UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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 October
31, 2007: 25,666,477
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
FORM 10-Q
INDEX
Part I FINANCIAL INFORMATION
Item 1 Financial Statements (Unaudited)
Consolidated Balance Sheets - October 31, 2007 and January 31, 2007 3
Consolidated Statements of Operations - Three and Nine Months Ended 5
October 31, 2007 and 2006
Consolidated Statements of Cash Flows - Nine Months Ended 6
October 31, 2007 and 2006
Consolidated Statements of Comprehensive Loss -
Three and Nine Months Ended October 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 26
Item 3 Quantitative and Qualitative Disclosures about Market Risk 34
Item 4 Controls and Procedures 34
Part II OTHER INFORMATION
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 35
Item 6 Exhibits 36
SIGNATURES 37
EXHIBIT INDEX 38
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)
October 31, January 31,
2007 2007
- --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 31,631 $ 5,384
Accounts receivable, less allowance for
doubtful accounts of $1,102 and $1,203 67,765 55,397
Inventories 71,452 53,172
Deferred income taxes 196 134
Prepaid taxes 1,775 2,634
Other current assets 1,103 6,121
Assets held for sale 4,198 132,442
- --------------------------------------------------------------------------------
Total current assets 178,120 255,284
Property, plant and equipment, net 78,994 80,896
Deferred income taxes 642 531
Intangible and other assets, net 16,320 15,543
Goodwill 59,800 59,733
- --------------------------------------------------------------------------------
TOTAL ASSETS $ 333,876 $ 411,987
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 5,472 $ 1,286
Accounts payable 52,447 40,282
Book overdrafts 70 2,310
Accrued liabilities 17,320 13,708
Other current liabilities 8,941 28,983
Liabilities held for sale -- 36,532
- --------------------------------------------------------------------------------
Total current liabilities 84,250 123,101
Deferred income taxes 10,387 9,155
Long-term debt 124,101 147,925
Other liabilities 31,728 28,591
- --------------------------------------------------------------------------------
Total liabilities 250,466 308,772
- --------------------------------------------------------------------------------
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 and Motive Power 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)
October 31, January 31,
2007 2007
- -----------------------------------------------------------------------------------------------------
Commitments and contingencies (see Note 10)
Minority interest 11,674 7,548
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 shares authorized;
29,081,110 and 29,040,960 shares issued; 25,666,477 and 25,649,424
shares outstanding, respectively 291 290
Additional paid-in capital 74,867 74,188
Treasury stock, at cost, 3,414,633 and 3,391,536 shares, respectively (47,244) (47,110)
Accumulated other comprehensive loss (31,783) (13,952)
Retained earnings 75,605 82,251
- -----------------------------------------------------------------------------------------------------
Total stockholders' equity 71,736 95,667
- -----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 333,876 $ 411,987
- -----------------------------------------------------------------------------------------------------
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 and Motive Power 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.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended Nine months ended
October 31, October 31,
2007 2006 2007 2006
----------------------------------------------------
NET SALES $ 91,253 $ 70,589 $ 251,586 $ 210,457
COST OF SALES 85,403 59,276 222,939 175,670
----------------------------------------------------
GROSS PROFIT 5,850 11,313 28,647 34,787
OPERATING EXPENSES:
Selling, general and administrative expenses 8,563 7,187 25,820 23,981
Research and development expenses 1,725 1,432 4,949 4,883
Gain on sale of Shanghai, China plant -- -- (15,162) --
----------------------------------------------------
OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS (4,438) 2,694 13,040 5,923
----------------------------------------------------
Interest expense, net 1,880 2,574 6,190 8,050
Other (income) expense, net (1,181) 258 (2,120) 975
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES
----------------------------------------------------
AND MINORITY INTEREST (5,137) (138) 8,970 (3,102)
----------------------------------------------------
Income tax provision (benefit) from continuing operations 2,186 163 1,281 (502)
----------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (7,323) (301) 7,689 (2,600)
Minority interest (330) (56) 3,672 (371)
----------------------------------------------------
(LOSS) INCOME FROM CONTINUING OPERATIONS (6,993) (245) 4,017 (2,229)
----------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (4,167) (17,158) (10,564) (22,707)
INCOME TAX (BENEFIT) PROVISION FROM DISCONTINUED OPERATIONS (1,862) 412 1,703 3,502
----------------------------------------------------
LOSS FROM DISCONTINUED OPERATIONS (2,305) (17,570) (12,267) (26,209)
----------------------------------------------------
NET LOSS $ (9,298) $ (17,815) $ (8,250) $ (28,438)
====================================================
Income (loss) per share:
Basic:
----------------------------------------------------
Net (loss) income from continuing operations $ (0.27) $ (0.01) $ 0.16 $ (0.09)
----------------------------------------------------
Net loss from discontinued operations $ (0.09) $ (0.69) $ (0.48) $ (1.02)
----------------------------------------------------
Net loss $ (0.36) $ (0.70) $ (0.32) $ (1.11)
----------------------------------------------------
Diluted:
----------------------------------------------------
Net (loss) income from continuing operations $ (0.27) $ (0.01) $ 0.16 $ (0.09)
----------------------------------------------------
Net loss from discontinued operations $ (0.09) $ (0.69) $ (0.48) $ (1.02)
----------------------------------------------------
Net loss $ (0.36) $ (0.70) $ (0.32) $ (1.11)
----------------------------------------------------
Dividends per share -- $ -- -- $ 0.01375
----------------------------------------------------
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 and Motive Power 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.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Nine months ended
October 31,
2007 2006
- ----------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net loss $ (8,250) $ (28,438)
Net loss from discontinued operations (12,267) (26,209)
- ----------------------------------------------------------------------------------------------------------
Net income (loss) from continuing operations 4,017 (2,229)
