UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended July 31, 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 July 31,
2007: 25,667,267
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - July 31, 2007 and January 31, 2007 3
Consolidated Statements of Operations - Three and Six Months
Ended July 31, 2007 and 2006 5
Consolidated Statements of Cash Flows - Six Months Ended
July 31, 2007 and 2006 6
Consolidated Statements of Comprehensive (loss) income - Three
and Six Months Ended July 31, 2007 and 2006 8
Notes to Consolidated Financial Statements 9
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 28
Item 3 Quantitative and Qualitative Disclosures about Market Risk 41
Item 4 Controls and Procedures 41
Part II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 42
Item 6 Exhibits 43
SIGNATURES 44
EXHIBIT INDEX 45
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)
July 31, January 31,
2007 2007
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,046 $ 5,384
Accounts receivable, less allowance for doubtful
accounts of $1,064 and $1,203 57,142 55,397
Inventories 67,859 57,041
Deferred income taxes 197 134
Prepaid taxes 2,561 2,634
Other current assets 4,186 6,121
Assets held for sale 122,925 125,485
- --------------------------------------------------------------------------------
Total current assets 259,916 252,196
Property, plant and equipment, net 81,316 83,984
Deferred income taxes 642 531
Intangible and other assets, net 16,593 15,543
Goodwill 59,778 59,733
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 418,245 $ 411,987
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 39,501 $ 1,286
Accounts payable 42,614 40,282
Book overdrafts 3,495 2,310
Accrued liabilities 13,473 13,708
Other current liabilities 8,836 28,983
Liabilities held for sale 36,212 36,532
- --------------------------------------------------------------------------------
Total current liabilities 144,131 123,101
Deferred income taxes 9,346 9,155
Long-term debt 123,421 147,925
Other liabilities 31,193 28,591
- --------------------------------------------------------------------------------
Total liabilities 308,091 308,772
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of these statements.
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
July 31, January 31,
2007 2007
- --------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Minority interest 11,846 7,548
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized;
29,081,110 and 29,040,960 shares issued; 25,667,267 and 25,649,424
shares outstanding, respectively 291 290
Additional paid-in capital 74,776 74,188
Treasury stock, at cost, 3,413,843 and 3,391,536 shares, respectively (47,239) (47,110)
Accumulated other comprehensive loss (14,423) (13,952)
Retained earnings 84,903 82,251
- --------------------------------------------------------------------------------------------------
Total stockholders' equity 98,308 95,667
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 418,245 $ 411,987
- --------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2007 2006 2007 2006
--------------------------------------------
NET SALES $ 94,590 $ 83,411 $ 183,055 $ 164,890
COST OF SALES 80,636 70,566 156,346 138,828
--------------------------------------------
GROSS PROFIT 13,954 12,845 26,709 26,062
OPERATING EXPENSES:
Selling, general and administrative expenses 12,267 11,638 24,304 22,927
Research and development expenses 1,801 1,736 3,308 3,572
Gain on sale of Shanghai, China plant -- -- (15,162) --
--------------------------------------------
OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS (114) (529) 14,259 (437)
--------------------------------------------
Interest expense, net 2,133 2,834 4,322 5,502
Other (income) expense, net (308) 445 (940) 717
--------------------------------------------
LOSS (INCOME) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
AND MINORITY INTEREST (1,939) (3,808) 10,877 (6,656)
--------------------------------------------
Income tax provision (benefit) from continuing operations 346 155 403 (282)
--------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (2,285) (3,963) 10,474 (6,374)
Minority interest (526) (102) 4,002 (315)
--------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (1,759) (3,861) 6,472 (6,059)
--------------------------------------------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (1,219) 963 (3,167) (1,858)
INCOME TAX PROVISION FROM DISCONTINUED OPERATIONS 104 699 2,257 2,706
--------------------------------------------
(LOSS) INCOME FROM DISCONTINUED OPERATIONS (1,323) 264 (5,424) (4,564)
--------------------------------------------
NET (LOSS) INCOME $ (3,082) $ (3,597) $ 1,048 $ (10,623)
============================================
Income (loss) per share:
Basic:
--------- --------------------- ----------
Net (loss) income from continuing operations $ (0.07) $ (0.15) $ 0.25 $ (0.24)
-------------------------------- ----------
Net (loss) income from discontinued operations $ (0.05) $ 0.01 $ (0.21) $ (0.18)
-------------------------------- ----------
Net (loss) Income $ (0.12) $ (0.14) $ 0.04 $ (0.42)
-------------------------------- ----------
Diluted:
--------------------------------------------
Net (loss) income from continuing operations $ (0.07) $ (0.15) $ 0.22 $ (0.24)
--------------------------------------------
Net (loss) income from discontinued operations $ (0.05) $ 0.01 $ (0.12) $ (0.18)
--------------------------------------------
Net (loss) income $ (0.12) $ (0.14) $ 0.10 $ (0.42)
--------------------------------------------
Dividends per share $ -- $ -- $ -- $ 0.01375
--------------------------------------------
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Six months ended
July 31,
2007 2006
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income (loss) $ 1,048 $ (10,623)
Net loss from discontinued operations (5,424) (4,564)
----------------------
Net income (loss) from continuing operations 6,472 (6,059)
Adjustments to reconcile net (loss) to continuing operations net cash used in
continuing operating activities:
Minority interest 4,002 (315)
Share-based compensation 315 174
Depreciation and amortization 6,341 6,557
Amortization of debt acquisition costs 791 583
Annual retainer to Board of Directors paid by the issuance of common stock 273 224
Deferred income taxes (267) 918
Gain on disposal of assets (15,174) (24)
Changes in assets and liabilities:
Accounts receivable (4,148) (9,081)
Inventories (10,526) (137)
Other current assets (2,138) 224
Accounts payable 435 (8,685)
Accrued liabilities (294) 1,480
Income taxes payable 355 (267)
Other current liabilities (365) (578)
Funds provided to discontinued operations (3,844) (11,451)
Other long-term assets 270 32
Other long-term liabilities 3,451 2,133
Other, net 1,306 403
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing operating activities (12,745) (23,869)
Net cash provided by discontinued operating activities 713 5,358
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (12,032) (18,511)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of property, plant and equipment (4,316) (8,816)
Proceeds from disposal of property, plant and equipment 1,893 30
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in continuing investing activities (2,423) (8,786)
Net cash used in discontinued investing activities (236) (1,431)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,659) (10,217)
- ----------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from new borrowings 14,107 24,924
Increase in book overdrafts 1,185 4,159
Financing cost of long term debt (459) (700)
Proceeds from exercise of stock options -- 975
Purchase of treasury stock (130) (122)
Common stock dividends paid -- (352)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by continuing financing activities 14,703 28,884
Net cash used in discontinued financing activities (405) (524)
- ----------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 14,298 28,360
- ----------------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 127 225
- ----------------------------------------------------------------------------------------------------------------------------
Decrease in cash and cash equivalents from continuing operations (338) (3,546)
Cash and cash equivalents, beginning of period 5,384 17,439
- ----------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 5,046 $ 13,893
- ----------------------------------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
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)
Six months ended
July 31,
2007 2006
- --------------------------------------------------------------------------------------------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in property, plant and equipment acquisitions in accounts payable $ 2,002 $ 520
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Dollars in thousands)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (3,082) $ (3,597) $ 1,048 $ (10,623)
Other comprehensive income (loss), net of tax:
Net unrealized loss on derivative instruments (1,563) (2,874) (2,297) (7,027)
Adjustment to recognize pension liability and net periodic pension cost 411 -- 850 --
Foreign currency translation adjustments 673 185 976 439
- ------------------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $ (3,561) $ (6,286) $ 577 $ (17,211)
- ------------------------------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the
presentation of the Power Electronics Division as discontinued operations as
well as the change in method of accounting for inventories. See item 1, Note 1,
Interim statements and basis of presentation and Note 2, Change in method of
accounting.
