 439 --
Foreign currency translation adjustments 303 254
----------------------------------------------------------------------------------------------
Total comprehensive income (loss) $ 2,582 $(12,557)
----------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim unaudited consolidated financial statements of
C&D Technologies, Inc (the "Company") have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, we do not include all the information and notes
required for complete financial statements. In the opinion of management, the
interim unaudited consolidated financial statements include all adjustments
considered necessary for the fair statements of the financial position, results
of operations and cash flows for the interim periods presented. The financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 2007 Annual Report on
Form 10-K dated April 16, 2007.
Effective February 1, 2007, the Company has begun classifying certain
costs, which were previously classified as cost of sales, as selling, general
and administrative expenses. For comparative purposes, the three months ended
April 30, 2006, has been revised to classify $2,036 of such costs as selling,
general and administrative expenses which were previously classified as cost of
sales.
2. STOCK-BASED COMPENSATION
The Company granted 279,334 and 13,000 stock option awards during the
three months ended April 30, 2007 and 2006, respectively. Under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 123R, the Company
recorded $64 and $50 of stock compensation related to stock option awards in its
unaudited consolidated statement of operations for the three months ended April
30, 2007 and 2006, respectively. The impact on earnings per share for the three
months ended April 30, 2007 and 2006 was less than $0.01.
On March 12, 2007, the Company granted 84,600 restricted stock awards and
84,600 of performance shares to selected executives and other key employees
under the Company's 2007 Stock Incentive Plan. The restricted stock awards vest
ratably over four years and the expense is recognized over the vesting period.
Compensation expense associated with restricted stock in the three months ended
April 30, 2007, was $28. The performance shares vest at the end of the
performance period upon the achievement of pre-established financial objectives.
Compensation expense associated with performance shares in the three months
ended April 30, 2007 was $18. There were no restricted stock awards or
performance shares granted in prior periods.
The following table summarizes information about the stock options
outstanding at April 30, 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 - $ 7.21 697,684 8.2 Years $ 6.08 338,484 8.1 Years $ 6.83
$ 7.81 - $ 9.18 564,385 8.8 Years $ 8.06 555,384 8.7 Years $ 8.06
$ 9.80 - $ 14.50 241,824 5.3 Years $ 11.32 241,824 5.3 Years $ 11.32
$ 14.94 - $ 22.31 974,644 5.1 Years $ 18.81 970,944 5.1 Years $ 18.82
$ 26.76 - $ 37.28 228,360 3.9 years $ 33.01 228,360 3.9 Years $ 33.01
$ 48.44 - $ 55.94 48,700 3.2 Years $ 54.41 48,700 3.2 Years $ 54.41
------------------------------------------------------------------------------------------------
Total 2,755,597 6.5 Years $ 14.53 2,383,696 6.2 Years $ 15.94
------------------------------------------------------------------------------------------------
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
The fair value of stock options granted during the three months ended
April 30, 2007 and 2006 was estimated on the grant date using the Black-Scholes
option pricing model with the following average assumptions.
Three months ended April 30, 2007 2006
-------------------------------------------------------------
Risk-free interest rate 4.45%-4.78% 4.66%-4.97%
Dividend yield 0% 0.60%-0.66%
Volatility factor 49.25%-49.30% 47.51%-54.25%
Expected lives 5-5.5 Years 5-6 Years
3. NEW ACCOUNTING PRONOUNCEMENTS
In February 2006, the Financial Accounting Standard Board ("FASB") issued
SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an
amendment of FASB Statements No. 133 and 140". SFAS No. 155 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. The adoption of SFAS No. 155 did not have a material impact
on the Company's 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.
The adoption of SFAS No. 156 did not have a material impact on the Company's
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 adoption of EITF No. 06-03 did not
have a material impact on the Company's 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 accordance with
generally accepted accounting principles ("GAAP"), and expands disclosures
about fair value measurements. SFAS No. 157 applies under other accounting
pronouncements that require or permit fair value measurements and, accordingly,
SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years. The Company
does not expect the adoption of SFAS No. 157 to have a material impact on its
financial position and results of operations.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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 has not yet determined the impact on its financial statements.
