10-Q 1 form10q3rdfy2007final.txt 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, 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) 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 requests), 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 Securities Exchange Act). YES |_| NO |X| Number of shares of the Registrant's Common Stock outstanding on October 31, 2006: 25,647,442 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX Part I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets - October 31, 2006 and January 31, 2006 3 Consolidated Statements of Operations - Three and Nine Months Ended 5 October 31, 2006 and 2005 Consolidated Statements of Cash Flows - Nine Months Ended 6 October 31, 2006 and 2005 Consolidated Statements of Comprehensive Loss - Three and Nine Months Ended October 31, 2006 and 2005 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 35 Part II OTHER INFORMATION Item 1A Risk Factors 36 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 39 Item 6 Exhibits 40 SIGNATURES 41 EXHIBIT INDEX 42 2 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) (UNAUDITED) PART I. FINANCIAL INFORMATION Item 1. Financial Statements
October 31, January 31, 2006 2006 ============================================================================================================== ASSETS Current assets: Cash and cash equivalents $ 13,671 $ 25,693 Accounts receivable, less allowance for doubtful accounts of $1,982 and $2,889 82,315 78,420 Inventories, net 90,336 83,803 Deferred income taxes 3,493 3,430 Prepaid taxes 6,583 6,838 Other current assets 9,131 8,892 -------------------------------------------------------------------------------------------------------------- Total current assets 205,529 207,076 Property, plant and equipment, net 99,889 91,041 Goodwill 68,243 81,451 Intangible and other assets, net 36,033 38,450 Deferred income taxes 374 401 -------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 410,068 $ 418,419 ============================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current portion of long-term debt $ 5,474 $ 1,038 Accounts payable 45,516 50,199 Book overdrafts 3,134 71 Accrued liabilities 26,425 23,440 Other current liabilities 30,384 35,578 -------------------------------------------------------------------------------------------------------------- Total current liabilities 110,933 110,326 Deferred income taxes 12,509 11,660 Long-term debt 145,465 133,067 Other liabilities 34,484 24,051 -------------------------------------------------------------------------------------------------------------- Total liabilities 303,391 279,104 --------------------------------------------------------------------------------------------------------------
3 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except par value) (UNAUDITED)
October 31, January 31, 2006 2006 =========================================================================================================== Commitments and contingencies (see Note 7) Minority interest 8,304 8,498 Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 29,040,960 and 28,828,428 shares issued and 25,647,442 and 25,448,326 outstanding, respectively 291 288 Additional paid-in capital 73,972 72,599 Unearned stock grant compensation 197 -- Treasury stock, at cost 3,393,518 and 3,380,102 shares, respectively (47,127) (47,094) Accumulated other comprehensive loss (11,542) (11,876) Retained earnings 82,582 116,900 ----------------------------------------------------------------------------------------------------------- Total stockholders' equity 98,373 130,817 ----------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 410,068 $ 418,419 ===========================================================================================================
The accompanying notes are an integral part of these statements. 4 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (UNAUDITED)
Three months ended Nine months ended October 31, October 31, 2006 2005 2006 2005 ============================================================================================================== NET SALES $ 130,707 $ 126,966 $ 392,304 $ 372,863 COST OF SALES 112,695 109,167 331,964 309,876 -------------------------------------------------------------------------------------------------------------- GROSS PROFIT 18,012 17,799 60,340 62,987 OPERATING EXPENSES: Selling, general and administrative expenses 14,663 15,582 45,621 46,606 Research and development expenses 6,888 6,329 21,584 18,853 Identifiable intangible asset impairment -- 20,045 -- 20,045 Goodwill impairment 13,947 13,674 13,947 13,674 -------------------------------------------------------------------------------------------------------------- OPERATING LOSS (17,486) (37,831) (20,812) (36,191) -------------------------------------------------------------------------------------------------------------- Interest expense, net 3,256 2,568 9,656 6,881 Other expense (income), net 439 (23) 869 33 -------------------------------------------------------------------------------------------------------------- LOSS BEFORE INCOME TAXES AND MINORITY INTEREST (21,181) (40,376) (31,337) (43,105) -------------------------------------------------------------------------------------------------------------- Provision for income taxes 575 19,613 3,000 17,706 -------------------------------------------------------------------------------------------------------------- LOSS BEFORE MINORITY INTEREST (21,756) (59,989) (34,337) (60,811) -------------------------------------------------------------------------------------------------------------- Minority interest (55) (6) (371) (169) -------------------------------------------------------------------------------------------------------------- NET LOSS $ (21,701) $ (59,983) $ (33,966) $ (60,642) ============================================================================================================== Net loss per common share - basic $ (0.85) $ (2.36) $ (1.33) $ (2.39) ============================================================================================================== Net loss per common share - diluted $ (0.85) $ (2.36) $ (1.33) $ (2.39) ============================================================================================================== Dividends per share $ -- $ 0.01375 $ 0.01375 $ 0.04125 ==============================================================================================================
