-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KG0X1tKLX7NTPTdblg0zXdc+030sQRdUJ6OHarkZlEtiekyGeM82Tee9GZWsh7XS mXyvUHnZvUzQMU3TM6gUtQ== 0000808064-06-000046.txt : 20060502 0000808064-06-000046.hdr.sgml : 20060502 20060502151832 ACCESSION NUMBER: 0000808064-06-000046 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20060131 FILED AS OF DATE: 20060502 DATE AS OF CHANGE: 20060502 FILER: COMPANY DATA: COMPANY CONFORMED NAME: C&D TECHNOLOGIES INC CENTRAL INDEX KEY: 0000808064 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS ELECTRICAL MACHINERY, EQUIPMENT & SUPPLIES [3690] IRS NUMBER: 133314599 STATE OF INCORPORATION: DE FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K/A SEC ACT: 1934 Act SEC FILE NUMBER: 001-09389 FILM NUMBER: 06799253 BUSINESS ADDRESS: STREET 1: 1400 UNION MEETING ROAD STREET 2: PO BOX 3053 CITY: BLUE BELL STATE: PA ZIP: 19422 BUSINESS PHONE: 2156192700 MAIL ADDRESS: STREET 1: 1400 UNION MEETING ROAD STREET 2: PO BOX 3053 CITY: BLUE BELL STATE: PA ZIP: 19422 10-K/A 1 form10kafy2006.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (Amendment No. 1) |X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2006 or |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-9389 C&D TECHNOLOGIES, INC. (Exact name of Registrant as specified in its Charter) State or other jurisdiction of incorporation or organization: Delaware I.R.S. Employer Identification Number: 13-3314599 Address of principal executive offices: 1400 Union Meeting Road Blue Bell, Pennsylvania 19422 Registrant's telephone number, including area code: (215) 619-2700 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange Title of Class on which registered -------------- ------------------- Common Stock, par value $.01 per share New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act Yes |_| No |X| Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act Yes |_| No |X| Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K |_| Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check One): Large accelerated filer Accelerated filer |X| Non-accelerated filer Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes |_| No|X| Aggregate market value of the voting and non-voting common equity held by nonaffiliates of the Registrant, based on the closing price on July 31, 2005: $252,802,496 Number of shares outstanding of each of the Registrant's classes of common stock as of March 31, 2006: 25,528,926 shares of Common Stock, par value $.01 per share. Documents incorporated by reference: Part III - Portions of Registrant's Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of Registrant's fiscal year covered by this Form 10-K. EXPLANATORY NOTE C&D Technologies, Inc. hereby amends its Annual Report on Form 10-K for the fiscal year ended January 31, 2006 (the "Form 10-K") (filed on April 10, 2006) as set forth in this Annual Report on Form 10-K/A (Amendment No. 1) (the "Form 10-K/A"). This Form 10-K/A includes an amendment to the following section of the Form 10-K: Pages 27-39. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. The only change is to correct tabular information presented on page 32. Except as described above, no other changes have been made to the original Form 10-K, and this Form 10-K/A does not amend, update or change the financial statements or any other Items or disclosures in the original Form 10-K. This Form 10-K/A does not reflect events occurring after the filing of the Form 10-K or modify or update those disclosures, including any exhibits to the Form 10-K affected by subsequent events. Information not affected by the changes described above is unchanged and reflects the disclosures made at the time of the original filing of the Form 10-K on April 10, 2006. Accordingly, this Form 10-K/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-K, including any amendments to those filings. 1 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations All dollar amounts in this Item 7 are in thousands, except per share amounts and per pound lead amounts. Overview During fiscal year 2006, major items that impacted our financial results include: (i) non-cash pre-tax intangible assets, goodwill and fixed asset impairment charges totaling $35,880 related to our Power Electronics Division and non-cash fixed asset impairment charges of $2,641 related to our Motive Power Division; (ii) the increased cost of lead, which had a significant negative impact on the results of our Standby Power and Motive Power divisions; and (iii) the acquisitions and associated financial results of Celab, Datel and CPS, which are included in the results of operations of the Power Electronics division for the entire year. Impact of Economy and Shift in Customer Demand During fiscal year 2006, our Standby Power Division experienced higher demand for products sold to the telecommunication markets, while demand for our Standby Power products sold into the UPS markets softened. Demand for our Motive Power products declined slightly while demand increased in the Power Electronics Division, after adjusting for prior year acquisitions. Raw Material Pricing and Productivity Lead, steel, copper, plastics and electronic components are the major raw materials used in the manufacture of our industrial batteries and electronics products and, accordingly, represent a significant portion of our materials costs. During fiscal years 2006, 2005 and 2004, the average London Metals Exchange (LME) price per pound of lead was as follows:
Fiscal 2006 2005 2004 ========================================================================================= Average annual LME price per pound of lead $ 0.45 $ 0.41 $0.25 Lowest average monthly LME price per pound of lead $ 0.39 $ 0.34 $0.20 Highest average monthly LME price per pound of lead $ 0.57 $ 0.44 $0.34
2 Lead represented approximately 20% of our consolidated cost of sales for the fiscal year 2006. Lead traded as high as $0.657 per pound on February 2, 2006. The increase in lead market price has negatively impacted our financial results in recent periods. We historically have not been able to fully offset the effects of higher costs of raw materials through price increases to customers or by way of productivity improvements. We estimate that a variation of $0.01 per pound of lead changes materials costs by approximately $1,500 for our Standby Power and Motive Power divisions. Inflation The cost to C&D of manufacturing materials and labor and most other operating costs are affected by inflationary pressures. All of our raw materials prices, including lead, steel, copper and resins, as well as fuel costs, continued to rise in fiscal year 2006, and we generally have not been able to fully offset these higher prices through selective price increases. We believe that, over recent years, we have been able to offset inflationary cost increases on most items other than lead by: o effective raw materials purchasing programs; o increases in labor productivity; o improvements in overall manufacturing efficiencies; and o selective price increases of our products. Results of Operations The following table sets forth selected items in C&D's consolidated statements of operations as a percentage of sales for the periods indicated.