4. INVENTORIES
Inventories consisted of the following:
April 30, January 31,
2007 2007
==========================================================================
Raw materials $ 33,227 $ 34,189
Work-in-process 15,387 16,089
Finished goods 34,555 37,951
-------------------------------------------------------------------------
Total $ 83,169 $ 88,229
-------------------------------------------------------------------------
5. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES
During fiscal year 2005, the Company received $15,547 (which was included
in other current liabilities at January 31, 2007) from the Chinese government as
partial payment for the Company's old joint venture 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, along with a final payment of $1,850 received
during the first quarter of fiscal year 2008, was recognized as income, net of
the book value of assets disposed and other exit costs, when the old facility
was transferred to the Chinese government during the first quarter of fiscal
year 2008. During the first quarter of fiscal 2008 the Company recognized a gain
of $15,162 on this transaction.
Deferred revenue of $2,056 and $3,855 is included in other current
liabilities as of April 30, 2007 and January 31, 2007 respectively. Deferred
revenue of $5,978 and $5,816 is included in other liabilities as of April 30,
2007 and January 31, 2007, respectively.
6. INCOME TAXES
Effective at the beginning of the first quarter of fiscal year 2008, the
Company adopted the provision of Financial Interpretation ("FIN") No. 48,
"Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement
No. 109." FIN No. 48 contains a two-step approach to recognizing and measuring
uncertain tax positions accounted for in accordance with SFAS No. 109,
"Accounting for Income Taxes." The first step is to evaluate the tax position
for recognition by determining if the weight of available evidence indicates
that it is more likely than not that the position will be sustained on audit,
including resolution of related appeals or litigation processes, if any. The
second step is to measure the tax benefit as the largest amount that is more
than 50% likely of being realized upon ultimate settlement.
As a result of the implementation of FIN No. 48, the Company decreased the
liability for net unrecognized tax benefits by $1,604 and accounted for the
reduction as a cumulative effect of a change in accounting principle that
resulted in an increase to retained earnings of $1,604. The total amount of
gross unrecognized tax benefits as of the date of adoption was $932, which if
recognized, approximately $530 would be recorded as a benefit to income taxes on
the statement of operations, therefore, would impact the effective tax rate. The
Company recognized $233 of previously unrecognized tax benefits as a discrete
item in the first quarter of fiscal year 2008 as the result of the expiration of
the statute of limitation with respect to a jurisdiction for which it had taken
a benefit for an uncertain tax position on a filed return.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company's policy to include interest and penalties related to
unrecognized tax benefits within the provision for income taxes on the
consolidated financial statements of income did not change as a result of
implementing the provisions of FIN No. 48. As of the date of adoption of FIN No.
48, the Company had accrued $120 for the payment of interest and penalties
relating to unrecognized tax benefits. Interest of $123 was included as part of
the increase to retained earnings as a result of adoption of FIN No. 48.
The Company files U.S. federal, state and foreign tax returns. The Company
and its subsidiaries are subject to U.S. federal income tax as well as income
tax of multiple foreign and state jurisdictions. The Company has substantially
concluded all U.S. federal income tax matters for years through fiscal year
2005. With few exceptions the Company is no longer subject to state or foreign
examinations for years prior to fiscal year 2002. The total amount of gross
unrecognized tax benefits was $764 as of April 30, 2007.
Due to the Company's federal, state and foreign net operating loss
carryforwards, any future adjustments to the unrecognized tax benefit will have
an immaterial impact on the Company's effective tax rate due to the valuation
allowance, which fully offsets the tax benefit related to the net operating
losses. The Company does not expect its unrecognized tax benefit to change
significantly during the next twelve months.
Three months ended
April 30,
Years Ended January 31, 2007 2006
=======================================================================
Provision for income taxes $ 2,209 $ 1,570
Effective income tax rate 23.7% (21.5)%
Effective tax rates were 23.7% and (21.5%) for the three months ended
April 30, 2007 and 2006, respectively. Tax expense in the three months ended
April 30, 2007 is due to a combination of tax expense in certain profitable
foreign subsidiaries and the lack of tax benefit recognized in certain
jurisdictions where the Company incurred a loss, in addition to the local tax
exemption on proceeds received related to the relocation of the Shanghai
facility. In the jurisdictions where the Company incurred a loss, the Company
recorded an increase to its valuation allowance. The U.S. tax impact from the
involuntary conversion gain of our facilities in China, was offset by a decrease
in our valuation allowance and was treated as a discrete event during the first
quarter of fiscal year 2008.