The accompanying notes are an integral part of these statements. 5 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Nine months ended October 31, 2006 2005 ============================================================================================================ Cash flows from operating activities: Net loss $ (33,966) $ (60,642) Adjustments to reconcile net loss to net cash (used in) provided by operating activities: Minority interest in net loss of consolidated subsidiary (371) (169) Stock based compensation 197 -- Depreciation and amortization 14,714 17,520 Impairment of fixed assets and long-lived assets -- 2,160 Impairment of goodwill 13,947 13,674 Impairment of intangible assets -- 20,045 Deferred income taxes 809 11,764 (Gain) loss on disposal of assets (38) 208 Annual retainer to Board of Directors paid by the issuance of common stock 224 199 Changes in: Accounts receivable and other receivable (3,328) (4,209) Inventories (5,930) (4,884) Other current assets (686) (1,405) Accounts payable (5,077) 10,075 Accrued liabilities 2,730 4,657 Income taxes payable 100 1,556 Other current liabilities (1,750) 2,555 Other liabilities 6,133 1,246 Other long-term assets 83 467 Other, net (923) 2,963 ------------------------------------------------------------------------------------------------------------ Net cash (used in) provided by operating activities (13,132) 17,780 ------------------------------------------------------------------------------------------------------------ Cash flows provided (used in) by investing activities: Acquisition of property, plant and equipment (19,553) (5,101) Proceeds from disposal of property, plant and equipment 54 74 ------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (19,499) (5,027) ------------------------------------------------------------------------------------------------------------ Cash flows provided (used in) by financing activities: Reduction of long-term debt (781) (4,225) Proceeds from new borrowings 17,428 -- Financing cost of long-term debt (701) (955) Increase (decrease) in book overdrafts 3,063 (7,711) Purchase of treasury stock (122) (158) Proceeds from issuance of common stock, net 1,210 307 Payment of common stock dividends (352) (699) ------------------------------------------------------------------------------------------------------------ Net cash provided by (used in) financing activities 19,745 (13,441) ------------------------------------------------------------------------------------------------------------ Effect of exchange rate changes on cash and cash equivalents 864 224 ------------------------------------------------------------------------------------------------------------ Decrease in cash and cash equivalents (12,022) (464) Cash and cash equivalents, beginning of period 25,693 26,855 ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents, end of period $ 13,671 $ 26,391 ============================================================================================================
The accompanying notes are an integral part of these statements. 6 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (Dollars in thousands) (UNAUDITED) SUPPLEMENTAL CASH FLOW DISCLOSURE Schedule of non cash investing and financing activities
Nine months ended October 31, 2006 2005 ================================================================================================== Increase (decrease) in property, plant, and equipment acquisitions in accounts payable $ 176 $ (353) Dividend declared, but not paid $ -- $ 350
The accompanying notes are an integral part of these statements. 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, 2006 2005 2006 2005 ======================================================================================================================== NET LOSS $ (21,701) $ (59,983) $ (33,966) $ (60,642) Other comprehensive income (loss) net of tax: Net unrealized income (loss) on derivative instruments 6,919 2,200 (108) 2,010 Foreign currency translation adjustments 3 (361) 442 (594) ------------------------------------------------------------------------------------------------------------------------ TOTAL COMPREHENSIVE LOSS $ (14,779) $ (58,144) $ (33,632) $ (59,226) ========================================================================================================================
The accompanying notes are an integral part of these statements. 8 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 1. INTERIM STATEMENTS The accompanying interim unaudited consolidated financial statements of C&D Technologies, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all the information and notes required for complete financial statements. In the opinion of management, the interim unaudited consolidated financial statements include all adjustments considered necessary for the fair statements of the financial position, results of operations and cash flows for the interim period presented. The financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company's 2006 Annual Report on Form 10-K dated April 10, 2006, and Form 10-K/A dated May 2, 2006. 2. SHARE-BASED COMPENSATION Effective February 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment," ("SFAS No. 123R"). SFAS No. 123R requires the recognition of the fair value of stock compensation in net income. The Company elected the modified prospective method in adopting SFAS No. 123R. Under this method, the provisions of SFAS No. 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption is recognized in net income in the periods after the date of adoption using the same valuation method (i.e. Black-Scholes) and assumptions determined under the original provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," as disclosed in our previous filings. Prior to the Company's adoption of SFAS No. 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows. SFAS No. 123R requires excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid. For the three and nine month periods ended October 31, 2006, due to the Company's net operating losses, no tax benefits have been realized from the exercises of options. As a result there is no cash flow impact related to tax benefits realized from the exercises during the three and nine months ended October 31, 2006. Prior to February 1, 2006, the Company accounted for employee stock option grants using the intrinsic method in accordance with Accounting Principles Board ("APB") Opinion No. 25 "Accounting for Stock Issued to Employees". As such, no compensation cost was recognized for employee stock options that had exercise prices equal to the fair market value of the Company's common stock at the date of granting the option. The Company also complied with the pro forma disclosure requirements of SFAS No. 123 "Accounting for Stock Based Compensation", and SFAS No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure". STOCK OPTIONS The Company has three stock option plans: the 1998 Stock Option Plan reserved 3,900,000 shares of Common Stock; the U.K. Stock Option Plan reserved 500,000 shares of Common Stock; and the 2007 Stock Incentive Plan reserved 1,500,000 shares for option grants. In addition, stock can be granted to officers, directors, employees and consultants of the Company, or an affiliate. The 1996 Stock Option Plan expired on July 25, 2006. The 2007 Stock Incentive Plan was approved by the stockholders on June 1, 2006. Incentive stock options are to be granted at no less than 100% of the fair market value on the date of grant, with a term of no more than ten years after the date of grant. Nonqualified stock options are to be granted at such price as the Compensation Committee of the Board of Directors deems appropriate, with a term of no more than ten years after the date of grant. The options are exercisable upon vesting as determined by the Compensation Committee at the time the options are granted. Generally options are granted with a three year vesting period unless adjusted by the Compensation Committee. On March 1, 2005, the Compensation Committee of the Board of Directors of the Company authorized and approved, effective March 1, 2005, and notwithstanding the terms of any stock option agreements between the Company and any employee, the vesting of all outstanding non-vested options then held by employees of the Company, which had been granted by the Company under the 1996 and 1998 Stock Option Plans. 