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in continuing operating activities:
Minority interest 3,672 (371)
Share-based compensation 444 197
Depreciation and amortization 8,315 9,023
Amortization of debt acquisition costs 1,208 889
Annual retainer to Board of Directors paid by the issuance of common stock 236 224
Deferred income taxes 628 877
Gain on disposal of assets (15,295) (29)
Changes in assets and liabilities:
Accounts receivable (14,127) (7,563)
Inventories (18,146) 567
Other current assets 702 (509)
Accounts payable 9,977 (1,966)
Accrued liabilities 3,762 2,869
Income taxes 1,792 (510)
Other current liabilities 864 2,015
Funds provided to discontinued operations (22,170) (21,380)
Other long-term assets 232 (5)
Other long-term liabilities 4,410 (544)
Other, net (2,356) 349
- ----------------------------------------------------------------------------------------------------------
Net cash used in continuing operating activities (31,835) (18,096)
Net cash (used in) provided by discontinued operating activities (1,249) 4,963
- ----------------------------------------------------------------------------------------------------------
Net cash used in operating activities (33,084) (13,133)
- ----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from the divestiture of businesses 85,700 --
Acquisition of property, plant and equipment (7,071) (15,446)
Proceeds from disposal of property, plant and equipment 2,248 38
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) continuing investing activities 80,877 (15,408)
Net cash used in discontinued investing activities (298) (4,091)
- ----------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities 80,579 (19,499)
- ----------------------------------------------------------------------------------------------------------
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 and Motive Power 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.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in thousands)
(UNAUDITED)
Nine months ended
October 31,
2007 2006
- ------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt, net (24,123) --
Proceeds from new borrowings 3,993 18,844
(Decrease) increase in book overdrafts (2,241) 3,063
Financing cost of long term debt (459) (701)
Proceeds from exercise of stock options -- 1,210
Purchase of treasury stock (134) (122)
Common stock dividends paid -- (352)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by continuing financing activities (22,964) 21,942
Net cash used in discontinued financing activities (5,212) (780)
- ------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (28,176) 21,162
- ------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 169 316
- ------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents from continuing operations 26,247 (11,246)
Cash and cash equivalents, beginning of period 5,384 17,439
- ------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of period $ 31,631 $ 6,193
======================================================================================================
Nine months ended
October 31,
2007 2006
- ------------------------------------------------------------------------------------------------------
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Increase in property, plant and equipment acquisitions in accounts payable $ 2,214 $ 71
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 and Motive Power 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.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(Dollars in thousands)
(UNAUDITED)
Three months ended Nine months ended
October 31, October 31,
2007 2006 2007 2006
- --------------------------------------------------------------------------------------------------------------------------------
NET LOSS $ (9,298) $ (17,815) $ (8,250) $ (28,438)
Other comprehensive income (loss), net of tax:
Net unrealized (loss)/gain on derivative instruments (2,939) 6,919 (5,236) (108)
Adjustment to recognize pension liability and net periodic pension cost 511 -- 1,361 --
Foreign currency translation adjustments (14,933) 3 (13,957) 442
- --------------------------------------------------------------------------------------------------------------------------------
Total comprehensive loss $ (26,659) $ (10,893) $ (26,082) $ (28,104)
- --------------------------------------------------------------------------------------------------------------------------------
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 and Motive Power 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.
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 presentation of the 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 began classifying certain costs,
which were previously classified as cost of sales, as selling, general and
administrative expenses. For comparative purposes, the three and nine months
ended October 31, 2006, have been revised to classify $732 and $2,987,
respectively, of such costs as selling, general and administrative expenses
which were previously classified as cost of sales.
On August 31, 2007, the Company completed the sale of its Power
Electronics Division to Murata Manufacturing Co., Ltd. Therefore, the results of
the Power Electronics Division for the three and nine months ended October 31,
2007, are presented as discontinued operations. All corresponding prior year
periods presented in the October 31, 2007 Form 10-Q were retrospectively
adjusted to reflect our Power Electronics Division as discontinued operations.
On October 24, 2007, the Company completed the sale of certain assets of
its Motive Power Division to Crown Battery Manufacturing Company. Therefore, the
results of the Motive Power Division for the three and nine months ended October
31, 2007, are presented as discontinued operations. All corresponding prior year
periods presented in the October 31, 2007 Form 10-Q were retrospectively
adjusted to reflect our Motive Power Division as 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 Statement of Financial
Accounting Standard ("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.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
3. DISCONTINUED OPERATIONS
On August 31, 2007, the Company completed the sale of its Power
Electronics Division for $85,000 and recognized a gain of approximately $3,900.
As a result of this decision and in accordance with SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets", the Company presents the
results of operation of the Power Electronics Division for the three and nine
months ended October 31, 2007 and 2006, respectively, as discontinued
operations.
The following is a summary of the net assets sold as initially presented
as of January 31, 2007, and as finally reported on the closing date of August
31, 2007, in respect of the sale of our Power Electronics division.