7. EARNINGS PER SHARE
Basic earnings per common share was computed using net income and the
weighted average number of common shares outstanding during the period. Diluted
earnings per common share was computed using net income and the weighted average
number of common shares outstanding plus potentially dilutive common shares
outstanding during the period. Potentially dilutive common shares include the
assumed exercise of stock options and assumed vesting of restricted stock awards
using the treasury stock method, as well as the assumed conversion of debt using
the if-converted method.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table sets forth the computation of basic and diluted
earnings (losses) per common share:
Three months ended
April 30,
2007 2006
==================================================================================================
Numerator:
Numerator for basic earnings (losses) per common share $ 2,574 $ (8,658)
Effect of dilutive securities: --
Interest expense on Convertible Notes 1,781 --
----------------------------
Numerator for diluted earnings (losses) per common share $ 4,355 $ (8,658)
============================
Denominator:
Denominator for basic earnings per common share- weighted average
common share 25,650,623 25,484,971
Effect of dilutive securities:
Convertible Notes 20,120,932 --
Employee stock awards 31 --
Employees stock options 102 --
----------------------------
Dilutive potential common shares 20,121,065 --
Denominator for diluted earnings per common share- adjusted weighted
average common shares and assumed conversions 45,771,688 25,484,971
----------------------------
Basic earnings (losses) per common share $ 0.10 $ (0.34)
----------------------------
Diluted earnings (losses) from common share $ 0.10 $ (0.34)
----------------------------
During the three months ended April 30, 2007, there were 2,479,597
outstanding employee stock options that were out-of-the-money and therefore
excluded from the calculation of the dilutive effect of employee stock options.
The dilutive effect of stock options outstanding at April 30, 2006 was not
included in the calculation of diluted loss per share for the three months
period ended April 30, 2006, because to do so would have had an anti-dilutive
effect, as the Company had a net loss in that period. The weighted average
number of shares excluded from the diluted loss per share computation was
135,668 for the three months period ended April 30, 2006. Additionally,
8,854,785 of dilutive securities issuable in connection with convertible bonds
have been excluded from the diluted loss per share calculation for the three
months ended April 30, 2006, because their effect would reduce the loss per
share.
8. 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 reached a settlement, and agreed to the terms of a Consent Decree,
with an agreed civil penalty of $1,600. The Court entered and the Company paid
the Consent Decree during the fourth quarter of fiscal year 2007. 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
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
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. 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.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company is aware of the existence of contamination at its former
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 a previous 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 (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 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 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. A Current Conditions Report,
detailing potential areas for investigation, has been completed for the Attica
site and submitted to the EPA. 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 completed remediation of on-site 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 April 30, 2007 and January 31,
2007, accrued environmental reserves totaled $1,865 and $2,192, respectively,
consisting of $1,142 and $1,469 in other current liabilities and $723 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.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
9. OPERATIONS BY REPORTABLE SEGMENT
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies, 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 Original Equipment Manufacturers ("OEM"s) 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 three months ended April 30, 2007 and 2006, is shown below. All
sales between business segments have been eliminated.
Standby Power Motive
Three months ended April 30, 2007 Power (1) Electronics Power Consolidated
=======================================================================================
Net sales $ 75,643 $ 42,345 $ 12,821 $ 130,809
Gross profit $ 9,936 $ 8,100 $ 1,521 $ 19,557
Operating income (loss) $ 15,930 $ (1,712) $ (2,360) $ 11,858
Three months ended April 30, 2006
=======================================================================================
Net sales $ 66,711 $ 47,688 $ 14,768 $ 129,167
Gross profit $ 9,739 $ 9,507 $ 1,467 $ 20,713
Operating income (loss) $ 605 $ (2,594) $ (1,970) $ (3,959)
(1) Standby Power operating income in the three months ended April 30, 2007
includes a $15,162 gain on the sale of the Company's old Shanghai, China
plant.