9 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) All subsequent grants during the fiscal year ended January 31, 2006 vested immediately upon the date of grant. Under the U.K. Stock Option Plan, upon the adoption of SFAS No. 123R the Company had unamortized compensation of $35 at February 1, 2006 related to 6,418 options granted in fiscal year 2004, and 13,680 options granted in fiscal year 2005. As of October 31, 2006 the unamortized compensation for these options was $8, which is expected to be recognized over the weighted average period of approximately two months. Under the provisions of SFAS No. 123R, the Company recorded $23 and $197 of stock compensation related to stock option awards in its unaudited consolidated statement of operations for the three and nine months ended October 31, 2006. The impact on earnings per share for the three and nine months ended October 31, 2006, was less than $0.01. The Company granted 28,000 and 123,000 stock option awards during the three and nine months ended October 31, 2006. Of the awards granted in the third quarter, none vested immediately. Of awards granted during the first nine months of fiscal year 2007, 40,500 vested immediately; accordingly for the nine months ended October 31, 2006, compensation cost included $137 for these awards that vested immediately. Compensation cost recognized during these periods relates to the awards granted during the period as well as the outstanding awards that were not vested at February 1, 2006. Based on the current awards outstanding, the estimated compensation expense for the remainder of the fiscal year is approximately $26. The estimated fair value of the options granted was calculated using the Black Scholes Merton option pricing model ("Black Scholes"). The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the estimated life of the option is based on U.S. Government Securities Treasury Constant Maturities over the contractual term of the equity instrument. Expected volatility is based on the historical volatility of the Company's stock. The Company uses the shortcut method described in Staff Accounting Bulletin No. 107 to determine the expected life assumption. Based on our historical experience, we have assumed an annualized forfeiture rate of 10% for share-based compensation awards. Under the true-up provisions of SFAS No. 123R, we will record additional expense if the actual forfeiture rate is lower than we estimated, and will record a recovery of prior expense if the actual forfeiture is higher than we estimated. No compensation expense related to stock option grants was recorded in the consolidated statement of operations for the three and nine months ended October 31, 2005. 10 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) SFAS No. 123R requires the Company to present pro-forma information for the comparative period prior to the adoption as if the Company had accounted for all its employee stock options under the fair value method of the original SFAS No. 123. The following table illustrates the effect on net income and net income per common share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation in the prior-year periods:
Three months ended Nine months ended October 31, 2005 October 31, 2005 ================================================================================================================== Net loss as reported $ (59,983) $ (60,642) Deduct: Total stock based compensation expense determined under the fair value method for all grants, net of related tax effects $ 2,756 $ 6,429 ------------------------------------------------------------------------------------------------------------------ Net loss pro forma $ (62,739) $ (67,071) ================================================================================================================== Net loss per common share-basic-as reported $ (2.36) $ (2.39) Net loss per common share-basic-pro forma $ (2.47) $ (2.64) Net loss per common share-diluted-as reported $ (2.36) $ (2.39) Net loss per common share-diluted-pro forma $ (2.47) $ (2.64)
The Company used the straight-line attribution method for the amortization of stock compensation under SFAS No. 123R for the period after its adoption, and under APB No. 25 or SFAS No. 123 (pro forma disclosure) for the period prior to its adoption. Total compensation cost of stock options granted but not yet vested as of October 31, 2006, was $230, which is expected to be recognized over the weighted average period of approximately 16 months. The following table summarizes activity under all stock option plans for the respective periods:
Three months ended Nine months ended October 31, October 31, 2006 2005 2006 2005 ================================================================================================================= Weighted-average fair value of options granted per share $ 3.89 $ 4.86 $ 3.58 $ 3.58 Fair value of options vested during the period $ -- $ 282 $ 246 $ 10,745 Intrinsic value of options exercised $ 24 $ 103 $ 297 $ 120 Cash received from option exercises $ 235 $ 260 $ 1,210 $ 307
11 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) Stock option activity under all plans during the nine months ended October 31, 2006, is as follows:
Weighted Average Weighted Average Remaining Number of Exercise Price Contractual Term Aggregate Shares per Share (years) Intrinsic Value ============================================================================================================= Balance at January 31, 2006 4,073,998 $ 16.62 7.0 $ 0 Options granted 123,000 $ 6.88 9.6 $ 0 Options exercised (179,850) $ 6.73 6.7 $ 0 Options forfeited (1,168,915) $ 19.30 5.3 $ 0 Balance at October 31, 2006 2,848,233 $ 15.72 6.8 $ 0 Exercisable, October 31, 2006 2,758,893 $ 15.99 6.7 $ 0
The aggregate intrinsic value on this table was calculated based on the difference between the closing price of our common stock on October 31, 2006, and the exercise price of the underlying options. Stock options outstanding at October 31, 2006, are summarized in the table below.
Weighted Weighted Average Average Remaining Weighted Remaining Weighted Range of Number Contractual Average Number Contractual Average Exercise Price Outstanding Life Exercise Price Exercisable Life Exercise Price ==================================================================================================================== $ 6.26 - $ 9.18 1,110,495 9.1 years $ 7.54 1,027,995 9.0 years $ 7.60 $ 9.80 - $ 14.50 255,224 5.7 years $ 11.36 255,224 5.7 years $ 11.36 $ 14.94 - $ 22.31 1,168,444 5.7 years $ 18.82 1,161,604 5.7 years $ 18.82 $ 26.76 - $ 37.28 261,320 4.4 years $ 33.12 261,320 4.4 years $ 33.12 $ 48.44 - $ 55.94 52,750 3.7 years $ 54.44 52,750 3.7 years $ 54.44 -------------------------------------------------------------------------------------------------------------------- TOTAL 2,848,233 6.8 years $ 15.72 2,758,893 6.7 years $ 15.99 ====================================================================================================================
12 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) A summary of the status of the Company's non-vested stock options as of October 31, 2006, is summarized below.
Weighted Average Option Number of Shares Grant Date Underlying Options Fair Value ========================================================================================= Non-vested at January 31, 2006 20,098 $ 8.53 Granted 123,000 $ 3.58 Vested (53,758) $ 4.57 ----------------------------------------------------------------------------------------- Non-Vested at October 31, 2006 89,340 $ 4.10 =========================================================================================
The fair value of stock options granted during the three and nine months ended October 31, 2006, was estimated on the grant date using the Black-Scholes option pricing model with the following average assumptions.