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 AND BASIS OF PRESENTATION
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 of America 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 and six months
ended July 31, 2006, have been revised to classify $1,397 and $2,725,
respectively, of such costs as selling, general and administrative expenses
which were previously classified as cost of sales.
During the second quarter of fiscal year 2008, the Company committed to
plans to sell the Power Electronics Division, thereby meeting the held for sale
criteria set forth in Statement of Financial Accounting Standards ("SFAS") No.
144 "Accounting for the Impairment of Disposal of Long-Lived Assets". As a
result of this decision, the Company presented in the July 31, 2007 Form 10-Q,
the assets and liabilities of the Power Electronics Division as held for sale
and presented the results of operations of the Power Electronics Division for
the three and six months ended July 31, 2007 as discontinued operations. All
corresponding prior year periods presented in July 31, 2007 Form 10-Q were
retrospectively adjusted to reflect segregation of assets and liabilities of the
Power Electronic Division as held for sale. In preparing the current segment
disclosures, the Company determined that continuing operations consists of two
segments, Standby Power and Motive Power. Indirect expenses, such as corporate
overheads, which previously were allocated to our Power Electronic Division, are
included within the results of our continuing operating segments. In accordance
with Emerging Issues Task Force ("EITF") No. 87-24, "Allocation of Interest to
Discontinued Operations", interest on debt that is required to be repaid as a
result of the disposal transaction has been allocated to the discontinued
operations.
2. CHANGE IN METHOD OF ACCOUNTING
On September 7, 2007 the Company announced the change of method of
accounting for its inventory from the last-in, first-out ("LIFO") to the
first-in, first-out ("FIFO") method. In accordance with SFAS No. 154,
"Accounting Changes and Error Corrections", the Company has retrospectively
applied this change in method of inventory costing to all prior periods. See
note 6, Inventories, for further discussion.
3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE
On June 19, 2007, the Company entered into a definitive agreement with
Murata Manufacturing Co., Ltd. of Japan ("Murata") pursuant to which the Company
agreed to sell its Power Electronics Division ("PED"). The Power Electronics
Division manufactures various devices relating to electronic power supply and
conversion. On August 31, 2007, the Company completed the sale of the Power
Electronics Division for $85,000, subject to post closing working capital
adjustments.
For financial reporting purposes, the assets, liabilities, results of
operations and cash flows of this business have been segregated from those of
continuing operations and are presented in the Company's consolidated financial
statements as discontinued operations and assets and liabilities held for sale.
Corresponding prior years were retrospectively adjusted to reflect segregation
of assets and liabilities of the Power Electronic Division as held for sale.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The following summarizes the results of operations for the Power
Electronics Division for the three and six months ended July 31, 2007 and 2006,
respectively.
Three months ended Six months ended
July 31, July 31,
2007 2006 2007 2006
------------------------------------------
Net sales $ 41,149 $ 49,019 $ 83,493 $ 96,707
------------------------------------------
Gross profit 8,514 12,845 16,871 21,974
------------------------------------------
Operating (loss) income (30) 1,171 (989) (1,247)
------------------------------------------
Income taxes provision 104 699 2,257 2,706
------------------------------------------
(Loss) income from discontinued operations $ (1,323) $ 264 $ (5,424) $ (4,564)
------------------------------------------
Assets and liabilities held for sale are comprised of the following:
July 31, January 31,
2007 2007
-----------------------
Assets held for sale:
Accounts receivable, net $ 29,613 $ 28,844
Inventories 40,487 42,965
Property, plant and equipment, net 16,639 16,831
Other assets, net 36,186 36,845
-----------------------
Total assets held for sale $ 122,925 $ 125,485
=======================
Liabilities held for sale:
Short-term debt $ 4,807 $ 5,212
Accounts payable 15,101 13,933
Accrued liabilities 7,606 8,202
Other liabilities 8,698 9,185
-----------------------
Total liabilities held for sale $ 36,212 $ 36,532
=======================
4. STOCK-BASED COMPENSATION
The Company granted 36,000 and 315,334 stock option awards during the
three and six months ended July 31, 2007, and 82,000 and 95,000 during the three
and six months ended July 31, 2006, respectively. Under the provisions of SFAS
No. 123R, the Company recorded $169 and $233, of stock compensation related to
stock option awards in its unaudited consolidated statement of operations for
the three and six months ended July 31, 2007, and $124 and $174 during the three
and six months ended July 31, 2006, respectively. The impact on earnings per
share for the three and six months ended July 31, 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 and six
months ended July 31, 2007, was $54 and $82, respectively. 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 and six months ended July 31, 2007 was $(18) and
$0, respectively. There were no restricted stock awards or performance shares
granted in prior periods.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table summarizes information about the stock options outstanding
at July 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 - $ 7.21 709,884 8.0 Years $ 6.05 371,351 8.1 Years $ 6.71
$ 7.81 - $ 9.18 533,735 8.5 Years $ 8.06 532,068 8.5 Years $ 8.06
$ 9.80 - $ 14.50 240,424 5.1 Years $ 11.32 240,424 5.1 Years $ 11.32
$ 14.94 - $ 22.31 891,244 4.9 Years $ 18.79 887,544 4.9 Years $ 18.80
$ 26.76 - $ 37.28 196,010 3.7 Years $ 32.64 196,010 3.7 Years $ 32.64
$ 48.44 - $ 55.94 48,700 3.0 Years $ 54.41 48,700 3.0 Years $ 54.41
- --------------------------------------------------------------------------------------------------
Total 2,619,997 6.4 Years $ 14.17 2,276,097 6.1 Years $ 15.48
- --------------------------------------------------------------------------------------------------
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 and six months
ended July 31, 2007 and 2006 was estimated on the grant date using the
Black-Scholes option pricing model with the following average assumptions.