Fiscal 2006 2005 * 2004 ========================================================================================================= NET SALES 100.0% 100.0% 100.0% - --------------------------------------------------------------------------------------------------------- COST OF SALES 83.3 83.9 76.4 - --------------------------------------------------------------------------------------------------------- GROSS PROFIT 16.7 16.1 23.6 OPERATING EXPENSES: Selling, general and administrative expenses 12.4 11.5 12.5 Research and development expenses 5.1 4.5 2.9 Identifiable intangible asset impairment 4.0 0.1 -- Goodwill impairment 2.8 17.9 -- - --------------------------------------------------------------------------------------------------------- OPERATING (LOSS) INCOME (7.6) (17.9) 8.2 - --------------------------------------------------------------------------------------------------------- Interest expense, net 2.1 1.2 0.4 Other expense, net 0.0 0.4 0.5 - --------------------------------------------------------------------------------------------------------- (LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (9.7) (19.5) 7.3 Provision (benefit) for income taxes 2.5 (5.2) 2.7 - --------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME BEFORE MINORITY INTEREST (12.2) (14.3) 4.6 Minority interest 0.0 0.0 0.0 - --------------------------------------------------------------------------------------------------------- NET (LOSS) INCOME (12.2)% (14.3)% 4.6% =========================================================================================================
* Reclassified for comparative purposes. 3 Critical Accounting Policies We have identified the critical accounting policies that are most important to the portrayal of our financial condition and results of operations. The policies set forth below require management's most subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Revenue Recognition C&D recognizes revenue when the earnings process is complete. This occurs when products are shipped to the customer in accordance with terms of the agreement, title and risk of loss have been transferred, collectibility is reasonably assured and pricing is fixed or determinable. Accruals are made for sales returns and other allowances based on our experience. While returns have historically been minimal and within the provisions established, we cannot guarantee that we will continue to experience the same return rates that we have in the past. Allowance for Doubtful Accounts C&D maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required. Inventory Reserves C&D adjusts the value of its obsolete and unmarketable inventory to the estimated market value based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Valuation of Long-lived Assets We assess the impairment of long-lived assets when events or changes in circumstances indicate that the carrying value of the assets or the asset grouping may not be recoverable. Factors we consider in deciding when to perform an impairment review include significant under-performance of a business or product line in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in our use of the assets. Recoverability of assets that will continue to be used in our operations is measured by comparing the carrying amount of the asset grouping to the related total future net cash flows. If an asset grouping's carrying value is not recoverable through those cash flows, the asset grouping is considered to be impaired. The impairment is measured by the difference between the assets' carrying amount and their fair value, based on the best information available, including market prices or discounted cash flow analyses. Impairment of Goodwill Goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations. Goodwill and other "indefinite-lived" assets are not amortized and are subject to the impairment rules of SFAS No. 142, "Goodwill and Other Intangible Assets." Goodwill is tested for impairment on an annual basis or upon the occurrence of certain circumstances or events. C&D determines the fair value of its reporting units using a combination of financial projections and discounted cash flow techniques adjusted for risk characteristics, also giving consideration to C&D's overall market capitalization. The fair market value of the reporting units is compared to the carrying value of the reporting units to determine if an impairment loss should be calculated. If the book value of a reporting unit exceeds the fair value of the reporting unit, an impairment loss is indicated. The loss is calculated by comparing the fair value of the goodwill to the book value of the goodwill. If the book value of the goodwill exceeds the fair value of the goodwill, an impairment loss is recorded. Fair value of goodwill is determined by subtracting the fair value of the identifiable assets of a reporting unit from the fair value of the reporting unit. 4 Deferred Tax Valuation Allowance C&D records a valuation allowance to reduce its deferred tax assets to the amount that is more likely than not to be realized. While we have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event C&D was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. Likewise, should we determine that C&D would not be able to realize all or part of its net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made. Warranty Reserves C&D provides for the estimated cost of product warranties at the time revenue is recognized. While we engage in extensive product quality programs and processes, including actively monitoring and evaluating the quality of our suppliers' products and processes, C&D's warranty obligation is affected by product failure rates, warranty replacement costs and service delivery costs incurred in correcting a product failure. Should actual product failure rates, warranty replacement costs or