Three months ended Nine months ended October 31, October 31, 2006 2005 2006 2005 ================================================================================================================== Risk-free interest rate 4.57% - 4.91% 3.89 - 4.45% 4.57% - 5.03% 3.73% - 4.45% Dividend yield 0.00% 0.52% - 0.60% 0.00% - 0.66% 0.52% - 0.81% Volatility factor 49.57% - 50.73% 49.90% - 51.30% 47.31% - 54.25% 49.90% - 55.07% Expected lives 6 years 5 years 5 - 6 years 5 years
13 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 3. NEW ACCOUNTING PRONOUNCEMENTS In February 2006, the Financial Accounting Standard Board ("FASB") issued SFAS No. 155, "Accounting for Certain Hybrid Financial Instruments - an amendment of FASB Statements No. 133 and 140" ("SFAS No. 155"). SFAS No. 155 simplifies the accounting for certain hybrid financial instruments that contain an embedded derivative that otherwise would have required bifurcation. SFAS No. 155 also eliminates the interim guidance in SFAS No. 133, which provides that beneficial interests in securitized financial assets are not subject to the provisions of SFAS No. 133. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity's first fiscal year that begins after September 15, 2006. SFAS No. 155 is required to be adopted by the Company in the first quarter of fiscal 2008. The Company does not expect the adoption of SFAS No. 155 to have a material impact on its financial position and results of operations. In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of Financial Assets - an amendment of FASB Statement No. 140 ("SFAS No. 156"). SFAS No. 156 requires that all separately recognized servicing assets and servicing liabilities be initially measured at fair value, if practicable. The statement permits, but does not require, the subsequent measurement of servicing assets and servicing liabilities at fair value. SFAS No. 156 is effective as of the beginning of an entity's first fiscal year that begins after September 15, 2006. SFAS No. 156 is required to be adopted by the Company in the first quarter of fiscal 2008. The Company does not expect the adoption of SFAS No. 156 to have a material impact on its financial position and results of operations. In June 2006, the FASB issued FASB Interpretation No. 48, ("FIN No. 48") "Accounting for Uncertainty in Income Taxes", an interpretation of FASB Statement No. 109, "Accounting for Income Taxes" ("SFAS No. 109")." FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise's financial statements in accordance with SFAS No. 109. FIN No. 48 prescribes a two-step process to determine the amount of tax benefit to be recognized. First, the tax position must be evaluated to determine the likelihood that it will be sustained upon examination. If the tax position is deemed "more-likely-than-not" to be sustained, the tax position is then measured to determine the amount of benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. FIN No. 48 is required to be adopted by the Company in fiscal 2008. The Company is currently evaluating the potential impact of FIN No. 48 on its financial position and results of operations. In June 2006, the Emerging Issues Task Force ("EITF") reached a consensus on Issue No. 06-03, "How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement." EITF No. 06-03 addresses the accounting for externally imposed taxes on revenue-producing transactions that take place between a seller and its customer, including, but not limited to sales, use, value added, and certain excise taxes. EITF No. 06-03 also provides guidance on the disclosure of an entity's accounting policies for presenting such taxes on a gross or net basis and the amount of such taxes reported on a gross basis. EITF No. 06-03 is effective for interim and fiscal years beginning after December 15, 2006. The Company does not expect the adoption of EITF No. 06-03 to have a material impact on its financial position and results of operations. In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157") which establishes a framework for measuring fair value in 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 is currently evaluating the potential impact that the adoption of this statement will have on its financial position and results of operations. 14 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans" (an amendment to FASB Statements No. 87, 88, 106, and 123R) ("SFAS No. 158"). SFAS No. 158 requires an employer to: (1) recognize in its statement of financial position and asset for a plan's overfunded status or a liability for a plan's underfunded status; (2) measure a plan's assets and its obligations that determine its funded status as of the end of the employer's fiscal year (with limited exceptions); and (3) recognize changes in the funded status of a defined benefit postretirement plan in the year in which the changes occur. Those changes will be reported in comprehensive income. The requirement by SFAS No. 158 to recognize the funded status of a benefit plan and the disclosure requirements of SFAS No. 158 are effective as of the end of the fiscal year ending after December 15, 2006 for entities with publicly traded equity securities. The requirement to measure plan assets and benefit obligations as of the date of the employer's fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Based upon current assumptions, the Company expects to make an adjustment to record an incremental net pension liability of approximately $6,000 upon the adoption of SFAS No. 158's recognition provisions. In September 2006, the SEC Staff issued Staff Accounting Bulletin ("SAB") No. 108, "Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements," which addresses how the effects of prior-year uncorrected misstatements should be considered when quantifying misstatements in current-year financial statements. The difference in approaches for quantifying the amount of misstatements primarily results from the effects of misstatements that were not corrected at the end of the prior year (prior year misstatements). SAB No. 108 will require companies to quantify misstatements using both the balance sheet and income-statement approaches and to evaluate whether either approach results in quantifying an error that is material in light of relevant quantitative and qualitative factors. When the effect of initial adoption is determined to be material, SAB No. 108 allows companies to record that effect as a cumulative effect adjustment to beginning-of-year retained earnings. The requirements are effective for reporting periods ending after November 15, 2006. The Company does not expect the adoption of SAB No. 108 to have a material impact on its financial position and results of operations. 4. INVENTORIES Inventories consisted of the following: October 31, January 31, 2006 2006 ================================================================================ Raw materials $ 34,292 $ 36,828 Work-in-process 15,027 13,993 Finished goods 41,017 32,982 -------------------------------------------------------------------------------- Total $ 90,336 $ 83,803 ================================================================================ 15 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 5. INCOME TAXES Nine months ended October 31, 2006 2005 ================================================================================ Provision for income taxes $ 3,000 $ 17,706 Effective income tax rate (9.6%) (41.1%) Tax expense in the nine months ended October 31, 2006, is primarily 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 the jurisdictions where the Company incurred a loss, the Company recorded an increase to the Company's valuation allowance due to the lack of evidence regarding future realization of certain deferred tax assets. In addition, the Company incurred deferred tax expense resulting from the amortization of goodwill for tax which the corresponding deferred tax liability cannot be used as a source of income to substantiate the realizability of deferred tax assets. These items are partially offset by the tax effect of the resolution of certain state tax matters. The tax expense recorded in the nine months ended October 31, 2005, principally resulted from the write off of deferred tax assets related to the investment in foreign subsidiaries and the establishment of a valuation allowance and tax reserves against deferred tax assets due to the lack of evidence regarding the realization of these assets in the foreseeable future. 6. NET LOSS PER COMMON SHARE Net loss per common share is based on the weighted-average number of shares of Common Stock outstanding. Net loss per common share - diluted reflects the potential dilution that could occur if stock options were exercised. Weighted-average common shares - basic and diluted were as follows:
Three months ended Nine months ended October 31, October 31, 2006 2005 2006 2005 =================================================================================================================== Weighted-average common shares - basic and diluted 25,628,845 25,380,480 25,570,763 25,361,952