Three months ended July 31, Six months ended July 31,
2007 2006 2007 2006
- -------------------------------------------------------------------------------------------
Risk-free interest rate 4.88% 4.96%-5.03% 4.45%-4.88% 4.66%-5.03%
Dividend yield 0.00% 0.00% 0.00% 0.00%-0.66%
Volatility factor 49.45% 47.31%-52.53% 49.25%-49.45% 47.31%-54.25%
Expected lives 5 Years 5-6 Years 5 Years 5-6 Years
5. NEW ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("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.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 does not expect the adoption of SFAS No. 159 to
have a material impact on its financial position and results of operations.
6. INVENTORIES
Inventories consisted of the following:
July 31, January 31,
2007 2007
--------------------------------------------------------------------------
Raw materials $ 19,265 $ 14,669
Work-in-process 20,446 15,943
Finished goods 28,148 26,429
--------------------------------------------------------------------------
Total $ 67,859 $ 57,041
--------------------------------------------------------------------------
On September 7, 2007 the Company changed the method of accounting for its
inventory from the last-in, first-out ("LIFO") method to the first-in, first-out
("FIFO") method. With the divestiture of the Company's Power Electronics
Division which was announced on August 31, 2007, the Company's remaining
business is all battery-related, and as a result the Company believes the FIFO
inventory method provides better comparability with industry peers, more
accurate matching of the company's revenues and expenses, a relevant and
meaningful balance sheet valuation methodology and a more efficient financial
closing process. In accordance with Statement of Financial Accounting Standards
No. 154, "Accounting Changes and Error Corrections", the Company has
retrospectively applied this change in method of inventory costing.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The impact of the change in method on certain financial statement line items is
as follows:
Three months Six months
ended ended
July 31, July 31,
2006 2006
-------------------------
Statement of earnings data:
As originally reported- reclassified to present
continuing operations
Cost of sales $ 69,685 $ 140,950
Operating income (loss) 352 (2,559)
Income taxes provision (benefit) 155 (282)
Loss from continuing operations (2,980) (8,181)
Net loss (3,607) (12,265)
Basic loss per share- continuing operations $ (0.12) $ (0.32)
Diluted loss per share- continuing operations $ (0.12) $ (0.32)
Basic and diluted net loss per share $ (0.14) $ (0.48)
Effect of Change - Increase (decrease)
Cost of sales 881 (2,122)
Operating (loss) income (881) 2,122
Income taxes -- --
(Loss) income from continuing operations (881) 2,122
Net loss 10 1,642
Basic (loss) earnings per share- continuing operations $ (0.03) $ 0.08
Diluted (loss) earnings per share- continuing operations $ (0.03) $ 0.08
Basic and diluted net loss per share $ -- $ 0.06
As revised
Cost of sales $ 70,566 $ 138,828
Operating loss (529) (437)
Income taxes 155 (282)
Loss from continuing operations (3,861) (6,059)
Net loss (3,597) (10,623)
Basic loss per share- continuing operations $ (0.15) $ (0.24)
Diluted loss per share- continuing operations $ (0.15) $ (0.24)
Basic and diluted net loss per share $ (0.14) $ (0.42)
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
As of
January 31,
2007
-----------
Balance sheet data:
As originally reported- reclassified to present continuing operations
Inventory $ 48,019
Total assets $ 400,210
Retained earnings $ 70,474
Total liabilities and stockholders' equity $ 400,210
Effect of change
Inventory $ 9,022
Total assets 11,777
Retained earnings (11,777)
Total liabilities and stockholders' equity $ (11,777)
As revised
Inventory $ 57,041
Total assets 411,987
Retained earnings 82,251
Total liabilities and stockholders' equity $ 411,987
Six
Months Ended
July 31,
2006
------------
Statement of Cash Flows data:
As originally reported- reclassified to present continuing operations
Net cash used in continuing operations $ (25,991)
Change in inventories $ (11,203)
Net loss $ (8,181)
Effect of change
Net cash used in continuing operations $ 2,122
Change in inventories $ 2,122
Loss from continuing operations $ 2,122
As revised
Net cash used in continuing operations $ (23,869)
Change in inventories $ (9,081)
Loss from continuing operations (6,059)
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
Had the Company continued to apply the LIFO method of accounting, the
impact on the statement of operations would have resulted in a decrease to
operating income of $8,358 and $9,781 ($8,358 and $9,781, net of tax) and a
decrease in basic (losses) earnings per share of approximately $0.33 and $0.38
for the three and six months ended July 31, 2007, respectively. The impact on
diluted (losses) earnings per share would have been approximately $0.22 for the
six months ended July 31, 2007.
7. 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.
8. INCOME TAXES
Effective at the beginning of the first quarter of fiscal year 2008, the
Company adopted 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.