service delivery costs differ from our estimates, revisions to the estimated warranty liability would be made. Pension and Other Employee Benefits Certain assumptions are used in the calculation of the actuarial valuation of our defined benefit pension plans and postretirement benefits. These assumptions include the weighted average discount rate, rates of increase in compensation levels, expected long-term rates of return on assets and increases or trends in health care costs. If actual results are less favorable than those projected by management, additional expense may be required. Litigation and Environmental Reserves C&D is involved in litigation in the ordinary course of business, including personal injury, property damage and environmental litigation. We also expend funds for environmental remediation of both company-owned and third-party locations. In accordance with SFAS No. 5, "Accounting for Contingencies" and Statement of Position 96-1, "Environmental Remediation Liabilities," we record a loss and establish a reserve for litigation or remediation when it is probable that an asset has been impaired or a liability exists and the amount of the liability can be reasonably estimated. Reasonable estimates involve judgments made by management after considering a broad range of information including: notifications, demands or settlements that have been received from a regulatory authority or private party, estimates performed by independent engineering companies and outside counsel, available facts, existing and proposed technology, the identification of other PRPs, their ability to contribute and prior experience. These judgments are reviewed quarterly as more information is received and the amounts reserved are updated as necessary. However, the reserves may materially differ from ultimate actual liabilities if the loss contingency is difficult to estimate or if management's judgments turn out to be inaccurate. If management believes no best estimate exists, the minimum loss is accrued. Research and Development Research and development costs are expensed as incurred. Research and development costs consist of direct and indirect internal costs related to specific projects. The cost of materials (whether from our normal inventory or acquired specially for research and development activities) and equipment or facilities that are acquired or constructed for research and development activities and that have alternative future uses (in research and development projects or otherwise) are capitalized as tangible assets when acquired or constructed. The cost of such materials consumed in research and development activities and the depreciation of such equipment or facilities used in those activities are recorded as research and development costs. 5 Fiscal 2006 Compared to Fiscal 2005 All comparisons are with the corresponding periods in the previous year, unless otherwise stated. Net sales for fiscal year 2006 increased $82,669 or 20% to $497,407 from $414,738 in fiscal year 2005. This increase resulted primarily from the acquisitions of Celab, Datel and CPS, for which a full year of sales was recorded in fiscal year 2006. Sales of the Power Electronics Division increased $74,759 or 67%, primarily due to the acquisitions. In the prior fiscal year, C&D owned Celab for eight months, Datel for seven months and CPS for four months. Sales by the Standby Power Division increased $10,478 or 4%, primarily due to increased sales in the telecom market, partially offset by lower sales to the UPS market. Motive Power divisional sales decreased $2,568 or 4%, primarily due to lower sales of both batteries and chargers. Gross profit for fiscal year 2006 increased $16,250 or 24% to $82,908 from $66,658. Margins increased to 16.7% from 16.1% in the prior year. Gross profit in the Power Electronics Division increased $7,921, primarily due to the results of the prior year acquisitions, partially offset by the current year charges for fixed asset impairments. Gross profit in the Standby Power and Motive Power divisions increased $5,774 and $2,555, respectively. These variances are due primarily to the fixed asset impairments and environmental clean-up charges incurred in the prior year, coupled with the re-evaluation of those environmental clean-up charges in the current year. The benefit of these prior year charges was partially offset by an increase in the cost of lead of approximately $9,697 and fixed asset impairments in the Motive Power Division. Selling, general and administrative expenses for fiscal year 2006 increased $14,332 or 30%. This increase was primarily due to increased selling and general and administrative expenses of $6,770 due to the acquisitions, increased severance and related costs of $3,380, higher Sarbanes-Oxley compliance costs of $918, principally attributable to the Company's fiscal 2005 acquisitions, and higher warranty expenses of $2,253 in the Standby and Motive Power divisions. Research and development expenses for fiscal year 2006 increased $6,487 or 35%. As a percentage of sales, research and development expenses increased from 4.5% during fiscal year 2005 to 5.1% during fiscal year 2006. The increase was primarily due to the full year impact of the Celab, Datel and CPS acquisitions. During the third quarter of the year, the Company conducted impairment tests of its goodwill and intangible assets, due to the existence of recurring realized and anticipated operating results below forecasted results in the Power Electronics Division. As a result of the impairment test performed during the third quarter of fiscal year 2006, the Company recorded charges to expense for impairments of intangible assets and goodwill of $20,045 and $13,674, respectively. The prior impairment test was the result of our annual assessment conducted in the fourth quarter of fiscal year 2005, and resulted in a goodwill impairment charge of $74,233 and an intangible asset impairment charge of $464. Operating loss for fiscal year 2006 decreased $36,409 or 49% to an operating loss of $37,751 from an operating loss of $74,160 in fiscal year 2005. Below is a summary of key items affecting operating (loss) income for fiscal year 2006: 6 Analysis of Change in Operating (Loss) Income