August 31, January 31,
2007 2007
---------------------------
Assets held for sale:
Accounts receivable, net $ 31,384 $ 28,844
Inventories 40,980 42,965
Property, plant and equipment, net 16,718 16,831
Other assets, net 36,267 36,845
---------------------------
Total assets held for sale $ 125,349 $ 125,485
===========================
Liabilities held for sale:
Short-term debt $ 4,838 $ 5,212
Accounts payable 14,193 13,933
Accrued liabilities 7,114 8,202
Other liabilities 7,677 9,185
---------------------------
Total liabilities held for sale $ 33,822 $ 36,532
===========================
On October 24, 2007, the Company announced the sale of certain assets of
its Motive Power Division. As a result of this decision and in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets",
the Company presents the results of operation of the Motive Power Division for
the three and nine months ended October 31, 2007 and 2006, respectively, as
discontinued operations. The Company received $700 in respect of the sale of
finished goods and certain identified equipment with an additional $2,500 to be
paid prior to January 31, 2008. At October 31, 2007 and January 31, 2007,
property, plant and equipment in the amount of $329 and $3,088 related to the
Motive Power Division was classified as held for sale. In addition, at October
31, 2007 and January 31, 2007, inventory in the amount of $3,869 and $3,869 was
also classified as held for sale.
The following is a summary of the net assets held for sale as of January
31, 2007 and as October 31, 2007, in respect of the sale of certain assets of
our Motive Power Division.
October 31, January 31,
2007 2007
---------------------------
Assets held for sale:
Inventories $ 3,869 $ 3,869
Property, plant and equipment, net 329 3,088
---------------------------
Total assets held for sale $ 4,198 $ 6,957
---------------------------
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The following summarizes the results of discontinued operations for the
three and nine months ended October 31, 2007 and 2006, respectively.
Three months ended Nine months ended
October 31, October 31,
2007 2006 2007 2006
----------------------------------------------------
Net sales $ 23,655 $ 60,119 $ 129,871 $ 181,848
----------------------------------------------------
Gross profit 1,688 12,184 22,472 36,746
----------------------------------------------------
Operating loss (4,567) (16,295) (8,774) (21,207)
----------------------------------------------------
Income tax (benefit) provision (1,862) 412 1,703 3,502
----------------------------------------------------
Loss from discontinued operations $ (2,305) $ (17,570) $ (12,267) $ (26,209)
----------------------------------------------------
The operating loss for the three and nine months ended October 31, 2007,
include a gain on the sale of the Power Electronics Division of approximately
$3,900 and severance, asset impairments and inventory obsolescence of
approximately $3,100 associated with the sale of certain assets of our Motive
Power Division. The operating loss for the three and nine months ended October
31, 2006, include a goodwill impairment charge of approximately $13,900 related
to the Power Electronics Division.
4. STOCK-BASED COMPENSATION
The Company granted 25,000 and 340,334 stock option awards during the
three and nine months ended October 31, 2007, and 28,000 and 123,000 during the
three and nine months ended October 31, 2006, respectively. Under the provisions
of SFAS No. 123R, the Company recorded $76 and $309, of stock compensation
related to stock option awards in its unaudited consolidated statement of
operations for the three and nine months ended October 31, 2007, and $23 and
$197 during the three and nine months ended October 31, 2006, respectively. The
impact on earnings per share for the three months ended October 31, 2007 and
2006 was less than $0.01. The impact on earnings per share for the nine months
ended October 31, 2007 and 2006 was $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 nine
months ended October 31, 2007, was $53 and $135, 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 nine months ended October 31, 2007 was $0
and $0, respectively, as management of the Company does not believe that the
performance criteria necessary to issue the March 12, 2007 performance shares
will be met. There were no restricted stock awards or performance shares granted
in prior periods.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The following table summarizes information about the stock options
outstanding at October 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
-----------------------------------------------------------------------------------------------------------
$ 4.25 - $ 6.26 395,534 7.8 Years $ 5.26 54,001 9.3 Years $ 6.00
$ 6.81 - $ 9.12 869,785 8.0 Years $ 7.59 853,451 8.0 Years $ 7.60
$ 9.80 - $ 14.50 213,724 5.5 Years $ 11.30 213,724 5.5 Years $ 11.30
$14.94 - $ 22.31 888,304 4.7 Years $ 18.79 888,304 4.7 Years $ 18.79
$26.76 - $ 35.00 194,750 3.4 Years $ 32.65 194,750 3.4 Years $ 32.65
$48.44 - $ 55.94 48,100 2.7 Years $ 54.39 48,100 2.7 Years $ 54.39
-----------------------------------------------------------------------------------------------------------
Total 2,610,197 6.2 Years $ 14.08 2,252,330 6.0 Years $ 15.49
===========================================================================================================
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 nine months
ended October 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 October 31, Nine months ended October 31,
2007 2006 2007 2006
---------------------------------------------------------------------------------------------------
Risk-free interest rate 4.25%-4.56% 4.57%-4.91% 4.25%-4.88% 4.57%-5.03%
Dividend yield 0.00% 0.00% 0.00% 0.00%-0.66%
Volatility factor 48.63%-48.84% 49.57%-50.73% 48.63%-49.45% 47.31%-54.25%
Expected lives 5.5 Years 6 Years 5-5.5 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.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 is currently evaluating the impact of SFAS No.
159 on its financial position and results of operations.
On December 4, 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" which improves reporting by creating greater consistency
in the accounting and financial reporting of business combinations, resulting in
more complete, comparable, and relevant information for investors and other
users of financial statements. To achieve this goal, the new standard requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of SFAS No. 141(R) on its financial position and
results of operations.
On December 4, 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements" which improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way as equity in the consolidated financial statements.
In addition, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by
requiring they be treated as equity transactions. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact of SFAS No. 160 on its financial position and results of
operations.
6. INVENTORIES
Inventories consisted of the following:
October 31, January 31,
2007 2007
--------------------------------------------------------------------------
Raw materials $ 14,092 $ 13,850
Work-in-process 23,423 14,970
Finished goods 33,937 24,352
--------------------------------------------------------------------------
Total $ 71,452 $ 53,172
--------------------------------------------------------------------------
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 SFAS No. 154, "Accounting Changes and Error
Corrections", the Company has retrospectively applied this change in method of
inventory costing.