The Company historically classified unrecognized tax benefits in current
taxes payable, or as a direct offset to deferred taxes to the extent the
uncertain tax position impacted a net operating loss. As a result of adoption of
FIN No. 48, unrecognized tax benefits in the amount of $436 were reclassified
and included within other liabilities in the Company's consolidated balance
sheet as of April 30, 2007.
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.
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,
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
Six months ended
July 31,
2007 2006
- ------------------------------------------------------------------------------------
Provision (benefit) for income taxes from continuing operations $ 403 $ (282)
Effective income tax rate 3.7% (4.2)%
The effective tax rates for continuing operations were 3.7% and (4.2)% for
the six months ended July 31, 2007 and 2006, respectively. Tax expense in the
six months ended July 31, 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 effective tax rate
in the six months ended July 31, 2006 benefited from the adjustment of
previously recorded tax reserves, due to the expiration of the statute of
limitations for the tax years to which the reserves related.
The U.S. tax impact from the involuntary conversion gain of its 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 and is reflected
within the effective income tax rate for the six months ended July 31, 2007.
The Company has significant federal and state net operating losses
carryforwards available, which begin to expire in varying amounts from December
31, 2009 to January 31, 2027. The Company is currently undertaking an analysis
to determine if the future use or the amount if any of its loss carryforwards
could be restricted as a result of possible recent changes in ownership as
defined by rules and limitations, set out in Section 382 of the Internal Revenue
code.
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
9. NET INCOME (LOSS) PER COMMON SHARE
Basic earnings (loss) per common share was computed using net income and
the weighted average number of common shares outstanding during the period.
Diluted earnings (loss) 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.
The following table sets forth the computation of basic and diluted
earnings (loss) per common share from continuing operations.
Three months ended Three months ended
July 31, July 31,
2007 2006 2007 2006
- ------------------------------------------------------------------------------------------------------------------------------------
Numerator:
Numerator for basic (loss) earnings per common share - income from
continuing operations $ (1,759) $ (3,861) $ 6,472 $ (6,059)
Effect of dilutive securities: -- --
Interest expense on Convertible Notes -- -- 3,515 --
Numerator for diluted (loss) earnings per common share - net income
(loss) from continuing operations $ (1,759) $ (3,861) $ 9,987 $ (6,059)
==========================================================
Denominator:
Denominator for basic earnings per common share- weighted average
common share 25,661,127 25,595,674 25,655,962 25,541,240
Effect of dilutive securities:
Convertible Notes -- -- 20,120,932 --
Employee stock awards -- -- 32 --
Employee stock options -- -- 104 --
----------------------------------------------------------
Dilutive potential common shares -- -- 20,121,068 --
Denominator for diluted earnings per common share - adjusted weighted
average common shares and assumed conversions 25,661,127 25,595,674 45,777,030 25,541,240
----------------------------------------------------------
Basic (loss) earnings per common share from continuing operations $ (0.07) $ (0.15) $ 0.25 $ (0.24)
----------------------------------------------------------
Diluted (loss) earnings from common share from continuing operations $ (0.07) $ (0.15) $ 0.22 $ (0.24)
----------------------------------------------------------
Due to a net loss in the three months ended July 31, 2007 and 2006, 137
and 19,980, respectively, of dilutive securities issuable in connection with
stock option plans have been excluded from the diluted loss per share
calculation because their effect would reduce the net loss per share. Due to a
net loss during the six months ended July 31, 2006, 77,828 of dilutive
securities issuable in connection with stock option plans have been excluded
from the diluted loss per share calculation because their effect would reduce
the net loss per share. Additionally, 20,120,932 and 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 July 31, 2007
and for the three and six months ended July 31, 2006, respectively, because
their effect would reduce the loss per share.
During the six months ended July 31, 2007, there were 2,347,997
outstanding employee stock options that were out of the money and therefore
excluded from the calculation of the dilutive effect of employee stock options.
In accordance with SFAS No. 128 "Earnings per Share" for the computation
of diluted earnings per share for the six months ended July 31, 2007, the (loss)
earnings per share for discontinued operations and net income per share was
included regardless of its effect, because the income from continuing operation
was dilutive.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
10. 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
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%.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
In August 2002, the Company was notified of its involvement as a PRP at
the NL Atlanta, Northside Drive Superfund site. NL and Norfolk Southern Railway
Company have been conducting a removal action on the site, preliminary to
remediation. The Company, along with other PRPs, continues to negotiate with NL
at this site regarding the Company's share of the allocated liability.
The Company is 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. In March 2007, the parties executed a
settlement agreement 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. However, in July 2007, the Company
received notice from plaintiff that plaintiff's property was allegedly more
contaminated than previously contemplated and that plaintiff intends to pursuer
the litigation.
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,
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
"Accounting for Contingencies." As of July 31, 2007 and January 31, 2007,
accrued environmental reserves totaled $1,692 and $2,192, respectively,
consisting of $969 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.
20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
11. OPERATIONS BY REPORTABLE SEGMENT
As a result of the Company's sale of its Power Electronic Division, the
composition of the Company's reportable segments has changed. The Company has
the following continuing operations 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 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,
original equipment manufactures.
Certain expenses, such as corporate overheads, which previously were
allocated to the Power Electronic Division, are now included within the results
of the continuing operating segments. For the three and six months ended July
31, 2006, the gross profit for the Standby Power Division has decreased by $402
and $1,160 and operating income by $768 and $1,905, respectively, from the
company's previously reported results. For the three and six months ended July
31, 2006, the gross profit for the Motive Power Division has decreased by $124
and $357 and operating income by $291 and $700, respectively, from the company's
previously reported results.
21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
Summarized financial information related to the Company's continuing
business segments for the three and six months ended July 31, 2007 and 2006, is
shown below. All sales between business segments have been eliminated.