Standby Power Motive Power Electronics Power Fiscal Year 2006 vs. 2005 Division Division Division Consolidated ================================================================================================================= Operating income (loss) - fiscal 2005 $ 9,211 $(71,703) $(11,668) $(74,160) Lead - increased costs (7,764) -- (1,933) (9,697) Fiscal 2006 fixed asset impairment -- (2,161) (2,641) (4,802) Fiscal 2005 fixed asset impairment 6,407 -- 3,195 9,602 Fiscal 2006 intangible asset impairment -- (20,045) -- (20,045) Fiscal 2005 intangible asset impairment -- 464 -- 464 Fiscal 2006 goodwill impairment -- (13,674) -- (13,674) Fiscal 2005 goodwill impairment -- 74,233 -- 74,233 Fiscal 2006 environmental liability estimate change 2,481 -- 1,023 3,504 Fiscal 2005 environmental accrual 2,481 -- 1,400 3,881 Fiscal 2006 management changes - severance/executive search fees (1,528) (1,353) (499) (3,380) Sarbanes-Oxley costs - decrease (increase) 56 (997) 23 (918) Increase in Standby and Motive warranty expense (1,201) -- (1,052) (2,253) Fiscal 2006 - RoHS compliance -- (2,684) -- (2,684) Fiscal 2006 - PED assimilation charges -- (770) -- (770) Fiscal 2005 Reynosa transition costs 599 -- 827 1,426 Pricing, volume, mix and other 1,898 (1,831) 1,455 1,522 - ---------------------------------------------------------------------------------------------------------------- Operating income (loss) fiscal 2006 $ 12,640 $(40,521) $ (9,870) $(37,751) =================================================================================================================
Interest expense, net, increased $5,472 in fiscal year 2006, primarily due to higher debt levels resulting from fiscal year 2005 acquisitions and refinancing activities that occurred during the year, resulting in higher interest rates compared to the prior fiscal year. Income tax expense of $12,362 was recorded in fiscal year 2006, compared to an income tax benefit of $21,289 in fiscal year 2005. The increase income tax expense in fiscal year 2006 is primarily due to the following items: o The valuation allowance related to domestic, state and foreign deferred tax assets increased by an additional $13,411 in fiscal year 2006 compared to fiscal year 2005; o The $8,614 write-off of deferred tax assets related to C&D's investment in several foreign subsidiaries; o The reduction of $2,154 in the tax benefit related to foreign tax credits taken in prior years due to the current year domestic net operating loss; o An increase in tax expense of $2,212 due to a combination of domestic losses for which no tax benefit is recorded and tax expense in certain profitable foreign jurisdictions, along with the lack of foreign tax credits related to current year repatriated earnings due to the domestic net operating loss; and o An increase of $11,882 in tax expense due to the lower pre-tax book loss in fiscal year 2006. These items are partially offset by a $2,731 decrease in the tax effect of the impairments of goodwill and intangible assets in certain jurisdictions. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by C&D. In the current year, the joint venture had minority interest of $83 at the Shanghai facility compared to a minority interest of $(5) in fiscal year 2005. As a result of all of the above, a net loss was recorded of $60,662 compared to a net loss of $59,493 in the prior year. On a per share basis, net loss was $2.39 compared to a net loss of $2.35 - basic and fully diluted for fiscal years 2006 and 2005, respectively. 7 Other Comprehensive Loss Other comprehensive loss increased from $57,477 in fiscal year 2005 to $77,813 in fiscal year 2006, primarily due to the recording of a minimum pension liability adjustment of $24,661, partially offset by an unrealized gain on derivative instruments of $7,813 related to lead hedges. Fiscal 2005 Compared to Fiscal 2004 All comparisons are with the corresponding periods in the previous year, unless otherwise stated. Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we acquired Celab, based in Hampshire, United Kingdom, a provider of power conversion products, predominately sold into military, CATV and telecommunications applications in Europe. On June 30, 2004, we acquired Datel, a Mansfield, Massachusetts-based manufacturer of DC to DC converters, data acquisition components and digital meters. On September 30, 2004, we acquired the Power Systems division of Celestica, Inc., which we now operate as "CPS," a Toronto, Ontario-based company. CPS develops DC to DC converters and AC to DC power supplies which are sold on a direct basis to large computing and communications OEMs. For reporting purposes, these three acquisitions are part of the Power Electronics Division. Net sales for fiscal year 2005 increased $89,914 or 28% to $414,738 from $324,824 in fiscal year 2004. This increase resulted primarily from the aforementioned acquisitions coupled with improved customer demand for products of all three divisions. Sales of the Power Electronics Division increased $72,466, primarily due to net sales of $66,806 recorded by the entities acquired during the year, coupled with higher sales by the legacy portion of the Power Electronics Division, which increased by $5,660 or 14%, primarily due to higher DC to DC converter sales. Sales by the Standby Power Division increased $13,107 or 6%, primarily due to increased sales to the UPS market, partially offset by continued weakness in the telecommunications market. Motive Power