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 Nine months
ended ended
October 31, October 31,
2006 2006
---------------------------
Statement of earnings data:
As originally reported- reclassified to present continuing operations
Cost of sales $ 62,133 $ 180,323
Operating income (loss) $ (163) $ 1,270
Income taxes provision (benefit) $ 163 $ (502)
Loss from continuing operations $ (3,102) $ (6,882)
Net loss $ (20,672) $ (33,091)
Basic loss per share- continuing operations $ (0.12) $ (0.27)
Diluted loss per share- continuing operations $ (0.12) $ (0.27)
Basic and diluted net loss per share $ (0.81) $ (1.29)
Effect of Change - Increase (decrease)
Cost of sales $ (2,857) $ (4,653)
Operating (loss) income $ 2,857 $ 4,653
Income taxes $ -- $ --
(Loss) income from continuing operations $ 2,857 $ 4,653
Net loss $ 2,857 $ 4,653
Basic (loss) earnings per share- continuing operations $ 0.11 $ 0.18
Diluted (loss) earnings per share- continuing operations $ 0.11 $ 0.18
Basic and diluted net loss per share $ 0.11 $ 0.18
As revised
Cost of sales $ 59,276 $ 175,670
Operating Income $ 2,694 $ 5,923
Income taxes $ 163 $ (502)
Loss from continuing operations $ (245) $ (2,229)
Net loss $ (17,815) $ (28,438)
Basic loss per share- continuing operations $ (0.01) $ (0.09)
Diluted loss per share- continuing operations $ (0.01) $ (0.09)
Basic and diluted net loss per share $ (0.70) $ (1.11)
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 $ 44,150
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 $ 53,172
Total assets $ 411,987
Retained earnings $ 82,251
Total liabilities and stockholders' equity $ 411,987
Nine
Months Ended
October 31,
2006
------------
Statement of Cash Flows data:
As originally reported- reclassified to present continuing operations
Net cash used in continuing operations $ (22,749)
Change in inventories $ (4,086)
Loss from continuing operations $ (6,882)
Effect of change
Net cash used in continuing operations $ 4,653
Change in inventories $ 4,653
Loss from continuing operations $ 4,653
As revised
Net cash used in continuing operations $ (18,096)
Change in inventories $ 567
Loss from continuing operations $ (2,229)
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 $8,376 and $17,697 ($8,376 and $17,697, net of tax) and an
increase in basic and diluted losses and a decrease in basic and diluted
earnings per share of approximately $0.33 and $0.69 for the three and nine
months ended October 31, 2007, respectively.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
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, the FIN No. 48 liability was reclassified and included within other
liabilities in the Company's consolidated balance sheet.
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 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.
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
Due to the Company's federal, state and foreign net operating loss
carryforwards, any future adjustments to the unrecognized tax benefit will have
an immaterial impact on the Company's effective tax rate due to the valuation
allowance, which fully offsets the tax benefit related to the net operating
losses. The Company does not expect its unrecognized tax benefit to change
significantly during the next twelve months.
Nine months ended
October 31,
2007 2006
--------------------------------------------------------------------------------------
Provision (benefit) for income taxes from continuing operations $ 1,281 $ (502)
Effective income tax rate 14.3% 16.2%
The effective tax rates for continuing operations were 14.3% and 16.2% for
the nine months ended October 31, 2007 and 2006, respectively. Tax expense in
the nine months ended October 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 nine months ended October 31, 2006 benefited from the adjustment of
approximately $300 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 nine months ended October 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 believes that the future use or the
amount if any of its loss carryforwards could be restricted as a result of
changes in ownership as defined by rules and limitations, set out in Section 382
of the Internal Revenue code. This would have no impact on the net deferred tax
assets recorded by the Company as a full valuation allowance has been
established against these net operating losses.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 Nine months ended
October 31, October 31,
2007 2006 2007 2006
-------------------------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per common share- weighted average
common share 25,666,838 25,628,845 25,659,627 25,570,763
Employee stock awards -- -- 21 --
Employee stock options -- -- 419 --
-------------------------------------------------
Dilutive potential common shares -- -- 440 --
-------------------------------------------------
Denominator for diluted earnings per common share - adjusted weighted
average common shares and assumed conversions 25,666,838 25,628,845 25,660,067 25,570,763
Due to a net loss in the three months ended October 31, 2007 and 2006,
1,052 and 34,790, 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 nine months ended October 31, 2006, 63,477 of dilutive
securities issuable in connection with stock option plans have been excluded
from the diluted loss per share calculation because their effect would be
anti-dilutive. Additionally, 20,120,932 of dilutive securities issuable in
connection with convertible bonds have been excluded from the diluted income per
share calculation for the nine months ended October 31, 2007, because their
effect would be anti-dilutive. During the nine months ended October 31, 2007,
there were 2,313,197 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 nine months ended October 31, 2007, the
(losses) earnings per share for discontinued operations and net income per share
was included regardless of its effect, because the income from continuing
operations was dilutive.
18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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%.
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 pursue
the litigation.
20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company accrues reserves for liabilities in its consolidated financial
statements and periodically reevaluates the reserved amounts for these
liabilities in view of the most current information available in accordance with
SFAS No. 5, "Accounting for Contingencies." As of October 31, 2007 and January
31, 2007, accrued environmental reserves totaled $1,591 and $2,192,
respectively, consisting of $868 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.
11. OPERATIONS BY REPORTABLE SEGMENT
As a result of the Company's sale of its Power Electronics Division and
certain assets of its Motive Power Divisions, the composition of the Company's
reportable segments has changed. The remaining activities following these
divestitures are included within our continuing operations, the Standby Power
Division.