Many of the Company's facilities manufacture products for more than one
segment. Therefore, it is not practical to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. DERIVATIVE INSTRUMENTS
The Company is exposed to various market risks. The primary financial
risks include fluctuations in certain commodity prices and changes in currency
exchange rates. The Company manages these risks through normal operating and
financing activities and when appropriate through the use of derivative
instruments.
The Company does not invest in derivative instruments for speculative
purposes, but does enter into hedging arrangements in order to reduce its
exposure to fluctuations in the price of lead as well as to fluctuations in
exchange rates. The Company applies hedge accounting in accordance with SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," whereby the
Company designates each derivative as a hedge of (i) the fair value of a
recognized asset or liability or of an unrecognized firm commitment (fair value
hedge); or (ii) the variability of anticipated cash flows of a forecasted
transaction or the cash flows to be received or paid related to a recognized
asset or liability (cash flow hedge). From time to time, however, the Company
may enter into derivatives that economically hedge certain of its risks, even
though hedge accounting is not allowed by SFAS No. 133 or is not applied by the
Company. In these cases, there generally exists a natural hedging relationship
in which changes in fair value of the derivative, that are recognized currently
in earnings, act as an economic offset to changes in the fair value of the
underlying hedged item(s).
The following table provides the fair value of the Company's derivative
contracts which include foreign exchange contracts and forward commodity
contracts.
April 30, January 31,
2007 2007
------------------------- ------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
=======================================================================================
Commodity hedges $ 4,312 $ 4,312 $ 4,890 $ 4,890
Foreign exchange hedges $ (273) $ (273) $ 117 $ 117
---------------------------------------------------------------------------------------
The commodity forwards are designated as cash flow hedges. Therefore,
changes in their fair value, net of tax, are recorded in accumulated other
comprehensive income and released to earnings in the period the hedged item is
recognized.
Hedge accounting was not applied by the Company for its foreign exchange
contracts; however, a natural hedging relationship exists between the underlying
hedged items and the derivative instrument itself. Changes in fair value of the
foreign exchange contracts are recorded in earnings each period.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
11. WARRANTY
The Company provides for estimated product warranty expenses when the
related products are sold. Because warranty estimates are forecasts that are
based on the best available information, primarily historical claims experience,
claims costs may differ from amounts provided. An analysis of changes in the
liability for product warranties follows:
Three months ended
April 30,
2007 2006
=========================================================================
Balance at beginning of period $ 8,033 $ 7,630
Current year provisions 2,000 1,665
Expenditures (1,416) (1,656)
Effect of foreign currency translation 1 3
-------------------------------------------------------------------------
Balance at end of period $ 8,618 $ 7,642
-------------------------------------------------------------------------
As of April 30, 2007, accrued warranty obligations of $8,618 include
$3,388 in current liabilities and $5,230 in other liabilities. As of January 31,
2007, accrued warranty obligations of $8,033 include $3,163 in current
liabilities and $4,870 in other liabilities.
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard requires the
disclosure of the components of net periodic benefit cost recognized during
interim periods.
Pension Benefits Postretirement Benefits
------------------ -----------------------
Three months ended Three months ended
April 30, April 30,
2007 2006 2007 2006
==========================================================================================
Components of net periodic benefit cost:
Service cost $ 460 $ 475 $ 38 $ 50
Interest cost 1,102 1,051 65 63
Expected return on plan assets (1,219) (1,213) -- --
Amortization of prior service costs 3 3 (5) (7)
Recognized actuarial loss/(gain) 439 519 (1) --
------------------------------------------------------------------------------------------
Net periodic benefit cost $ 785 $ 835 $ 97 $ 106
------------------------------------------------------------------------------------------
The Company estimates that it will be required to make contributions of
approximately $1,700 to its U.S. pension plan for fiscal year 2008. The Company
made a contribution of $33 to its Japanese pension in the first quarter of
fiscal year 2008. The Company plans to make additional contributions of
approximately $100 to its Japanese plan during fiscal year 2008. The Company
also expects to make contributions totaling approximately $285 to the two
Company sponsored postretirement benefit plans during fiscal year 2008.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
13. RESTRUCTURING
During fiscal year 2007, the Company has 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 the three months ended April 30, 2006 of $168, in its consolidated
statements of operations. These charges relate to work force reductions of
approximately 136 employees. All cash payments were completed by April 30, 2007.