divisional sales increased $4,341 or 8%, primarily due to higher battery and charger sales. Gross profit for fiscal year 2005 declined $10,021 or 13% to $66,658 from $76,679 with margins decreasing from 23.6% to 16.1%. Gross profit in the Standby Power and Motive Power divisions declined primarily as a result of non-cash impairment charges at our Leola, Pennsylvania, and Huguenot, New York, facilities totaling $9,602, and associated environmental clean-up charges at these two facilities in the amount of $3,881, coupled with an increase in the cost of lead of approximately $25,309. Additionally, there were rigging, transportation and severance costs related to the transfer of production to our Reynosa, Mexico, facility of approximately $1,426. Gross profit in the Power Electronics Division increased primarily due to the results of the acquisitions coupled with the favorable impact of increased sales by the legacy portion of the Power Electronics Division. Selling, general and administrative expenses for fiscal year 2005 increased $7,021 or 17%. This increase was primarily due to selling, general and administrative expenses of $9,253 incurred by the current year acquisitions. Excluding the acquired companies, selling, general and administrative expenses decreased $2,232 primarily as a result of lower warranty costs of $3,738 and lower commissions of $988, partially offset by Sarbanes-Oxley compliance costs of $2,664. Research and development expenses for fiscal year 2005 increased $9,099. As a percentage of sales, research and development expenses increased from 2.9% during fiscal year 2004 to 4.5% during fiscal year 2005. The increase was primarily the result of $8,473 of research and development expenses incurred by our recent acquisitions, including acquired in-process research and development expenses of $780 related to the acquired companies. Goodwill impairment charges of $74,233 were recorded in the Power Electronics Division for the fiscal year ended January 31, 2005. No goodwill impairment charges were recorded in the Standby Power Division. All of the goodwill of the Motive Power Division was written off in fiscal year 2003. C&D determined the fair value of its reporting units, using a combination of financial projections and discounted cash flow techniques adjusted for risk characteristics, also giving consideration to C&D's overall market capitalization. Operating (loss) income for fiscal year 2005 decreased $100,838 to an operating loss of $74,160 from operating income of $26,678 in fiscal year 2004. This decrease was primarily the result of goodwill and intangible impairment charges in the Power Electronics Division, lower operating income in the Standby Power Division, coupled with a higher operating loss in the Motive Power Division. 8 Below is a summary of key items affecting operating (loss) income for fiscal year 2005: Analysis of Change in Operating (Loss) Income
Standby Power Motive Power Electronics Power Fiscal Year 2005 vs. 2004 Division Division Division Consolidated =========================================================================================================== Operating income (loss) - fiscal 2004 $ 30,280 $ 1,109 $ (4,711) $ 26,678 Lead - increased costs (20,740) -- (4,569) (25,309) Operations 9,158 1,063 3,034 13,255 Operations - Acquired companies -- 822 -- 822 Reynosa rigging, transportation, severance (599) -- (827) (1,426) Impairments and environmental cleanup (8,888) -- (4,595) (13,483) Goodwill and intangible asset impairments -- (74,697) -- (74,697) - ----------------------------------------------------------------------------------------------------------- Operating income (loss) - fiscal 2005 $ 9,211 $(71,703) $(11,668) $(74,160) ===========================================================================================================
Interest expense, net, increased $3,747 in fiscal year 2005, primarily due to higher average debt balances outstanding during the period due to funds borrowed to finance the Celab, Datel and CPS acquisitions. There was an income tax benefit of $21,289 recorded in fiscal year 2005 as a result of a net loss before income taxes, compared to income tax expense of $8,795 in fiscal year 2004. The effective tax rate consists of statutory rates adjusted for the tax impacts of foreign operations and other permanent items. The effective tax rate for fiscal year 2005 reflects a benefit of 26.4% compared to a provision of 37% in the prior year. The benefit recorded in fiscal year 2005 was adjusted from the statutory rate to reflect the tax effect of the goodwill impairment, an increase to the valuation allowance relating to foreign tax credits for the unremitted earnings of a controlled foreign subsidiary, and the impact of non-deductible acquired in-process research and development assets related to the Datel acquisition. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by C&D. The joint venture incurred a net loss in fiscal year 2005 compared to net income in the prior year. As a result of all of the above, a net loss was recorded of $59,493 compared to net income of $14,891 in the prior year. On a per share basis, net loss was $2.35 compared to net income of $0.58 - basic and fully diluted for fiscal years 2005 and 2004, respectively. 