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.
21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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.
October 31, January 31,
2007 2007
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
--------------------------------------------------------------------------
Commodity hedges $ 133 $ 133 $ 4,890 $ 4,890
Foreign exchange hedges $ -- $ -- $ 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. From time to time, the Company may enter into put options at the
time lead forward contracts are entered into to eliminate the risk of lead price
declines below the put option strike price. During the three and nine months
ended October 31, 2007, approximately $600 of expense was recorded in the
consolidated statement of operations related to put option expense.
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.
22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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:
Nine months ended
October 31,
2007 2006
-------------------------------------------------------------------------
Balance at beginning of period $ 7,760 $ 7,324
Current year provisions 7,960 5,091
Expenditures (4,610) (5,407)
Effect of foreign currency translation 2 5
-------------------------------------------------------------------------
Balance at end of period $ 11,112 $ 7,013
-------------------------------------------------------------------------
As of October 31, 2007, accrued warranty obligations of $11,112 include
$3,957 in current liabilities and $7,155 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.
23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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
October 31, October 31,
2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 382 $ 438 $ 31 $ 45
Interest cost 1,070 1,048 61 62
Expected return on plan assets (1,218) (1,212) -- --
Amortization of prior service costs 2 4 (5) (7)
Recognized actuarial loss/(gain) 425 528 (2) 1
-----------------------------------------------------------------------------------------
Net periodic benefit cost $ 661 $ 806 $ 85 $ 101
=========================================================================================
Pension Benefits Postretirement Benefits
------------------ -----------------------
Nine months ended Nine months ended
October 31, October 31,
2007 2006 2007 2006
-----------------------------------------------------------------------------------------
Components of net periodic benefit cost:
Service cost $ 1,147 $ 1,316 $ 92 $ 134
Interest cost 3,210 3,145 183 185
Expected return on plan assets (3,654) (3,637) -- --
Amortization of prior service costs 6 11 (16) (21)
Recognized actuarial loss/(gain) 1,275 1,584 (4) 3
Curtailment 22 13 -- (36)
Special termination benefit 173 -- --
-----------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,179 $ 2,432 $ 255 $ 265
=========================================================================================
The Company estimates that it will be required to make contributions of
approximately $1,763 to its pension plans for fiscal year 2008. The Company also
expects to make contributions totaling approximately $230 to the two Company
sponsored postretirement benefit plans during fiscal year 2008.
24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOIDATED 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 terminations 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 $22 and $560 in its financial statements during
the three and nine months ended October 31, 2007. These charges were included in
the cost of sales on the consolidated statement of operations. In addition, the
Company incurred approximately $200 of special pension termination benefits and
approximately $1,500 of other costs relating to the closure of Conyers.
On October 24, 2007, the Company announced the sale of certain assets of
its Motive Power Division. As a result of this decision, the Company recorded
severance accruals in the third quarter of $726 in its consolidated statement of
operations. These charges relate to workforce reductions of approximately 168
employees.
As a result of the divestitures of the Power Electronics Division and
Motive Power Division, the Company has taken additional actions to reduce
selling, general and administrative expenses. The Company recorded severance
accruals in the third quarter of fiscal year 2008 of $528 in its consolidated
statement of operations. These charges relate to workforce reductions of
approximately 30 employees.
A reconciliation of the beginning and ending severance liability and
related activity is shown below.
Balance at Balance at
January 31, Provision October 31,
2007 Additions Expenditures 2007
--------------------------------------------------------------------------
Severance $ 626 $ 1,814 $ 1,058 $ 1,382
--------------------------------------------------------------------------
Total $ 626 $ 1,814 $ 1,058 $ 1,382
==========================================================================
25
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 October 31, 2007, compared to Three Months Ended
October 31, 2006
On August 31, 2007, the Company completed the sale of its Power
Electronics Division for $85,000 and recognized a gain of approximately $3,900.
As a result of this decision and in accordance with SFAS No. 144 "Accounting for
the Impairment or Disposal of Long-Lived Assets", the Company presents the
results of operation of the Power Electronics Division for the three and nine
months ended October 31, 2007 and 2006, respectively, as discontinued
operations.
On October 24, 2007, the Company announced the sale of certain assets of
its Motive Power Division. As a result of this decision and in accordance with
SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets",
the Company presents the results of operation of the Motive Power Division for
the three and nine months ended October 31, 2007 and 2006, respectively, as
discontinued operations. The Company recorded severance of approximately $1,000,
fixed asset impairments of approximately $2,100 and approximately $1,100 in
inventory obsolescence in discontinued operations as a result of the sale. The
Company also recorded severance of approximately $250 within continuing
operations in the quarter ended October 31, 2007 as a result of corporate
down-sizing.
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 third 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 third quarter of fiscal year 2008 increased $20,664 or
29% to $91,253 from $70,589 in the third quarter of fiscal year 2007. This
increase resulted from increased pricing coupled with strong volume in the UPS
and cable markets.
Gross profit in the third quarter of fiscal year 2008 decreased $5,463 or
48% to $5,850 from $11,313. Margins decreased from 16.0% in the third quarter of
fiscal year 2007 to 6.4% in the third quarter of fiscal year 2008. Price
increases and benefits from the Company's cost reduction programs were more than
offset by higher raw material costs, principally lead, resins, copper and steel.
Average London Metal Exchange ("LME") prices increased from an average of $0.61
cents per pound in the third quarter of fiscal year 2007 to $1.52 per pound in
the third quarter of fiscal year 2008. Lead traded as high as $1.81 per pound on
October 15, 2007. Price increases to recover escalating lead costs continued to
lag these higher raw material costs. Based upon our contractual pricing
mechanisms and business practices, we currently estimate that there is a lag of
up to six months before we fully recover pricing from these activities.