The dilutive effect of stock options outstanding at October 31, 2006 and 2005 was not included in the calculation of diluted loss per share for the three and nine months periods ended October 31, 2006 and 2005 because to do so would have had an anti- dilutive effect, as the Company had a net loss for each of these periods. The weighed average number of shares excluded from the diluted loss per share computation was 34,790 and 182,109 for the three-month periods ended October 31, 2006 and 2005. The weighted average number of shares excluded from the diluted loss per share computation was 63,477 and 104,600 for the nine-month periods ended October 31, 2006 and 2005. Additionally, 8,854,785 of dilutive securities issuable in connection with convertible bonds have been excluded from the diluted loss per share calculation for the three and nine months ended October 31, 2006, because their effect would reduce the loss per share. 16 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 7. CONTINGENT LIABILITIES Legal and 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 therefore), the Company may be held liable for certain damages, the costs of investigation and remediation, and fines and penalties, which could have a material adverse effect on the Company's business, financial condition, or results of operations. However, under the terms of the purchase agreement with Allied Corporation (Allied) for the acquisition (the Acquisition) of the Company (the Acquisition Agreement), Allied was obligated to indemnify the Company for any liabilities of this type resulting from conditions existing at January 28, 1986, that were not disclosed by Allied to the Company in the schedules to the Acquisition Agreement. These obligations have since been assumed by Allied's successor in interest, Honeywell (Honeywell). C&D is participating in the investigation of contamination at several lead smelting facilities (Third Party Facilities) to which C&D allegedly made scrap lead shipments for reclamation prior to the date of the acquisition. Pursuant to a 1996 Site Participation Agreement, as later amended in 2000, C&D and several other potentially responsible parties (PRPs) 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 site in Pedricktown, New Jersey, Third Party Facility. In April 2002, one of the original PRPs, Exide Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the United States Code. In August 2002, Exide notified the PRPs that it would no longer be taking an active role in any further action at the site and discontinued its financial participation, resulting in a pro rata increase in the cost participation of the other PRPs, including C&D, for which C&D's allocated share rose from 5.25% to 7.79%. In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. NL Industries, Inc. (NL) and Norfolk Southern Railway Company have been conducting a removal action on the site, preliminary to remediation. The Company, along with other PRPs, continues to negotiate with NL at this site regarding the Company's share of the allocated liability. The Company has terminated operations at its Huguenot, New York, facility, and is currently conducting facility decontamination and disposal of chemicals and hazardous wastes remaining at the facility following termination of operations in accordance with applicable regulatory requirements. The Company is also aware of the existence of contamination at its Huguenot, New York, facility, which is expected to require expenditures for further investigation and remediation. The site is listed by the New York State Department of Environmental Conservation (NYSDEC) on its registry of inactive hazardous waste disposal sites due to the presence of fluoride and other contaminants in and underlying a lagoon used by the former owner of this site, Avnet, Inc., for disposal of wastewater. Contamination is present at concentrations that exceed state groundwater standards. In 2002, the NYSDEC issued a Record of Decision (ROD) for the soil remediation portion of the site. A ROD for the ground water portion has not yet been issued by the NYSDEC. In 2005, the NYSDEC also requested that the parties engage in a Feasibility Study, which the parties are conducting in accordance with a NYSDEC approved work plan. In February 2000, the Company filed suit against Avnet, Inc., which has agreed in principle to bear a substantial share of the costs associated with investigation and remediation of the lagoon-related contamination. Should the parties fail to reach a final settlement agreement, the Company will aggressively pursue available legal remedies. Additionally, should the parties fail to reach a final settlement agreement, NYSDEC may conduct the remediation and seek recovery from the parties. 17 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 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 (CVOCs) in groundwater. 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 C&D in March 2003 in the United States District court for the Southern District of Indiana for alleged violations of the Clean Water Act. The parties have reached a settlement, and agreed to the terms of a Consent Decree, with an agreed civil penalty of $1,600. The Court entered the Consent Decree on November 20, 2006. In addition to the civil penalty, the Consent Decree requires the Company to implement a Compliance Work Plan for completing implementation of certain compliance measures set forth in the Consent Decree. These compliance measures are required to be implemented by the Company in accordance with a schedule approved by the EPA. The Compliance Work Plan and schedule are fully enforceable parts of the Consent Decree. The Consent Decree also requires certain pretreatment compliance measures, including the continued operation of a wastewater pretreatment system, which was previously installed at the Attica facility. The Consent Decree further requires certain National Pollution Discharge Elimination System (NPDES) compliance measures, including testing, sampling and reporting requirements relating to a NPDES storm water monitoring system at the facility. Additionally, the Consent Decree provides for stipulated penalties for noncompliance with the requirements of the Consent Decree. In February 2005, the Company received a request from the EPA to conduct exploratory testing to determine if the historical municipal landfill located on the C&D Attica, Indiana property is the source of elevated levels of trichloroethylene detected in two city wells downgradient of the C&D property. EPA advised that it believes the former landfill is subject to remediation under the RCRA corrective action program. The Company has conducted testing in accordance with an investigation work plan and has submitted the test results to EPA. EPA has recently advised that the agency also wants C&D to embark upon a more comprehensive investigation under an agreed consent order to determine whether there have been any releases of other hazardous waste constituents from the C&D Attica facility and, if so, to determine what corrective measure may be appropriate. The scope of any potential exposure is not defined at this time. 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, 2006 and January 31, 2006, accrued environmental reserves totaled $3,258 and $3,775, respectively, consisting of $2,154 and $2,534 in other current liabilities and $1,104 and $1,241 in other liabilities, respectively. 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. 18 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 8. OPERATIONS BY REPORTABLE SEGMENT The Company has the following three reportable business segments: The Standby Power Division manufactures and markets integrated reserve power systems and components for the standby power market, which includes telecommunications, uninterruptible power supplies (UPS), 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 (CATV) signal powering, corporate data center powering and computer network backup for use during power outages. The Power Electronics Division manufactures and markets custom, standard and modified-standard electronic power supply systems, including DC to DC converters, for large Original Equipment Manufacturers (OEMs),of telecommunications and networking equipment, as well as office and industrial equipment. In addition, the division also manufactures power conversion products sold into military and CATV applications as well as digital panel meters and data acquisition components. The Motive Power Division manufactures complete systems and individual components (including power electronics and batteries) to power, monitor, charge and test the batteries used in electric industrial vehicles, including fork-lift trucks, automated guided vehicles and airline ground support equipment. These products are marketed to end users in a broad array of industries, dealers of fork-lift trucks and other material handling vehicles and, to a lesser extent, OEMs. Summarized financial information related to the Company's business segments for three and nine months ended October 31, 2006 and 2005, is shown below. All sales between business segments have been eliminated.