9 Future Outlook The Company considers the following, among other matters, to be key elements of focus for its underlying business plans and strategies for fiscal year 2007. Any failures in effectively implementing these strategies and actions would impact our performance and results of operations. Lead and Commodity Costs and Pricing In response to continually increasing raw materials prices, particularly lead, the Company announced a general price increase for its Standby and Motive Power products effective March 1, 2006. We expect higher raw materials costs, particularly lead, to continue to put pressure on our results of operations in the near term. Higher lead prices negatively affected operating results in fiscal year 2006 by approximately $9,697 compared to the prior year. Manufacturing Moves Construction of a new manufacturing facility has commenced with our joint venture in China, due to the required relocation of our Shanghai facility. We expect production will begin in the fourth quarter of fiscal year 2007. The joint venture received $15,547 from the Chinese government as a partial payment for the Shanghai facility. Upon return of the existing property to the Chinese government by January 2007, the Chinese government will pay the joint venture an additional $1,727. On April 3, 2006 we announced changes to our contract manufacturing arrangements for our Power Electronics business involving the termination of existing manufacturing agreements with Celestica. Wind down of these operations and transfer to other manufacturers is scheduled to be completed by September 2006. These changes are expected to drive our ability to meet customer needs and improve our cost structure. On April 6, 2006 we announced further actions associated with the revitalization of our Motive Power Products business. These actions include launching new products to open access to several unaddressed markets, the planned closure of our Huguenot, New York facility and relocation of production to Reynosa, Mexico and the establishment of new distribution centers to service our customer base. These manufacturing moves all require significant inventory builds during transition/relocation to other operations which is expected to adversely impact our working capital requirements, principally during the second and third quarters of fiscal year 2007. We expect these inventory builds to be temporary in nature with a return to historical working capital levels by the end of fiscal year 2007. Cost Management, Quality and Six Sigma The Company is expanding its efforts to reduce costs and improve customer service and satisfaction through enhanced quality and delivery focus and goals. These strategies are being supported by Lean supply chain initiatives and Six Sigma methodologies and tools. The completion of the integration of the fiscal year 2005 Power Electronics acquisitions also continues, with an emphasis in fiscal year 2007 on supply chain management and product development activities. RoHS Conversion and Compliance A key operational initiative facing the Company's Power Electronics business in fiscal year 2006 and early in fiscal year 2007 relates to conversion of products to satisfy regulatory changes and customer demands driven by the European Union's "Restriction on Use of Hazardous Substances in Electrical and Electronic Equipment" (RoHS). The Company's execution of these requirements, which involves product design changes among other matters, if not successful, would impact our ability to service customer order demands and risks of inventory obsolescence. 10 Liquidity and Capital Resources Net cash provided by operating activities decreased $9,373 or 31% to $20,818 for the fiscal year ended January 31, 2006, compared to $30,191 in the prior fiscal year. The decrease in net cash provided by operating activity was primarily due to: (i) a higher net loss of $46,947 after adjusting for non-cash impairment charges in both fiscal years; (ii) a decrease of $2,721 in other liabilities in fiscal year 2006 as compared to an increase of $6,450 in fiscal year 2005; (iii) an increase of $5,092 in accounts receivable in fiscal year 2006 as compared to a decrease of $3,994 in fiscal year 2005; and (iv) a $6,765 increase in inventories in fiscal year 2006 as compared to a $1,288 increase in fiscal year 2005 . These changes were partially offset by (i) an increase of $15,467 in accounts payable in fiscal year 2006 as compared to an increase of $2,797 in fiscal year 2005; (ii) an increase of $4,848 in other current liabilities in fiscal year 2006 as compared to a decrease of $4,475 in fiscal year 2005; and (iii) a decrease in current taxes payable of $958 in fiscal year 2006 as compared to a decrease of $5,449 in fiscal year 2005. The fiscal year 2006 receivable increases reflect the increased pace of the business in the fourth quarter of fiscal year 2006 as compared to fiscal year 2005, particularly in the Power Electronics Division. The increases in inventory that occurred in fiscal year 2006 reflect the Company's decision to stock additional lead to protect against shortages of this important raw material. Additionally, the Company has been increasing its inventory of Motive Power finished goods in order to more quickly meet the needs of our customers. Net cash used by investing activities decreased $115,909 or 93% to $8,700 in the fiscal year 2006 as compared to $124,609 in the prior fiscal year, primarily due to the acquisitions of Celab, Datel and CPS and the receipt of approximately $15,547 from the Chinese government as partial payment for the Shanghai joint venture's existing battery facility, both of which occurred in the prior fiscal year. These funds will be applied to the construction of a new battery manufacturing facility in Shanghai, China, which began at the end of the fiscal year ended January 31, 2006. We had net cash used in financing activities of $13,648 in fiscal year 2006 as compared to net cash provided by financing activities of $108,889 in the prior fiscal year. Current year financing activities included $133,142 from new borrowings, primarily used to repay prior debt agreements. Other activities included a decrease in book overdrafts and the payment of financing costs related to the new debt agreements. On November 21, 2005, the Company completed the private placement of $75,000 aggregate principal amount of Notes. The Company used substantially all of the net proceeds to