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 is equal to the total amount of
rent and other direct costs, net of estimated sub-lease income, for the
remaining period of the lease. As of April 30, 2007, the Company's liability for
rent and other direct costs, net of estimated sub-lease income, was $753.
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. All employee termination and cash
payments were completed by April 30, 2007.
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 $218 in its financial statements during the first
quarter of fiscal year 2008. . These charges were included in the cost of sales
on the consolidated statement of operations. Additional severance charges of
approximately $350 are expected to be incurred in the second and third quarter
of fiscal year 2008. Additionally, approximately $1,700 is expected to be
incurred during the second and third quarters of fiscal year 2008, related to
the relocation of certain equipment from Conyers to Leola and other closure
costs.
A reconciliation of the beginning and ending liability and related
activity is shown below.
Balance at Balance at
January 31, Provision April 30,
2007 Additions Expenditures 2007
==================================================================================
Severance $ 737 $ 218 $ 459 $ 496
Closure costs 874 -- 121 753
----------------------------------------------------------------------------------
Total $ 1,611 $ 218 $ 580 $ 1,249
----------------------------------------------------------------------------------
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Three Months Ended April 30, 2007, compared to Three Months Ended April
30, 2006
Within the following discussion, unless otherwise stated, "quarter" and
"three-month" period" refer to the first quarter of fiscal year 2008. All
comparisons are with the corresponding period in the prior fiscal year, unless
otherwise stated.
Net sales in the first quarter of fiscal year 2008 increased $1,642 or 1%
to $130,809 from $129,167 in the first quarter of fiscal year 2007. This
increase resulted from higher sales in the Standby Power Division while sales
were lower in the Power Electronics Division and the Motive Power Division.
Sales in the Standby Power Division increased $8,932 or 13%. Primarily due to
increased pricing. Power Electronics Division and Motive Power Division sales
decreased $5,343 or 11% and $1,947 or 13%, respectively primarily as a result of
lower volume compared to the first quarter of fiscal year 2007.
Gross profit in the first quarter of fiscal year 2008 decreased $1,156 or
6% to $19,557 from $20,713. Margins decreased slightly from 16.0% to 15.0% in
the first quarter of fiscal year 2008. Gross profit in the Standby Power
Division increased $197 with margins decreasing to 13.1% from 14.6%. Price
increases and benefits from the Company's cost reduction programs were offset by
higher raw material costs, principally lead, resins, copper and steel. Average
London Metal Exchange ("LME") prices increased from an average of 55 cents per
pound in the first quarter of fiscal year 2007 to 86 cents per pound in the
first quarter of fiscal year 2008. Lead traded as high as $1.07 per pound on
June 1, 2007. First quarter fiscal year 2008 results included severance costs
associated with the closure of the division's Conyers, Georgia facility of $218
while fiscal 2007 included $451 of management severance costs. Gross profit in
the Motive Power Division increased $54, with margins increasing from 9.9% to
11.9%. This increase is primarily due to improved pricing and benefits from the
third quarter fiscal year 2007 closure of the Company's Huguenot, New York
manufacturing facility substantially offset by higher lead costs. Gross profit
in the Power Electronics Division decreased $1,407, with margins decreasing to
19.1% from 19.9%. Margins in the division have been negatively impacted by
unfavorable product mix and pricing changes. First quarter of fiscal year 2007
results included $589 of charges and expenses resulting from compliance with the
European Union's RoHS legislation and $1,150 of contract manufacturer transition
costs.
Selling, general and administrative expenses in the first quarter of
fiscal year 2008 decreased $144 or 1% to $17,088 from $17,232. As a percentage
of sales selling, general and administrative expenses were 13.1% and 13.3% in
the first quarter of fiscal 2008 and 2007, respectively.