Standby Motive
Three months ended July 31, 2007 Power (1) Power Consolidated
- --------------------------------------------------------------------------------
Net sales $ 80,951 $ 13,639 $ 94,590
Gross profit $ 12,053 $ 1,901 $ 13,954
Operating income (loss) $ 2,657 $ (2,771) $ (114)
Three months ended July 31, 2006
- --------------------------------------------------------------------------------
Net sales $ 69,279 $ 14,132 $ 83,411
Gross profit $ 12,154 $ 691 $ 12,845
Operating income (loss) $ 2,673 $ (3,202) $ (529)
Six months ended July 31, 2007
- --------------------------------------------------------------------------------
Net sales $ 156,595 $ 26,460 $ 183,055
Gross profit $ 23,560 $ 3,149 $ 26,709
Operating income (loss) $ 19,740 $ (5,481) $ 14,259
Six months ended July 31, 2006
- --------------------------------------------------------------------------------
Net sales $ 135,990 $ 28,900 $ 164,890
Gross profit $ 24,019 $ 2,043 $ 26,062
Operating income (loss) $ 5,025 $ (5,462) $ (437)
(1) Standby Power operating income in the six months ended July 31, 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.
22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
12. 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.
July 31, January 31,
2007 2007
--------------------- ----------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------
Commodity hedges $ 2,380 $ 2,380 $ 4,890 $ 4,890
Foreign exchange hedges $ (245) $ (245) $ 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.
23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
13. WARRANTY
The Company provides for estimated product warranty expenses when the
related products are sold. Because warranty estimates are forecasts that are
based on the best available information, primarily historical claims experience,
claims costs may differ from amounts provided. An analysis of changes in the
liability for product warranties follows:
Six months ended
July 31,
2007 2006
------------------------------------------------------------------
Balance at beginning of period $ 7,760 $ 7,324
Current year provisions 5,090 3,405
Expenditures (3,163) (4,098)
Effect of foreign currency translation 1 3
------------------------------------------------------------------
Balance at end of period $ 9,688 $ 6,634
------------------------------------------------------------------
As of July 31, 2007, accrued warranty obligations of $9,688 include $3,508
in current liabilities and $6,180 in other liabilities. As of January 31, 2007,
accrued warranty obligations of $7,760 include $2,890 in current liabilities and
$4,870 in other liabilities.
24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
14. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
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 Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This standard requires the
disclosure of the components of net periodic benefit cost recognized during
interim periods.
Pension Benefits Postretirement Benefits
------------------- ------------------------
Three months ended Three months ended
July 31, July 31,
2007 2006 2007 2006
- -----------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 325 $ 423 $ 23 $ 39
Interest cost 1,045 1,052 57 60
Expected return on plan assets (1,217) (1,212) -- --
Amortization of prior service costs 1 4 (6) (7)
Recognized actuarial loss/(gain) 411 539 (1) 2
Curtailment 22 12 -- (36)
Special termination benefit 173 -- -- --
- -----------------------------------------------------------------------------------------
Net periodic benefit cost $ 760 $ 818 $ 73 $ 58
- -----------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits
------------------- ------------------------
Six months ended Six months ended
July 31, July 31,
2007 2006 2007 2006
- -----------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 765 $ 878 $ 61 $ 89
Interest cost 2,140 2,096 122 123
Expected return on plan assets (2,436) (2,425) -- --
Amortization of prior service costs 4 7 (11) (14)
Recognized actuarial loss/(gain) 850 1,056 (2) 2
Curtailment 22 13 -- (36)
Special termination benefit 173 -- -- --
- -----------------------------------------------------------------------------------------
Net periodic benefit cost $ 1,518 $ 1,625 $ 170 $ 164
- -----------------------------------------------------------------------------------------
The Company estimates that it will be required to make contributions of
approximately $1,763 to its U.S. pension plans for fiscal year 2008. The Company
also expects to make contributions totaling approximately $338 to the two
Company sponsored postretirement benefit plans during fiscal year 2008.
25
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
15. RESTRUCTURING
During fiscal year 2007, the Company 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.
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 the Company's 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 $320 and $538 in its financial statements during
the three and six months ended July 31, 2007. These charges were included in the
cost of sales on the consolidated statement of operations. Further severance
charges of approximately $28 are expected to be incurred in the third quarter of
fiscal year 2008. In addition the Company incurred approximately $200 of special
pension termination benefits and approximately $400 of other cost relating to
the closure of Conyers. Additionally, approximately $1,595 is expected to be
incurred during the third and fourth 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 severance liability and
related activity is shown below.
Balance at Balance at
January 31, Provision July 31,
2007 Additions Expenditures 2007
---------------------------------------------------------------
Severance $ 626 $ 538 $ 851 $ 313
---------------------------------------------------------------
Total $ 626 $ 538 $ 851 $ 313
---------------------------------------------------------------
26
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
16. SUBSEQUENT EVENTS
On August 31, 2008, the Company announced the completion of the sale of
its Power Electronic Division to Murata Manufacturing Co., Ltd of Japan for
$85,000 cash, subject to working capital adjustments. The agreement to sell this
business was previously announced on June 19, 2007. The Company used a portion
of the sale proceeds to repay in full outstanding borrowings under its Credit
facility.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Item 2.
Three Months Ended July 31, 2007, compared to Three Months Ended July 31,
2006
During the second quarter of fiscal year 2008, the Company committed to
plans to sell the Power Electronics Division, thereby meeting the held for sale
criteria set forth in SFAS No. 144 "Accounting for the Impairment of Disposal of
Long-Lived Assets". As a result of this decision, the Company presented in the
July 31, 2007 Form 10-Q, the assets and liabilities of the Power Electronics
Division as held for sale and presented the results of operations of the Power
Electronics Division for the three and six months ended July 31, 2007 as
discontinued operations. All corresponding prior year periods presented in the
July 31, 2007 Form 10-Q were retrospectively adjusted to reflect segregation of
assets and liabilities of the Power Electronic Division as held for sale. In
preparing our current segment disclosures, the Company determined that
continuing operations consists of two segments, Standby Power and Motive Power.
Indirect expenses, such as corporate overheads, which previously were allocated
to our Power Electronic Division, are included within the results of our
continuing operating segments. In accordance with EITF No. 87-24, "Allocation of
Interest to Discontinued Operations", interest on debt that is required to be
repaid as a result of the disposal transaction has been allocated to the
discontinued operations
On September 7, 2007 the Company announced the change of method of
accounting for its inventory from the last-in, first-out ("LIFO") to the
first-in, first-out ("FIFO") method. In accordance with Statement of Financial
Accounting Standards No. 154, "Accounting Changes and Error Corrections", the
Company has retrospectively applied this change in method of inventory costing
to all prior periods. See item 1, note 6, Inventories, for further discussion.