reduce the balance of its existing revolving credit agreement. On December 7, 2005, the Company completed the refinancing of its debt with the closing of $125,000 principal amount of new credit facilities, consisting of (i) a $75,000 principal amount Credit Facility and (ii) a $50,000 Term Loan. The Credit Facility consists of a five-year senior revolving line of credit. The maximum availability under the Credit Facility is $75,000, although at any time the Company is limited by the amount available as determined by a borrowing base. As of January 31, 2006, the maximum availability calculated under the borrowing base was $53,798, of which $8,143 was funded, and $3,212 was utilized for letters of credit. The Credit Facility is secured by a first lien on certain assets and initially bears interest at LIBOR plus 1.75% or Prime plus ..25%. As provided under the Credit Facility, excess borrowing capacity will be available for future working capital needs and general corporate purposes. The Term Loan is a five and one half year term facility with payment due in 2011. The facility is secured by a second lien on certain assets and bears interest at LIBOR plus 6.75% or Prime plus 4.50%. In anticipation of a possible future violation of the leverage ratio covenant under the Term Loan, and to provide greater flexibility with respect to this covenant, on March 30, 2006 the Company executed a first amendment to both of these credit facilities. These amendments modified the definition of EBITDA of both credit facilities, changed the leverage ratio commencing February 28, 2006 through December 31, 2006 under the Term Loan facility and modified certain other definitions. In consideration of these changes the Company paid a fee of $500 to the Term Loan lenders and $38 to the Credit Facility lenders. The Company agreed to grant a security interest in its Leola, Pennsylvania battery plant and its Mansfield, Massachusetts electronics plant. The Company also agreed to an increase in the interest rate for the benefit of the Term Loan lenders of .25% until such time as the leverage ratio falls below 3.0 as defined in the amended Term Loan agreement. 11 The availability under the Credit Facility is expected to be sufficient to meet our ongoing cash needs for working capital requirements, debt service and capital expenditures. Capital expenditures during fiscal year 2006 were incurred to fund cost reduction programs, normal maintenance and regulatory compliance. Fiscal year 2007 capital expenditures are expected to be approximately $35,000 primarily for the construction of our new Shanghai joint-venture facility (of which approximately $15,547 has already been received from the Chinese government to fund construction). The Credit Facility and Term Loan include a minimum fixed charge coverage ratio that is measured only when the excess availability as defined in the agreements is less than $15,000. Both agreements limit restricted payments including dividends and Treasury Stock purchases to no more than $250 for Treasury Stock in any one calendar year and $1,750 for dividends for any one calendar year subject to adjustments of up to $400 per year in the case of the conversion of debt to stock per the terms of the 5.25% convertible offering. These restricted payments can only occur with prior notice to the lenders and provided that there is a minimum of $30,000 in excess availability for a period of thirty days prior to the dividend. The Term Loan also includes a maximum leverage ratio. On December 7, 2005 the entire proceeds of the Term Loan and approximately $15,869 of the initial proceeds of the Credit Facility were used to pay in full and terminate the existing $200,000 amended and restated revolving credit agreement which was entered into on June 30, 2004 (Former Credit Agreement), and which had a maturity date of June 30, 2009. The total aggregate amount of loans outstanding under the Term Loan, the Notes and the Credit Facility, and the Former Credit Agreement, at any point during the year ended January 31, 2006 was $145,673, and the outstanding loans under these credit agreements, computed on a monthly basis, averaged $134,902 at a weighted-average interest rate of 6.03%. The Credit Facility includes a swingline sub-loan facility not to exceed $7,000. The Former Credit Agreement included a swingline sub-loan facility of $10,000. As of January 31, 2006, the Company had $2,658 of letters of credit with other financial institutions that do not reduce the Company's availability under its Credit Facility. Contractual Obligations and Commercial Commitments The following tables summarize our contractual obligations and commercial commitments as of January 31, 2006:
Payments Due by Period ----------------------------------------------------------------- Less than 1 1 - 3 4 - 5 After Contractual Obligations Total year years years 5 years ============================================================================================================================= Operating leases $ 20,233 $ 4,292 $ 7,024 $ 5,886 $ 3,031 Inventory 1,944 1,944 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Total contractual cash obligations $ 22,177 $ 6,236 $ 7,024 $ 5,886 $ 3,031 ============================================================================================================================= 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 ============================================================================================================================= Mortgage $ 5,230 $ 279 $ 4,951 $ -- $ -- Capital lease 1,024 759 265 -- -- Notes 75,000 -- -- -- 75,000 Term Loan 50,000 -- -- -- 50,000 Credit Facility 8,143 -- -- 8,143 -- Standby letters of credit 5,870 1,670 4,200 -- -- Lead commitments 6,216 6,216 -- -- -- - ----------------------------------------------------------------------------------------------------------------------------- Total commercial commitments $151,483 $ 8,924 $ 9,416 $ 8,143 $125,000 =============================================================================================================================