Standby Power Motive Three months ended October 31, 2006 Power Electronics Power Consolidated =================================================================================================== Net sales $ 68,805 $ 47,343 $ 14,559 $ 130,707 Gross profit $ 8,663 $ 9,101 $ 248 $ 18,012 Operating income (loss) $ 1,650 $ (15,735) $ (3,401) $ (17,486) Three months ended October 31, 2005 =================================================================================================== Net sales $ 69,897 $ 43,292 $ 13,777 $ 126,966 Gross profit $ 12,365 $ 4,614 $ 820 $ 17,799 Operating income (loss) $ 4,766 $ (40,753) $ (1,844) $ (37,831) Standby Power Motive Nine months ended October 31, 2006 Power Electronics Power Consolidated =================================================================================================== Net sales $ 204,795 $ 144,050 $ 43,459 $ 392,304 Gross profit $ 29,791 $ 28,697 $ 1,852 $ 60,340 Operating income (loss) $ 6,784 $ (19,107) $ (8,489) $ (20,812) Nine months ended October 31, 2005 =================================================================================================== Net sales $ 197,177 $ 135,320 $ 40,366 $ 372,863 Gross profit $ 33,734 $ 27,735 $ 1,518 $ 62,987 Operating income (loss) $ 10,654 $ (40,070) $ (6,775) $ (36,191)
Many of the Company's facilities manufacture products for more than one segment. Therefore, it is not practical to disclose asset information (assets, expenditures for long-lived assets) on a segment basis. 19 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 9. 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. Fair Value at Fair Value at October 31, January 31, 2006 2006 ================================================================================ Foreign currency contracts $ (468) $ (38) Commodity forward contracts $ 5,975 $ 6,507 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. 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. The Company received approximately $3,099 in cash proceeds from commodity contracts terminated by the counter party during the first quarter of fiscal year 2007. This settlement does not change the hedge accounting for these forward contracts, with the gain in comprehensive loss continuing to be released to earnings during fiscal year 2007 in the periods in which the hedged item is recognized in cost of sales. 20 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 10. 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, 2006 2005 ================================================================================ Balance at beginning of period $ 7,630 $ 8,303 Current year provisions 5,150 3,882 Expenditures (5,531) (5,404) Effect of foreign currency translation 12 3 -------------------------------------------------------------------------------- Balance at end of period $ 7,261 $ 6,784 ================================================================================ As of October 31, 2006, accrued warranty obligations of $7,261 include $2,365 in current liabilities and $4,896 in other liabilities. As of January 31, 2006, accrued warranty obligations of $7,630 include $4,020 in current liabilities and $3,610 in other liabilities. 11. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods.
Pension Benefits Postretirement Benefits --------------------- ----------------------- Three months ended Three months ended October 31, October 31, 2006 2005 2006 2005 =============================================================================================== Components of net periodic benefit cost: Service cost $ 459 $ 430 $ 45 $ 44 Interest cost 1,055 974 62 64 Expected return on plan assets (1,213) (1,217) -- -- Amortization of prior service costs 4 5 (7) (7) Recognized actuarial loss 529 372 -- -- ----------------------------------------------------------------------------------------------- Net periodic benefit cost $ 834 $ 564 $ 100 $ 101 =============================================================================================== Pension Benefits Postretirement Benefits --------------------- ----------------------- Nine months ended Nine months ended October 31, October 31, 2006 2005 2006 2005 =============================================================================================== Components of net periodic benefit cost: Service cost $ 1,377 $ 1,374 $ 134 $ 150 Interest cost 3,164 3,070 185 193 Expected return on plan assets (3,638) (3,856) -- -- Amortization of prior service costs 11 12 (21) 15 Recognized actuarial loss 1,588 1,322 2 -- Curtailment 12 29 (36) -- ----------------------------------------------------------------------------------------------- Net periodic benefit cost $ 2,514 $ 1,951 $ 264 $ 358 ===============================================================================================
21 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The Company is not required to make any contributions to its U.S. pension plans for fiscal 2007 and the Company does not intend to make any discretionary contributions. The Company made a contribution of $46 to its Japanese pension plan in the nine month period ended October 31, 2006. The Company plans to make additional contributions of approximately $15 to its Japanese plan for fiscal year 2007. The Company also expects to make contributions totaling approximately $300 to the two Company sponsored postretirement benefit plans for fiscal year 2007. 12. DEBT On March 30, 2006, the Company executed a first amendment to both of its credit facilities. These amendments modified the definition of EBITDA of both credit facilities, changed the leverage ratio commencing February 28, 2006, through December 31, 2006 under the Term Loan facility and modified certain other definitions. In consideration of these changes, the Company paid a fee of $500 to the Term Loan lenders and $38 to the Line of Credit facility lenders. The Company agreed to grant a security interest in its Leola, Pennsylvania, battery plant and it's 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. 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. As of October 31, 2006, the Company did not meet the availability requirements to make these restricted payments. The Term Loan also includes a maximum leverage ratio. On October 24, 2006, C&D entered into an agreement with its second-lien lenders whereby the second-lien lenders have agreed to a waiver of the leverage ratio covenant of the Loan and Security Agreement, dated December 7, 2005, as amended, for October 31, 2006, until November 30, 2006. On November 21 2006, the Company completed the private placement of $54,500 aggregate principal amount of 5.5% Convertible Senior Notes Due 2026. The Company used substantially all of the net proceeds to repay its $50,000 million secured term loan. This transaction is further described in Note 15. The Company's debt is more fully described in Note 6 to the Consolidated Financial Statements included in the Company's 2006 Annual Report on Form 10-K. 22 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 13. RESTRUCTURING 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 action, the Company recorded severance accruals of $168 in its financial statements for the year ended January 31, 2006. Further severance and related closure costs of $591 have since been recorded. As of the end of the third quarter of fiscal year 2007, the transfer of production was complete. On October 31, 2006, the Company announced the closure of its Power Electronic Division design facility in Portland, Oregon, and the centralization of its activities into the Company's operations in Mansfield, Massachusetts, and Toronto, Canada. The Company recognized severance obligations of $619 on October 31, 2006, for the affected employees. It is expected that the Company will record additional costs of approximately $100 during the fourth quarter of fiscal year 2007 in association with this move. The Company expects to abandon its design facility in Portland, Oregon, during the first quarter of fiscal year 2008. Under the terms of the lease, the Company is obligated for rent and other costs associated with this lease, at an annual cost of approximately $480, until March 31, 2010. The Company has no plans to occupy this facility in the foreseeable future, but is examining options to sub-lease or otherwise assign this agreement. In accordance with SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," the Company expects to record a charge to earnings to recognize the costs of exiting this facility, which will be equal to the total amount of rent and other direct costs, net of estimated sub-lease income, for the period of the lease during the first quarter of fiscal year 2008. A reconciliation of the beginning and ending liability and related activity is shown below.