Within the following discussion, unless otherwise stated, "quarter" and
"three-month" period" refer to the second quarter of fiscal year 2008. All
comparisons are with the corresponding period in the prior fiscal year, unless
otherwise stated.
Continuing operations
Net sales in the second quarter of fiscal year 2008 increased $11,179 or
13% to $94,590 from $83,411 in the second quarter of fiscal year 2007. This
increase resulted from higher sales in the Standby Power Division while sales
were lower in the Motive Power Division. Sales in the Standby Power Division
increased $11,672 or 17%, primarily due to increased pricing coupled with strong
volume in the UPS and Cable markets. Motive Power Division sales decreased $493
or 3% primarily as increased pricing was more than offset by lower volume
compared to the second quarter of fiscal year 2007.
Gross profit in the second quarter of fiscal year 2008 increased $1,109 or
9% to $13,954 from $12,845. Margins decreased from 15.4% to 14.8% in the second
quarter of fiscal year 2008. Gross profit in the Standby Power Division
decreased $101 with margins decreasing to 14.9% from 17.5%. 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 48 cents per pound in the
second quarter of fiscal year 2007 to $1.15 per pound in the second quarter of
fiscal year 2008. Lead traded as high as $1.58 per pound on July 23, 2007.
Second quarter fiscal year 2008 results also included severance and other costs
associated with the closure of the Division's Conyers, Georgia facility of $924.
Gross profit in the Motive Power Division increased $1210 with margins
increasing from 4.9% to 13.9%. This improvement is primarily due to the prior
year impact of costs incurred associated with the closure of the Company's
Huguenot, New York manufacturing facility. Excluding these charges, lower
volumes and higher lead costs, net of pricing recoveries negatively impacted
Motive Power gross profit performance.
Selling, general and administrative expenses in the second quarter of
fiscal year 2008 increased $629 or 5% to $12,267 from $11,638 primarily as a
result of higher warranty costs in the Motive Power Division due to higher
current lead prices. As a percentage of sales selling, general and
administrative expenses were 13.0% and 14.0% in the second quarter of fiscal
2008 and 2007, respectively.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Research and development expenses in the second quarter of fiscal year
2008 increased $65 or 4% to $1,801 from $1,736. As a percentage of sales,
research and development expenses decreased from 2.1% in the second quarter of
fiscal year 2007 to 1.9% in the second quarter of fiscal year 2008.
Operating loss from continuing operations in the second quarter of fiscal
year 2008 was decreased $415 or 78% to $114 from $529.
29
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) from continuing operations
Second Quarter of Fiscal Year 2008 vs. Second Quarter of Fiscal Year 2007
Standby Motive
Power Power
Division Division Consolidated
- --------------------------------------------------------------------------------
Operating income (loss) 2Q 07 $ 2,673 $ (3,202) $ (529)
Lead costs, net (7,230) (702) (7,932)
Price / volume 6,891 709 7,600
Huguenot closure -- 1,111 1,111
Conyers closure (924) -- (924)
Warranty (388) (918) (1,306)
Fiscal year 2007 management changes 419 97 516
Other net, including cost reduction programs 1,216 134 1,350
- -------------------------------------------------------------------------------
Operating income (loss) 2Q 08 $ 2,657 $ (2,771) $ (114)
- -------------------------------------------------------------------------------
Interest expense, net in the second quarter of fiscal year 2008 decreased
$701 or 25% to $2,133 from $2,834 in the second quarter of fiscal year 2007,
primarily due to a lower effective interest rate resulting from last year's
convertible notes refinancing.
Other income was $308 in the second quarter of fiscal year 2008 compared
to other expense of $445 in the second quarter of fiscal year 2007. The
difference was primarily due to $499 of foreign exchange gains in the second
quarter of fiscal year 2008 compared to $226 of foreign exchange losses in the
second quarter of fiscal year 2007.
Income tax expense from continuing operations of $346 was recorded in the
second quarter of fiscal year 2008, compared to $155 in the second quarter of
fiscal year 2007. Tax expense in the second quarter of both fiscal years 2008
and 2007, is primarily due to foreign taxes on profits which were not offset by
losses for which no tax benefit is recognized under SFAS No. 109.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by the Company.
In the second quarter of fiscal year 2008, the joint venture had a benefit of
$526 compared to a benefit of $102 in the second quarter of fiscal year 2007.
As a result of the above, a loss from continuing operations of $1,759 was
recorded in the second quarter of fiscal year 2008 as compared to a net loss of
$3,861 in the prior year.
Discontinued operations
Loss from discontinued operations before income taxes was $1,219 in the
second quarter of fiscal year 2008 as compared to income of $963 in the second
quarter of fiscal year 2007. Income tax expense from discontinued operations of
$104 was recorded in the second quarter of fiscal year 2008, compared to income
tax expense of $699 in the second quarter of fiscal year 2007. Net loss from
discontinued operations in the second quarter of fiscal year 2008 was $1,323
compared to an income of $264 in the second quarter of fiscal year 2007. The
deterioration was driven primarily by unfavorable product mix, pricing changes
and manufacturing moves partially offset 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.
As a result of the above, net loss of $3,082 was recorded as compared to a
net loss of $3,597 in the prior year. On a per share basis, the net loss from
continuing operations was $0.07 in the second quarter of fiscal year 2008
compared to a net loss of $0.15 in the second quarter of fiscal year 2007, basic
and diluted, respectively. The net loss from discontinued operations was
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
$0.05 compared to net income of $0.01 in the second quarter of fiscal year 2007,
basic and fully diluted. The net loss on a per share basis was $0.12 compared to
$0.14 in the second quarter of fiscal year 2007, basic and diluted.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Other Comprehensive Loss
Other comprehensive loss decreased by $2,725 in the second quarter of
fiscal year 2008 to $3,561 from a loss of $6,286 in the second quarter of fiscal
year 2007. This decrease was primarily due to a decrease in net loss of $515
coupled with a lower unrealized loss on derivative instruments of $1,563
compared to $2,874 in second quarter of fiscal year 2007.