Accordingly, in a period of rising lead costs we would expect our gross margins
and results to be adversely impacted. Gross margins were also impacted by
restructuring activities during the quarter including the closure of our
Conyers, Georgia facility and other headcount actions.
Selling, general and administrative expenses in the third quarter of
fiscal year 2008 increased $1,376 or 19% to $8,563 from $7,187 primarily as a
result of higher warranty accruals in the amount of approximately $423 as a
result of higher sales, commission expense of approximately $200 as a result of
higher sales, an increase in severance of approximately $400 and higher wages
and fringe benefits compared to the prior year. As a percentage of sales
selling, general and administrative expenses were 9.4% and 10.2% in the third
quarter of fiscal 2008 and 2007, respectively.
Research and development expenses in the third quarter of fiscal year 2008
increased $293 or 20% to $1,725 from $1,432. As a percentage of sales, research
and development expenses decreased from 2.0% in the third quarter of fiscal year
2007 to 1.9% in the third quarter of fiscal year 2008.
In the third quarter of fiscal year 2008, the Company had an operating
loss from continuing operations in the amount of $4,438 as compared to operating
income of $2,694 in the comparable period of the prior fiscal year.
26
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
Third Quarter of Fiscal Year 2008 vs. Third Quarter of Fiscal Year 2007
-------------------------------------------------------------------------
Operating income - third quarter of fiscal year 2007 $ 2,694
Lead costs, net (20,463)
Price / volume 13,282
Severance (425)
Conyers closure (1,386)
Warranty (423)
Other net, including cost reduction programs 2,283
-------------------------------------------------------------------------
Operating loss - third quarter of fiscal year 2008 $ (4,438)
=========================================================================
Interest expense, net in the third quarter of fiscal year 2008 decreased
$694 or 27% to $1,880 from $2,574 in the third quarter of fiscal year 2007,
primarily due to a lower effective interest rate resulting from last year's
convertible notes refinancing.
Other income was $1,181 in the third quarter of fiscal year 2008 compared
to other expense of $258 in the third quarter of fiscal year 2007. The
difference was primarily due to $1,243 of foreign exchange gains in the third
quarter of fiscal year 2008 compared to $604 of foreign exchange losses in the
third quarter of fiscal year 2007.
Income tax expense from continuing operations of $2,186 was recorded in
the third quarter of fiscal year 2008, compared to $163 in the third quarter of
fiscal year 2007. Tax expense in the third 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 third quarter of fiscal year 2008, the joint venture partners share of
losses were $330 compared to $56 in the third quarter of fiscal year 2007.
As a result of the above, a loss from continuing operations of $6,993 was
recorded in the third quarter of fiscal year 2008 as compared to a loss of $245
in the prior year.
Discontinued operations
Loss from discontinued operations before income taxes was $4,167 in the
third quarter of fiscal year 2008 as compared to $17,158 in the third quarter of
fiscal year 2007. Income tax benefit from discontinued operations of $1,862 was
recorded in the third quarter of fiscal year 2008, compared to income tax
expense of $412 in the third quarter of fiscal year 2007. Net loss from
discontinued operations for the three months ended October 31, 2007 was $2,305
compared to $17,570 in the comparable period of the prior fiscal year. The third
quarter of fiscal year 2008 included one month of activity for the Power
Electronics Division as compared to three months in the comparable period of the
prior fiscal year. Additionally, the third quarter of fiscal year 2008 included
a gain of approximately $3,900 related to the sale of our Power Electronics
Division and severance and fixed asset impairments of approximately $3,100
related to the sale of certain assets of our Motive Power Division. The third
quarter of fiscal year 2007 included a goodwill impairment within the Power
Electronics Division in the amount of $13,947.
As a result of the above, a net loss of $9,298 was recorded as compared to
a net loss of $17,815 in the prior year. On a per share basis, the net loss from
continuing operations was $0.27 in the third quarter of fiscal year 2008
compared to a net loss of $0.01 in the third quarter of fiscal year 2007, basic
and diluted, respectively. The net loss from discontinued operations was $0.09
compared to $0.69 in the third quarter of fiscal year 2007, basic and fully
diluted. The net loss on a per share basis was $0.36 compared to $0.70 in the
third quarter of fiscal year 2007, basic and diluted.
27
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 increased by $15,766 in the third quarter of
fiscal year 2008 to $26,659 from a loss of $10,893 in the third quarter of
fiscal year 2007. This increase was due to a foreign currency translation loss
of $14,933 in the third quarter of fiscal year 2008 as compared to a gain of $3
in the comparable period of the prior fiscal year, coupled with an unrealized
loss on derivative instruments in the amount of $2,939 in the third quarter of
fiscal year 2008 as compared to a gain of $6,919 in the third quarter of fiscal
year 2007. These increases in comprehensive loss were partially offset by a
decrease in the net loss from $17,815 in the third quarter of fiscal year 2007
to $9,298 in the third quarter of fiscal year 2008, coupled with an adjustment
to recognize pension liability and net periodic pension costs in the amount of
$511 in the third quarter of fiscal year 2008.
Nine Months Ended October 31, 2007, compared to Nine months Ended October
31, 2006
Continuing operations
Net sales for the nine months ended October 31, 2007 increased $41,129 or
20% to $251,586 from $210,457 in the nine months ended October 31, 2006. This
increase resulted from increased pricing and strong volume in the UPS and cable
markets.
Gross profit for the nine months ended October 31, 2007 decreased $6,140
or 18% to $28,647 from $34,787. Margins decreased from 16.5% in fiscal year 2007
to 11.4% in fiscal year 2008. 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 $0.55 cents per pound in the nine months ended
October 31, 2006 to $1.18 per pound in the nine months ended October 31, 2007.