Research and development expenses in the first quarter of fiscal year 2008
decreased $1,667 or 22% to $5,773 from $7,440. As a percentage of sales,
research and development expenses decreased from 5.8% in the first quarter of
fiscal year 2007 to 4.4% in the first quarter of fiscal year 2008. The decrease
was driven primarily by fiscal 2008 savings associated with the closure of the
Company's Milwaukie, Oregon facility as well as fiscal 2007 costs incurred in
connection with the Company's RoHS Compliance Programs.
During the first quarter of fiscal year 2008, the Company recognized a
gain of $15,162 from the sale of its old joint venture manufacturing facility in
Shanghai, China.
The Company had operating income in the first quarter of fiscal year 2008
of $11,858 compared to an operating loss of $3,959 in the first quarter of
fiscal year 2007.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Analysis of Change in Operating Income (Loss)
Standby Power Motive
Power Electronics Power
Fiscal Year 2007 vs. 2006 Division Division Division Consolidated
--------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1Q 07 $ 605 $ (2,594) $ (1,970) $ (3,959)
Lead costs, net (4,805) -- (370) (5,175)
Price / volume 4,465 (2,322) (84) 2,059
Gain on sale of Shanghai, China plant 15,162 -- -- 15,162
Conyers severance (218) -- -- (218)
Warranty (28) 43 (350) (335)
Technology savings related to Milwaukie, Oregon closure -- 850 -- 850
Fiscal year 2007 management changes 451 57 84 592
Fiscal year 2007 RoHS compliance costs -- 589 -- 589
Fiscal year 2007 contract manufacturer transition costs -- 1,150 -- 1,150
Other, net including cost reduction programs 298 515 330 1,143
-------------------------------------------------------------------------------------------------------------------
Operating income (loss) 1Q 08 $ 15,930 $ (1,712) $ (2,360) $ 11,858
===================================================================================================================
Interest expense, net in the first quarter of fiscal year 2008 decreased
$320 or 11% to $2,708 from $3,028 in first quarter of fiscal year 2007,
primarily due to a lower effective interest rate resulting from last year's
convertible notes refinancing partially offset by higher average debt.
Other income was $161 in the first quarter of fiscal year 2008 compared to
other expense $315 in the first quarter of fiscal year 2007. The difference was
primarily due to $347 of foreign exchange gain in the first quarter of fiscal
year 2008 compared to $168 of foreign exchange losses in the first quarter of
fiscal year 2007.
Income tax expense of $2,209 was recorded in the first quarter of fiscal
year 2008, compared to $1,570 in the first quarter of fiscal year 2007. Tax
expense in the first quarter of both fiscal years 2008 and 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. We adopted FIN No. 48 in the first
quarter of fiscal year 2008. See "Note 6: Income Taxes" in the Notes to
Consolidated Financial Statements of this Form 10-Q for further discussion.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by the Company.
In the first quarter of fiscal year 2008, the joint venture had minority
interest of $4,528 compared to a minority interest of $(214) in the first
quarter of fiscal year 2007. Approximately, $5,003 of the increase in minority
interest was the result of $15,162 of gain recognized on the sale of our old
manufacturing plant in Shanghai, China.
As a result of the above, net income of $2,574 was recorded as compared to
a net loss of $8,658 in the prior year. On a per share basis, the net income was
$0.10 in the first quarter of fiscal year 2008 compared to a net loss of $0.34
in the first quarter of fiscal year 2007, basic and fully diluted.
Other Comprehensive Loss
Other comprehensive income increased by $15,139 in the first quarter of
fiscal year 2007 to $2,582 from a loss of $12,557 in the first quarter of fiscal
year 2007. This increase was primarily due to an increase in net income of
$11,232 coupled with a lower unrealized loss on derivative instruments of $734
compared to $4,153 in first quarter of fiscal year 2007.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Liquidity and Capital Resources
Net cash used in operating activities was $6,160 for the three months
ended April 30, 2007, compared to $5,316 in the comparable period of the prior
fiscal year. The increase is a result of i) higher lead and other raw material
costs in our Power Systems Division not recovered through pricing actions; ii)
pricing and mix pressures in our Power Electronics Division; iii) the receipt of
$3,099 on a lead hedge settlement in fiscal year 2007; and iv) a reduction in
our accounts payables driven by decreases in our inventory and trade credit
changes. These decreases were partially offset by a current fiscal year
inventory reduction of $5,353 as compared to an increase of $2,741 in the prior
fiscal year. The fiscal year 2008 inventory reduction occurred in our Standby
and Power Electronics divisions while inventory increased in our Motive Power
Division. Accounts receivable constituted a use of cash in both fiscal years
2008 and 2007 as the increase in accounts receivable was driven by higher
revenues and changes in customer mix / credit profile.