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Six Months Ended July 31, 2007, compared to Six months Ended July 31, 2006
Continuing operations
Net sales for the six months ended July 31, 2007 increased $18,165 or 11%
to $183,055 from $164,890 in the six months ended July 31, 2006. This increase
resulted from higher sales and pricing in the Standby Power Division while sales
were lower in the Motive Power Division. Sales in the Standby Power Division
increased $20,605 or 15%, primarily due to increased pricing and strong volume
in the UPS and cable markets. Motive Power Division sales decreased $2,440 or 8%
with increased pricing offset by lower volume compared to the second quarter of
fiscal year 2007.
Gross profit for the six months ended July 31, 2007 increased $647 or 2%
to $26,709 from $26,062. Margins decreased from 15.8% to 14.6%. Gross profit in
the Standby Power Division decreased $459 with margins decreasing to 15.0% from
17.7%. 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
52 cents per pound in the six months ended July 31, 2006 to $1.01 per pound in
the six months ended July 31, 2007. Six months ended July 31, 2007 results
included severance costs and other costs associated with the closure of the
Division's Conyers, Georgia facility of $1,142. Gross profit in the Motive Power
Division increased $1,106, with margins increasing from 7.1% to 11.9%. This
improvement is primarily due to the prior year impact of costs associated with
the closure of the Company's Huguenot, New York manufacturing facility.
Excluding these charges, lower volumes, higher lead costs, net of pricing
recoveries and warranty more than offset the savings realized from the Company's
cost reduction programs.
Selling, general and administrative expenses for the six months ended July
31, 2007, increased $1,377 or 6.0% to $24,304 from $22,927 primarily as a result
of higher Motive Power Division warranty costs. As a percentage of sales
selling, general and administrative expenses were 13.3% and 13.9% in the six
months ended July 31, 2007 and 2006, respectively.
Research and development expenses for the six months ended July 31, 2007
decreased $264 or 7% to $3,308 from $3,572. As a percentage of sales, research
and development expenses decreased from 2.2% in the six months ended July 31,
2006 to 1.8% in the six months ended July 31, 2007.
During the six months ended July 31, 2007, the Company recognized a gain
of $15,162 from the sale of its old joint venture manufacturing facility in
Shanghai, China.
Operating income from continuing operations for the six months of fiscal
year 2008 was $14,259 compared to an operating loss of $437 in the second
quarter of fiscal year 2007.
33
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) from continuing operations
Six months ended July 31, 2007 vs. Six months ended July 31, 2006
Standby Motive
Power Power
Division Division Consolidated
- ---------------------------------------------------------------------------------------------------
Operating income (loss) Six months ended July 31, 2006 $ 5,025 $ (5,462) $ (437)
Lead costs, net (12,629) (1,132) (13,761)
Price / volume 11,356 625 11,981
Gain on sale of Shanghai, China plant 15,162 -- 15,162
Conyers closure (1,142) -- (1,142)
Huguenot closure -- 1,219 1,219
Warranty (416) (1,268) (1,684)
Fiscal year 2007 management changes 870 181 1,051
Other net, including cost reduction programs 1,514 356 1,870
- ---------------------------------------------------------------------------------------------------
Operating income (loss) 2Q Six months ended July 31, 2007 $ 19,740 $ (5,481) $ 14,259
- ---------------------------------------------------------------------------------------------------
Interest expense, net for the six months ended July 31, 2007, decreased
$1,180 or 21% to $4,322 from $5,502 in the six months ended July 31, 2006,
primarily due to a lower effective interest rate resulting from last year's
convertible notes refinancing.
Other income was $940 for the six months ended July 31, 2007, compared to
other expense $717 in the six months ended July 31, 2006. The difference was
primarily due to $1,269 of foreign exchange gains in the second quarter of
fiscal year 2008 compared to $372 of foreign exchange losses in the second
quarter of fiscal year 2007.
Income tax expense from continuing operations of $403 was recorded in six
months ended July 31, 2007, compared to an income tax benefit of $282 in the six
months ended July 31, 2006. Tax expense in the six months ended July 31, 2007 is
primarily due to foreign taxes on profits which were not offset by losses for
which no tax benefit is recognized under SFAS No. 109.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by the Company.
In the six months ended July 31, 2007, the joint venture had minority interest
of $4,002 compared to a benefit of $315 in the six months ended July 31, 2006.
Approximately, $5,003 of the increase in minority interest was the result of the
$15,162 gain recognized on the sale of our old manufacturing plant in Shanghai,
China.
As a result of the above, income from continuing operations of $6,472 was
recorded compared to a loss of $6,059 in the prior year.
Discontinued operations
Loss from discontinued operations before income taxes was $3,167 compared
to a loss of $1,858 for the six months ended July 31, 2006. Income tax expense
from discontinued operations of $2,257 was recorded, compared to $2,706 for the
six months ended July 31, 2006. Net loss from discontinued operations for the
six months ended July 31, 2007 was $5,424 compared to $4,564 in the prior year.
The increase in net loss was primarily driven by unfavorable product mix,
pricing changes partially offset 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 and
manufacturing moves.
As a result of the above, net income of $1,048 was recorded as compared to
a net loss of $10,623 in the prior year. On a per share basis, the net income
from continuing operations was $0.25 and $0.22 for basic and diluted,
respectively, compared to a net loss of $0.24 for the six months ended July 31,
2006. The net loss for discontinued operations was $0.21 and $0.12 for basic and
diluted, respectively, compared to a net loss of $0.18 for the six months ended
July 31, 2006, basic and diluted. Net
34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
income on a per share basis was $0.04 and $0.10 basic and diluted, respectively,
compared to a net loss of $0.42 in the prior year, basic and diluted.
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Other Comprehensive Income (Loss)
The Company recorded other comprehensive income of $577 for the six months
ended July 31, 2007 as compared to a comprehensive loss of $17,211 in the six
months ended July 31, 2006. This increase was primarily due to net income of
$1,048 in the six months ended July 31, 2007 as compared to a net loss of
$10,623 in the comparable period at the previous fiscal year. This was coupled
with lower unrealized loss on derivative instruments of $2,297 compared to
$7,027 in second quarter of fiscal year 2007.