Based upon our contractual pricing mechanisms and business practices, we
currently estimate that there is a lag of up to six months before we fully
recover pricing from these activities. Accordingly, in a period of rising lead
costs we would expect our gross margins and results to be adversely impacted.
Nine months ended October 31, 2007 results included severance costs and other
costs associated with the closure of the Company's Conyers, Georgia facility of
approximately $2,400.
Selling, general and administrative expenses for the nine months ended
October 31, 2007, increased $1,839 or 8% to $25,820 from $23,981. The increase
is primarily due to a higher warranty accrual in the amount of $825, primarily
as a result of the increase in sales, increased commissions of approximately
$250 also related to the increase in sales and higher wages and fringe benefits
compared to the prior year. As a percentage of sales selling, general and
administrative expenses were 10.3% and 11.4% in the nine months ended October
31, 2007 and 2006, respectively.
Research and development expenses for the nine months ended October 31,
2007 increased $66 or 1% to $4,949 from $4,883. As a percentage of sales,
research and development expenses decreased from 2.3% in the nine months ended
October 31, 2006 to 2.0% in the nine months ended October 31, 2007.
During the nine months ended October 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 first nine months of
fiscal year 2008 was $13,040 compared to $5,923 for the first nine months of
fiscal year 2007.
28
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 from continuing operations
Nine months ended October 31, 2007 vs. nine months ended October 31, 2006
-------------------------------------------------------------------------
Operating income nine months ended October 31, 2006 $ 5,923
Lead costs, net (33,092)
Price / volume 24,638
Gain on sale of Shanghai, China plant 15,162
Conyers closure (2,395)
Warranty (838)
Fiscal year 2007 management changes 1,025
Fiscal 2008 severance (425)
Other net, including cost reduction programs 3,042
-------------------------------------------------------------------------
Operating income nine months ended October 31, 2007 $ 13,040
=========================================================================
Interest expense, net for the nine months ended October 31, 2007,
decreased $1,860 or 23% to $6,190 from $8,050 in the nine months ended October
31, 2006, primarily due to a lower effective interest rate resulting from last
year's convertible notes refinancing.
Other income was $2,120 for the nine months ended October 31, 2007,
compared to other expense of $975 in the nine months ended October 31, 2006. The
difference was primarily due to $2,513 of foreign exchange gains in fiscal year
2008 compared to $976 of foreign exchange losses in fiscal year 2007.
Income tax expense from continuing operations of $1,281 was recorded in
the nine months ended October 31, 2007, compared to an income tax benefit of
$502 in the nine months ended October 31, 2006. Tax expense in the nine months
ended October 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 nine months ended October 31, 2007, the minority interest expense was
$3,672 compared to a benefit of $371 in the nine months ended October 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 $4,017 was
recorded in the nine months ended October 31, 2007 as compared to a loss of
$2,229 in the comparable period of the prior fiscal year.
Discontinued operations
Loss from discontinued operations before income taxes was $10,564 for the
nine months ended October 31, 2007 compared to a loss of $22,707 for the nine
months ended October 31, 2006. Income tax expense from discontinued operations
of $1,703 was recorded, compared to $3,502 for the nine months ended October 31,
2006, basic and diluted. Net loss from discontinued operations for the nine
months ended October 31, 2007 was $12,267 compared to $26,209 in the comparable
period of the prior fiscal year. Fiscal year 2008 included seven months of
activity for the Power Electronics Division as compared to nine months in the
comparable period of the prior fiscal year. Fiscal year 2007 included a goodwill
impairment within the Power Electronics Division in the amount of $13,947.
As a result of the above, a net loss of $8,250 was recorded as compared to
a net loss of $28,438 in the prior fiscal year. On a per share basis, the net
income from continuing operations was $0.16 for basic and diluted compared to a
net loss of $0.09 for the nine months ended October 31, 2006. The net loss for
discontinued operations was $0.48 for basic and diluted compared to a net loss
of $1.02 for the nine months ended October 31, 2006, basic and diluted. Net loss
on a per share basis was $0.32 basic and diluted, compared to a net loss of
$1.11 in the prior year, basic and diluted.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Other Comprehensive Loss
Other comprehensive loss decreased by $2,022 in the nine months ended
October 31, 2007 to $26,082 from a loss of $28,104 in the nine months ended
October 31, 2006. This decrease was due to a decrease in the net loss from
$28,438 in fiscal year 2007 to $8,250 in fiscal year 2008, coupled with an
adjustment to recognize pension liability and net periodic pension costs in the
amount of $1,361 in fiscal year 2008. These decreases in comprehensive loss were
partially offset by a foreign currency translation loss of $13,957 in the nine
months ended October 31, 2007 as compared to a gain of $442 in the comparable
period of the prior fiscal year, coupled with an unrealized loss on derivative
instruments in the amount of $5,236 in fiscal year 2008 as compared to a loss of
$108 in fiscal year 2007.
Liquidity and Capital Resources
Net cash used in operating activities from continuing operations was
$31,835 for the nine months ended October 31, 2007, compared to $18,096 in the
comparable period of the prior fiscal year. The cash use is primarily
attributable to higher working capital investments required to fund escalating
lead costs. The increase is a result of inventory increases attributable to
higher lead and other raw material costs, an increase in cash used for accounts
receivable due primarily to an increase in sales, driven by both pricing and
volume partially offset by higher accounts payable balances.
Net cash used in discontinued operations was $1,249 in the nine months
ended October 31, 2007. In the nine months ended October 31, 2006, net cash
provided by discontinued operations was $4,963.