Balance at Provision Balance at January 31, 2006 Additions Expenditures October 31, 2006 =============================================================================================== Severance 168 1,885 688 1,365 Other Employee Matters -- 63 63 -- Closure Costs -- 12 12 -- ----------------------------------------------------------------------------------------------- Total 168 1,960 763 1,365 ===============================================================================================
The year to date expense of $1,960 is included in cost of goods sold ($705), selling and general and administrative expense ($834) and research and development expenses ($421) lines of the Company's consolidated statement of operations for the nine months ended October 31, 2006. 14. GOODWILL IMPAIRMENT During the quarter ended October 31, 2006, the Company identified circumstances suggesting that goodwill within the Power Electronics Division may be impaired. These circumstances included a decision made by the Company to evaluate strategic alternatives for the Power Electronics Division, including the possible sale of the business. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the Company determined that the carrying value of its goodwill within the Power Electronic Division exceeded its fair value. The fair value was calculated using a combination of the income and market approach. As a result of the impairment test, the Company recorded a pre-tax charge of $13,947 related to goodwill. In the comparative quarter in fiscal year 2006, the Company recorded a pre-tax charge of $2,160 related to the fixed assets at its Tucson, Arizona, location. The charge was included in cost of sales. The Company also recorded a pre-tax charge of $20,045 for impairments of its identifiable intangible assets at Portland Oregon, and Toronto, Canada. In addition, the Company recorded a pre-tax charge in its Power Electronic Division of $13,674 related to goodwill impairment. Other than as described above, there were no impairment indicators with regard to fixed assets, identifiable intangible assets or goodwill as of October 31, 2006. 23 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 15. SUBSEQUENT EVENTS On November 16, 2006, the Company announced that it has made the decision to evaluate strategic alternatives for its Power Electronics Division, including the possible sale of the business. On November 21, 2006, the Company completed the private placement of $54,500 aggregate principal amount of 5.5% Convertible Senior Unsecured Notes Due 2026. The Company used the proceeds to repay its $50,000 secured term loan, fees and expenses associated with the offering and for general corporate purposes. The notes are unsubordinated unsecured obligations and rank equally within the Company's existing and future unsubordinated and unsecured obligations and are junior to any of the Company's future secured obligations to the extent of the value of the collateral securing such obligations. The notes are not guaranteed by, and are structurally subordinate in right of payment to, all obligations of the Company's subsidiaries, except for those subsidiaries that may in the future guarantee certain of the Company's other obligations will also be required to guarantee the notes. The notes require the semi-annual payment of interest on May 1 and November 1 of each year beginning May 15, 2007, at 5.5% per annum on the principal amount outstanding. The notes will mature on November 15, 2026. Prior to maturity, the holders may convert their notes into shares of the Company's common stock under certain circumstances. The initial conversion rate is 206.72 shares of common stock per $1,000 principal amount of notes, which is equivalent to an initial conversion price of approximately $4.84 per share. At any time on or after November 15, 2011, the Company may at its option redeem the notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the notes to be redeemed, plus any accrued and unpaid interest. The holder of the notes may require the Company to repurchase some or all of the holder's notes for cash upon the occurrence of a fundamental change as defined in the indenture and on each of November 15, 2011, 2016 and 2021 at a price equal to 100% of the principal amount to the notes being repurchased, plus accrued and unpaid interest, if any, in each case. If applicable, the Company will pay a make-whole premium on notes converted in connection with any fundamental change that occurs prior to November 15, 2011. The amount of the make-whole premium, if any, will be based on the Company's stock price and the effective date of the fundamental change. The indenture contains a detailed description of how the make-whole premium will be determined and a table showing the make-whole premium that would apply at various stock prices and fundamental change effective dates based on assumed interest and conversion rates. No make-whole premium will be paid if the price of the Common Stock on the effective date of the fundamental change is less than $4.30. Any make-whole premium will be payable in shares of Common Stock (or the consideration into which the Company's Common Stock has been exchanged in the fundamental change) on the conversion date for the notes converted in connection with the fundamental change. 24 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The notes were issued in an offering not registered under the Securities Act of 1933, as amended (Securities Act) and were sold to the Initial Purchasers on a private placement basis in reliance on the exemption from registration provided by Section 4(2) of the Securities Act and Rule 144A. Pursuant to the Registration Rights Agreement, the Company agreed, as promptly as practicable, but in no event more than 90 days after the original issuance of the notes, to file a shelf registration statement with the Securities and Exchange Commission (SEC) covering resales of the notes and the Common Stock issuable upon conversion of the notes. In addition, the Company agreed to use its commercially reasonable efforts to cause the shelf registration statement to become effective under the Securities Act on or prior to 210 days following the date the notes were originally issued. If the Company should fail to meet the registration obligations described above, the interest rate payable on the notes will increase by 0.25% per annum for the first 90 days the Company is not in compliance with such registration obligations and by an additional 0.25% per annum from and after the 91st day during which such registration default continues. As of December 7, 2006, the Company had not filed a shelf registration statement with the SEC. In connection with the issuance of the notes, the Company incurred approximately $2,500 in issuance costs which primarily consisted of investment banker fees, legal and other professional fees. These costs will be amortized to interest expense over five years. The Company expects to write off $982 of deferred financing costs associated with debt under the Company's previous capital structure during the fourth quarter of fiscal year 2007. 