36
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 from continuing operations was
$12,745 for the six months ended July 31, 2007, compared to $23,869 in the
comparable period of the prior fiscal year. The improvement is a result of i) a
decrease in cash use for accounts payable due primarily to the timing of
payments to our vendors, ii) a decrease in cash used for accounts receivable due
primarily to improved days sales outstanding in our Standby Power Division
partially offset by increased sales, and iii) a decrease in cash used to fund
discontinued operations. These improvements were partially offset by inventory
increases, principally attributable to higher lead and other raw material costs.
Net cash provided by discontinued operations was $713 and $5,358 in the
six months ended July 31, 2007 and 2006, respectively.
Net cash used by continuing investing activities decreased $6,363 or 72%
to $2,423 in the six months ended July 31, 2007 from $8,786 in the six months
ended July 31, 2006. Acquisition of property, plant and equipment was $4,316
during the first six months of fiscal 2008 as compared to $8,816 during the
first six months of fiscal year 2007. The decrease in capital spending is due to
the completion of our new manufacturing facility in Shanghai, China during
fiscal year 2007. During the first six months of fiscal year 2008, we had
proceeds from the disposal of property, plant and equipment in the amount of
$1,893. We received $1,850 from the last installment on the sale of our old
battery plant in Shanghai, China.
Net cash used in discontinued investing activities was $236 and $1,431 in
the six months ended July 31, 2007 and 2006, respectively.
Net cash provided by continuing operations financing activities decreased
$14,181 or 49% to $14,703 for the six months ended July 31, 2007, compared to
$28,884 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 - both continuing and discontinued.
Net cash used in discontinued financing activities for the six months
ended July 31, 2007 and 2006 was $405 and $524, respectively.
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.
On June 19, 2007, the Company entered into a definitive agreement with
Murata pursuant to which the Company agreed to sell its Power Electronics
Division. On August 31, 2007, the Company completed the sale of the Power
Electronics Division for $85,000, subject to post closing working capital
adjustments. Proceeds from the sale were used to pay in full existing borrowings
under the Company's Credit Facility, with the balance currently held as short
term cash investments.
As of July 31, 2007, the maximum availability calculated under the
borrowing base was $71,952, of which $39,501 was funded, and $5,375 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. Availability under the Company's Credit Facility as of
August 31, 2007, was similarly adjusted to reflect the sale of certain PED
assets which were previously reflected in the Company's borrowing base. The
Company estimates that recalculated availability under the Credit Facility,
undrawn except for outstanding letters of credit as of September 7, 2007, was
approximately $44,500.
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 six 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 $12,000 to $15,000, for similar purposes as well as the move
of manufacturing from Conyers, Georgia to Leola, Pennsylvania.
37
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
New Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("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.
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 does not expect the adoption of SFAS No. 159 to
have a material impact on its financial position and results of operations.
38
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 of our Form 10-K for the fiscal year
ended January 31, 2007, 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, Europe and
Asia;
o the substantial management time and financial and other resources
needed for our consolidation and rationalization of acquired
entities;
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;
o our ability to maintain and generate liquidity to meet our operating
needs;
o we may have additional impairment charges;
39
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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;
o our ability to protect our proprietary intellectual property and
technology; and
o possible post-closing working capital adjustments to the purchase
price in accordance with the Purchase Agreement for the sale of
Power Electronics Division.
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.
40
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.
41
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
- -----------------------------------------------------------------------------------------------------
May 1 - May 31, 2007 748 $ 5.35 -- 1,000,000
June 1 - June 30, 2007 19,526 $ 5.89 -- 1,000,000
July 1 - July 31, 2007 1,722 $ 5.23 -- 1,000,000
- -------------------------------------- ------------------
Total 21,996 --
- -------------------------------------- ------------------
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.
42
Item 6. Exhibits.
Incorporated by Reference
-------------------------------------
Exhibit Exhibit Filed
Number Exhibit Description Form Date Number Herewith
- -----------------------------------------------------------------------------------------------------
10.1 Consent and amendment No. 6 to Loan and security X
agreement, dated as of August 30, 2007, by and
among Wachovia Bank, National Association, in its
capacity as agent, C&D Technologies, Inc., a
Delaware corporation, C&D Technologies (Datel),
Inc., a Delaware corporation, C&D Technologies
(CPS) LLC, a Delaware limited liability company,
C&D Charter Holdings, Inc., a Delaware
corporation, C&D Dynamo Corporation, a Delaware
corporation, Dynamo Acquisition Corporation, a
Delaware corporation, C&D International Investment
Holdings Inc., a Delaware corporation and Datel
Holding Corporation, a Delaware corporation.
10.2 Purchase and Sale agreement dated as of June 19, 8-K 8/31/2007 99.1
2007, between C&D Technologies, Inc., a Delaware
corporation, and Murata Manufacturing Co., Ltd., a
corporation organized under the laws of Japan.
18.1 Letter regarding change in accounting principles X
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 Vice X
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
43
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
September 7, 2007 By: /s/ Jeffrey A. Graves
----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
September 7, 2007 By: /s/ Ian J. Harvie
----------------------------------
Ian J. Harvie
Vice President Finance
and Chief Financial Officer
(Principal Financial Officer)
September 7, 2007 By: /s/ Neil E. Daniels
----------------------------------
Neil E. Daniels
Vice President Corporate
Controller and Treasurer
(Principal Accounting Officer)
44
EXHIBIT INDEX
10.1 Consent and amendment No. 6 to Loan and security agreement, dated as of
August 30, 2007, by and among Wachovia Bank, National Association, in its
capacity as agent, C&D Technologies, Inc., a Delaware corporation, C&D
Technologies (Datel), Inc., a Delaware corporation, C&D Technologies (CPS)
LLC, a Delaware limited liability company, C&D Charter Holdings, Inc., a
Delaware corporation, C&D Dynamo Corporation, a Delaware corporation,
Dynamo Acquisition Corporation, a Delaware corporation, C&D International
Investment Holdings Inc., a Delaware corporation and Datel Holding
Corporation, a Delaware corporation.
18.1 Letter regarding change in accounting principles
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
45