Net cash provided by investing activities was $383 in the first quarter of
fiscal year 2008 as compared to a use of cash of $3,460 in the first quarter of
fiscal year 2007. During the first three months of fiscal year 2008, we had
proceeds from the disposal of property, plant and equipment in the amount of
$2,422. We received $1,850 from the last installment on the sale of our old
battery plant in Shanghai, China as well as $530 from the sale of land in the
United Kingdom. Acquisition of property, plant and equipment was $2,039 during
the first three months of fiscal 2008 as compared to $3,478 during the first
three months of fiscal year 2007.
Net cash provided by financing activities decreased $2,050 or 24% to
$6,579 for the three months ended April 30, 2007, compared to $8,629 in the
comparable period of the prior fiscal year. Proceeds from borrowings under the
Company's revolving credit facility were the primary source of cash provided by
financing activities in both fiscal years 2008 and 2007. The primary purpose of
the new borrowings in each of the fiscal years was to fund operations.
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 and other related charges of approximately $260.
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 the first three months of
fiscal year 2008 were primarily for cost reduction programs, normal maintenance
and regulatory compliance. We estimate capital spending for fiscal year 2008 to
be in the range of $15,000 to $18,000, for similar purposes as well as the move
of manufacturing from Conyers, Georgia to Leola, Pennsylvania. As of April 30,
2007, the maximum availability calculated under the borrowing base was $66,852,
of which $32,433 was funded, and $4,816 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.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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, cost savings initiatives 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;
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;
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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;
The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of a variety of
factors, including those discussed in "Risk Factors" included in the Company's
Form 10-K annual report for the year ended January 31, 2007.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Item 3. Quantitative and Qualitative Disclosure about Market Risk
The Company is exposed to various market risks. The primary financial
risks include fluctuations in interest rates, certain raw material commodity
prices, and changes in currency exchange rates. The Company manages these risks
through normal operating and financing activities and when appropriate through
the use of derivative instruments. It does not invest in derivative instruments
for speculative purposes, but enters into hedging arrangements in order to
reduce its exposure to fluctuations in interest rates, the price of lead, as
well as to fluctuations in exchange rates.
On occasion, the Company has entered into non-deliverable forward
contracts with certain financial counterparties to hedge our exposure to the
fluctuations in the price of lead, the primary raw material component used in
our Standby Power and Motive Power divisions. The Company employs hedge
accounting in the treatment of these contracts. Changes in the value of the
contracts are marked to market each month and the gains and losses are recorded
in other comprehensive loss until they are released to the income statement
through cost of goods sold in the same period as is the hedged item (lead).
Additional disclosure regarding various market risks were set forth in the
Company's fiscal year 2007 Annual Report on Form 10-K filed with the SEC.
Item 4. Controls and Procedures:
Management, with the participation of its Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of the Company's
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, the Company's Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of such period, the
Company's controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by it in the reports that it files or submits under the Exchange Act
and include controls and procedures designed to ensure that information required
to be disclosed by the Company in such reports is accumulated and communicated
to the Company's management, including the Chief Executive Officer and the Chief
Financial Officer, as appropriate, to allow timely decisions regarding timely
disclosures.
Internal Control over Financial Reporting:
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal quarter to which this report relates
that have materially affected, or are reasonably likely to materially affect,
its internal control over financial reporting.