Net cash provided by continuing investing activities was $80,877 during
the nine months ended October 31, 2007 as compared to net cash used in
continuing investing activities of $15,408 during the nine months ended October
31, 2006. During the nine months ended October 31, 2007, we received $85,000
from Murata for the Power Electronics Division as well as $700 from Crown for
certain assets of the Motive Power Division. Further proceeds of approximately
$6,700 are expected to be received in connection with the sale of Motive Power
assets over the next six months.
Net cash used in discontinued investing activities was $298 and $4,091 in
the nine months ended October 31, 2007 and 2006, respectively.
Net cash used in continuing financing activities was $22,964 during the
nine months ended October 31, 2007 as compared to cash provided by continuing
financing activities of $21,942 in the comparable period of the prior fiscal
year. Subsequent to the sale of the Power Electronics Division, the Company paid
off the balance of its U.S. revolving line of credit. Proceeds from borrowings
under the Company's revolving credit facility were the primary source of cash
provided by financing activities in fiscal year 2007. The primary purpose of the
new borrowings was to fund continued and discontinued operations.
Net cash used in discontinued financing activities for the nine months
ended October 31, 2007 and 2006 was $5,212 and $780, 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 October 31, 2007, the maximum availability calculated under the
borrowing base was $51,699, of which $0 was funded, and $5,317 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.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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 nine 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 $9,000 to $12,000, for similar purposes as well as the move
of manufacturing from Conyers, Georgia to Leola, Pennsylvania.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of October 31, 2007:
Payments Due by Period
-------------------------------------------------------
Less than 1 - 3 4 - 5 After
Contractual Obligations Total 1 year years years 5 years
- ----------------------------------------------------------------------------------------------
Notes $ 129,500 $ -- $ -- $ -- $ 129,500
Interest payable on notes $ 131,295 $ 6,935 $ 13,870 $ 13,870 $ 96,620
Operating leases $ 8,684 $ 1,866 $ 3,221 $ 1,106 $ 2,491
Lead commitments $ 272,902 $ 82,058 $ 96,717 $ 94,127 $ --
- ----------------------------------------------------------------------------------------------
Total contractual cas obligations $ 542,381 $ 90,859 $113,808 $109,103 $ 228,611
==============================================================================================
Amount of Commitment Expiration per Period
-------------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After
Other Commercial Commitments Committed 1 year years years 5 years
- ----------------------------------------------------------------------------------------------
Standby letters of credit $ 5,317 $ 4,759 $ 558 $ -- $ --
- ----------------------------------------------------------------------------------------------
Total commercial commitments $ 5,317 $ 4,759 $ 558 $ -- $ --
- ----------------------------------------------------------------------------------------------
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 is currently evaluating the impact of SFAS No.
159 on its financial position and results of operations.
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
On December 4, 2007, the FASB issued SFAS No. 141 (revised 2007),
"Business Combinations" which improves reporting by creating greater consistency
in the accounting and financial reporting of business combinations, resulting in
more complete, comparable, and relevant information for investors and other
users of financial statements. To achieve this goal, the new standard requires
the acquiring entity in a business combination to recognize all (and only) the
assets acquired and liabilities assumed in the transaction; establishes the
acquisition-date fair value as the measurement objective for all assets acquired
and liabilities assumed; and requires the acquirer to disclose to investors and
other users all of the information they need to evaluate and understand the
nature and financial effect of the business combination. SFAS No. 141(R) is
effective for fiscal years beginning after December 15, 2008. The Company is
currently evaluating the impact of SFAS No. 141(R) on its financial position and
results of operations.
On December 4, 2007, the FASB issued SFAS No. 160, "Noncontrolling
Interests in Consolidated Financial Statements" which improves the relevance,
comparability, and transparency of financial information provided to investors
by requiring all entities to report noncontrolling (minority) interests in
subsidiaries in the same way as equity in the consolidated financial statements.
In addition, SFAS No. 160 eliminates the diversity that currently exists in
accounting for transactions between an entity and noncontrolling interests by
requiring they be treated as equity transactions. SFAS No. 160 is effective for
fiscal years beginning after December 15, 2008. The Company is currently
evaluating the impact of SFAS No. 160 on its financial position and results of
operations.
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, acquisitions 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;
32
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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;
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 impact of any changes in our management;
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.
33
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 batteries. 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.
34
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
---------------------------------------------------------------------------------------------------------------
August 1 - August 31, 2007 -- $ -- -- 1,000,000
September 1 - September 30, 2007 791 $ 5.06 -- 1,000,000
October 1 - October 31, 2007 -- $ -- -- 1,000,000
------------------------------------------------ ------------------
Total 791 --
================================================ ==================
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.
35
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 10-Q 7/31/07 10.1
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 Asset Purchase Agreement dated October 24, 2007, 8-K 10/24/07 10.1
between C&D Technologies, Inc. and Crown Battery
Manufacturing Co.
18.1 Letter dated September 7, 2007 regarding change in 10-Q 7/31/07 18.1
accounting principles
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
36
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
December 6, 2007 By: /s/ Jeffrey A. Graves
----------------------------------
Jeffrey A. Graves
President, Chief Executive
Officer and Director
(Principal Executive Officer)
December 6, 2007 By: /s/ Ian J. Harvie
----------------------------------
Ian J. Harvie
Vice President Finance
and Chief Financial Officer
(Principal Financial Officer)
December 6, 2007 By: /s/ Neil E. Daniels
----------------------------------
Neil E. Daniels
Vice President Corporate
Controller and Treasurer
(Principal Accounting Officer)
37
EXHIBIT INDEX
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Section 1350 Certification of the President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Section 1350 Certification of the Vice President and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
38