12 Off-Balance Sheet Arrangements Other than certain elements of our Notes arrangements, we have no off-balance sheet arrangements at January 31, 2006. New Accounting Pronouncements In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, "Inventory Costs, an amendment of Accounting Research Bulletin (ARB) No. 43, Chapter 4" (SFAS No. 151), which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS No. 151 requires abnormal amounts of idle facility expense, freight, handling costs and wasted material or spoilage to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. SFAS No. 151 will be effective for inventory costs incurred beginning February 1, 2006. Adoption of this standard is not expected to have a material impact on C&D's consolidated operations, financial position or cash flows. In December 2004, the FASB issued SFAS No. 123 (revised 2004), "Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company will no longer be permitted to follow the intrinsic value accounting method of APB No. 25, and the pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. Under SFAS No. 123R, the Company must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at date of adoption. SFAS No. 123R is effective for the Company on February 1, 2006, and will apply to all prospective awards using the modified prospective transition method without restatement of prior periods. Adoption of SFAS No. 123R in the first quarter of fiscal 2007 will result in a reduction of reported future earnings. However, the accelerated vesting of stock options on March 1, 2005 will reduce the amount of stock-based compensation expense to be incurred in future periods. The Company also accelerated grants of stock options in January 2006. The Company's future stock-based compensation strategy, stock price volatility, estimated forfeitures and employee stock option exercise behavior, will affect the amount of future stock-based compensation expense that will be recognized in future periods. In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for Conditional Asset Retirement Obligations--an Interpretation of FASB Statement No. 143" (FIN 47). This Interpretation clarifies that the term conditional asset retirement obligation as used in SFAS No. 143 refers to a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the entity. FIN 47 requires an entity to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated. FIN 47 was effective for the Company in the fourth quarter of fiscal year 2006, and adoption of this Interpretation did not have a material impact on the Company's financial position and results of operations. See Note 9 of Notes to Consolidated Financial Statements. In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3" (SFAS No. 154). Previously, APB No. 20, "Accounting Changes" and SFAS No. 3 "Reporting Accounting Changes in Interim Financial Statements" required the inclusion of the cumulative effect of changes in accounting principle in net income of the accounting principle, including a change required by a new accounting pronouncement when the pronouncement does not include specific transition provisions, retrospectively to prior periods' financial statements. The Company will assess the impact of a retrospective application of a change in accounting principle in accordance with SFAS No. 154 when such a change arises after the effective date of February 1, 2006. 13 In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid Instruments" (SFAS No. 155). This standard allows financial instruments that have embedded derivatives to be accounted for as a whole (eliminating the need to bifurcate the derivative from its host) if the holder elects to account for the whole instrument on a fair value basis. This standard is effective for all financial instruments acquired or issued by the Company in fiscal year 2008, and may be applied to hybrid financial instruments previously entered into that meet certain criteria. The Company will assess the impact of adoption of this standard on our consolidated operations, financial position or cash flows as new financing arrangements arise. 14 SIGNATURE Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. C&D TECHNOLOGIES, INC. May 2, 2006 By: /s/ Ian J. Harvie ---------------------------------- Ian J. Harvie Vice President and Chief Financial Officer 15 Item 15. Exhibits and Financial Statement Schedules (3) Exhibits: 31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 16 EXHIBIT 31.1 CERTIFICATION I, Jeffrey A. Graves, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A of C&D Technologies, Inc. for the fiscal year ended January 31, 2006; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. Date: May 2, 2006 /s/ Jeffrey A. Graves ----------------- --------------------------------- Jeffrey A. Graves President and Chief Executive Officer (Principal Executive Officer) A signed original of this certification required by Section 302 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 17 EXHIBIT 31.2 CERTIFICATION I, Ian J. Harvie, certify that: 1. I have reviewed this Amendment No. 1 to the annual report on Form 10-K/A of C&D Technologies, Inc. for the fiscal year ended January 31, 2006; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. Date: May 2, 2006 /s/ Ian J. Harvie ----------------- --------------------------------- Ian J. Harvie Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer) A signed original of this certification required by Section 302 has been provided to C&D Technologies, Inc. and will be retained by C&D Technologies, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. 18 -----END PRIVACY-ENHANCED MESSAGE-----