25
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities:
Maximum Number
Total Number (or Approximate
of Shares Dollar Value) of
Total Number Publicly Announced Shares that May Yet
of Shares Average Price Plans Be Purchased Under the
Period Purchased Paid per Share or Programs Plans or Programs
============================================================================================================
February 1 - February 28, 2007 311 $ 5.62 -- 1,000,000
March 1 - March 31, 2007 -- $ -- -- 1,000,000
April 1 - April 30, 2007 -- $ -- -- 1,000,000
-------------------------------------------- ------------------
Total 311 --
-------------------------------------------- ------------------
On September 30, 2004, the Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1 million shares of C&D Technologies common stock having a total purchase
price of no greater than $25 million. This program entirely replaces and
supersedes all previously authorized stock repurchase programs. All of the
shares purchased during the first quarter of fiscal year 2008 were purchased
pursuant to the Company's deferred compensation plan.
Restrictions on Dividends and Treasury Stock Purchases:
Our Credit Facility limits restricted payments including dividends and
Treasury Stock purchases to no more than $250,000 for Treasury Stock in any one
calendar year and $1,750,000 for dividends for any one calendar year subject to
adjustments of up to $400,000 per year in the case of the conversion of debt to
stock per the terms of our convertible offerings. These restricted payments can
only occur with prior notice to the lenders and provided that there is a minimum
of $30,000,000 in excess availability for a period of thirty days prior to the
dividend. The Company may declare and pay a dividend provided these conditions
are met and there does not exist an event of default.
26
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of stockholders of C&D on June 6, 2007, the
stockholders voted on two proposals: The election of ten directors for one-year
terms and a proposal to ratify the appointment of PricewaterhouseCoopers LLP as
the independent registered public accounting firm for C&D for the fiscal year
ended January 31, 2008.
Proposal 1 - Election of Directors
Nominee Votes for Votes withheld
William Harral, III 23,443,059 423,473
Pamela Lewis Davies 23,553,215 313,317
Kevin P. Dowd 23,552,166 314,366
Jeffrey A. Graves 23,549,167 317,365
Robert I. Harries 23,512,770 353,762
Michael H. Kalb 23,568,899 297,633
George MacKenzie 23,568,632 297,900
John A. H. Shober 23,322,740 543,792
Stanley W. Silverman 23,568,899 297,633
Ellen C. Wolf 23,443,914 422,618
Proposal 2 - Ratification of the appointment of PricewaterhouseCoopers LLP as
the independent registered public accounting firm for the fiscal year ending
January 31, 2008.
For Against Abstain
23,643,632 218,725 4,175
27
Item 6. Exhibits.
Incorporated by Reference
-----------------------------------
Exhibit Exhibit Description Form Date Exhibit Filed
Number Number Herewith
- ---------------------------------------------------------------------------------------------------------------
10.1 Amendment No. 4 dated April 13, 2007 to the 10-K 1/31/07 10.21
Company's loan and Security Agreement dated
December 7, 2005 by and among C&D
Technologies, Inc., C&D Technologies (Datel),
Inc., C&D Technologies (CPS) LLC, as Borrowers
and C&D Charter Holdings, Inc., C&D Dynamo
Corp., Dynamo Acquisition Corp., C&D
International Investment Holdings Inc. and
Datel Holding Corporation, as Guarantors, and
Wachovia Bank National Association, as
Administrative Agent and Wachovia Capital
Markets, LLC as Sole Lead Arranger, Manager
and Bookrunner.
10.2 Performance Share Award Grant Agreement dated 10-K 1/31/07 10.56
March 12, 2007.
10.3 Restricted Stock Award Grant Agreement dated 10-K 1/31/07 10.57
March 12, 2007
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
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 X
and 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
28
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
June 8, 2007 By: /s/ Jeffrey A. Graves
-----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
June 8, 2007 By: /s/ Ian J. Harvie
-----------------------------------
Ian J. Harvie
Vice President Finance
and Chief Financial Officer
(Principal Financial Officer)
June 8, 2007 By: /s/ Neil E. Daniels
-----------------------------------
Neil E. Daniels
Vice President Corporate
Controller and Treasurer
(Principal Accounting Officer)
29
EXHIBIT INDEX
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and Chief
Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Section 1350 Certification of the President and Chief Executive Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Section 1350 Certification of the Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
30