25 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Item 2. Three Months Ended October 31, 2006, compared to Three Months Ended October 31, 2005 Within the following discussion, unless otherwise stated, "quarter" and "nine-month period" refer to the third quarter of fiscal year 2007 and the nine months ended October 31, 2006. All comparisons are with the corresponding period in the prior year, unless otherwise stated. Net sales for the third quarter of fiscal year 2007 increased $3,741 or 3% to $130,707 from $126,966 in the third quarter of fiscal year 2006. This increase resulted from higher sales in the Power Electronics and Motive Power divisions, partially offset by lower sales in the Standby Power Division. Sales in the Power Electronics Division increased $4,051 or 9% primarily due to increased sales in magnetics, military and data acquisition markets. Sales in the Motive Power Division increased $782 or 6%, primarily due to pricing. Standby Power sales decreased by $1,092 or 2%, primarily due to lower volume, partially offset by higher pricing. Gross profit for the third quarter of fiscal year 2007 increased $213 or 1% to $18,012 from $17,799. Margins decreased to 13.8% from 14.0% in the prior year. Gross profit in the Power Electronics Division increased $4,487, with margins improving from 10.7% to 19.2%. This increase in margin was primarily due to the increase in sales coupled with prior year charges for fixed asset impairments of $2,160 and inventory write-offs of $2,434 resulting from compliance with the European Union's "Restriction on Use of Hazardous Substances in Electrical and Electronic Equipment" (RoHS) legislation. Gross profit in the Standby Power Division decreased $3,702, with margins decreasing from 17.7% to 12.6%. This decrease in margin was primarily due to the lower sales, coupled with higher lead costs. Average London Metal Exchange ("LME") prices increased from an average of 43 cents per pound in the third quarter of fiscal year 2006 to 61 cents per pound in the third quarter of fiscal year 2007. Gross profit in the Motive Power Division decreased by $572, with margins decreasing from 6.0% to 1.7%. Approximately $1,471 in costs and productivity losses were recorded in the quarter in connection with the transfer of production from Huguenot, New York, to Reynosa, Mexico, comprising severance and related closure costs of approximately $108 and productivity and unabsorbed overheads of approximately $1,363. Selling, general and administrative expenses for the third quarter of fiscal year 2007 decreased $919, or 6% to $14,663 from $15,582. This decrease was primarily due to lower fees for outside professional services in the amount of $1,002, lower salary and fringe costs in the amount of $823 and lower amortization expense of $321. These decreases were partially offset by higher warranty expense of $638. The decrease in professional fees was primarily due to lower Sarbanes-Oxley related expenses. The decrease in salary and fringes were primarily due to lower bonus and severance expenses. The decrease in amortization was primarily due to the intangible asset impairments which took place during the third quarter of fiscal year 2006. Research and development expenses for the third quarter of fiscal year 2007 increased $559 or 9% to $6,888 from $6,329. As a percentage of sales, research and development expenses increased from 5.0% during the third quarter of fiscal year 2006 to 5.3% during the third quarter of fiscal year 2007. Fiscal year 2007 expenses include severance costs of $421 associated with the closure of the Company's design facility in Portland, Oregon. During the third quarter of fiscal years 2007 and 2006, the Company recorded goodwill impairments in the amount of $13,947 and $13,674, respectively. During the third quarter of fiscal year 2006, the Company recorded impairments to identifiable intangible assets in the amount of $20,045. Operating loss for the third quarter of fiscal year 2007 decreased $20,345 to $17,486 from $37,831 in the third quarter of fiscal year 2006. 26 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Analysis of Change in Operating Income (Loss) Third Quarter of Fiscal Year 2007 vs. Third Quarter of Fiscal Year 2006
Standby Power Motive Power Electonics Power Division Division Division Consolidated ================================================================================================================ Operating Income (loss) - 3Q06 $ 4,766 $(40,753) $ (1,844) $(37,831) Impairment of identifiable intangible assets - 3Q06 -- 20,045 -- 20,045 Impairment of goodwill - 3Q06 -- 13,674 -- 13,674 Impairment of goodwill - 3Q07 -- (13,947) -- (13,947) Impairment of fixed assets - 3Q06 -- 2,160 -- 2,160 Management severance costs - 3Q06 487 259 82 828 Management severance costs - 3Q07 (56) (93) (127) (276) Huguenot closure -- -- (1,471) (1,471) Portland closure costs -- (619) -- (619) Assimilation charges - 3Q06 -- 770 -- 770 RoHS compliance - 3Q06 -- 2,434 -- 2,434 Contract manufacturers transition costs -- (203) -- (203) Lead - increased cost (6,003) -- (500) (6,503) Lead - hedge income 861 -- 10 871 Decrease (increase) in warranty expenses 204 72 (914) (638) Decrease in Sarbanes Oxley compliance costs 305 228 73 606 Pricing 3,100 -- 1,300 4,400 Volume/mix (1,377) 500 (500) (1,377) Other (637) (262) 490 (409) ---------------------------------------------------------------------------------------------------------------- Operating income (loss) - 3Q07 $ 1,650 $(15,735) $ (3,401) $(17,486) ================================================================================================================
Interest expense, net, increased $688 or 27% in the third quarter of fiscal year 2007, primarily due to higher debt levels, coupled with a higher effective interest rate. Income tax expense of $575 was recorded in the third quarter of fiscal year 2007, compared to income tax expense of $19,613 in the third quarter of fiscal year 2006. Tax expense in the three months ended October 31, 2006, is primarily due to a combination of tax expense in certain profitable foreign subsidiaries and the impact of losses for which no tax benefit is recognized under SFAS No. 109, "Accounting for Income Taxes" (SFAS No. 109). In the comparable period of the prior fiscal year, the Company wrote off a significant portion of its deferred tax assets and recorded valuation allowances against an additional portion of these deferred tax assets primarily due to the significant losses recognized in the fiscal year ended January 31, 2005, and the nine months ended October 31, 2005. 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 the current fiscal year, the joint venture had minority interest of $(55) compared to a minority interest of $(6) in the comparable period of the prior fiscal year. As a result of the above, a net loss of $21,701 was recorded compared to a net loss of $59,983 in the prior year. On a per share basis, the net loss was $0.85 compared to $2.36 in the third quarter of fiscal years 2007 and 2006, respectively. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Other Comprehensive Loss Other comprehensive loss was $14,779 in the third quarter of fiscal year 2007 as compared to $58,144 in the comparable period of fiscal year 2006. This was primarily due to the Company's net loss of $21,701 during the three months ended October 31, 2006, as compared to $59,983 during the three months ended October 31, 2005. Additionally, the Company had an unrealized gain on derivative instruments in the three months ended October 31, 2006, of $6,919 as compared to $2,200 during the three months ended October 31, 2005. The gains reflect the mark to market of the Company's forward commodity contracts as of October 31, 2006 and 2005. Nine months Ended October 31, 2006, compared to Nine months Ended October 31, 2005 Net sales for the nine months ended October 31, 2006, increased $19,441 or 5% to $392,304 from $372,863 in the nine months ended October 31, 2005. This increase resulted from higher sales in all three of the Company's divisions. Sales in the Power Electronics Division increased $8,730 or 6%, primarily due to higher volume with the Company's tier I customers. Sales in the Standby Power Division increased $7,618 or 4%. Motive Power sales increased by $3,093 or 8%. Sales increases in the Standby Power and Motive Power divisions are primarily due to increased pricing. Gross profit for the nine months ended October 31, 2006, decreased $2,647 or 4% to $60,340 from $62,987. Margins decreased to 15.4% from 16.9% in the prior year. Gross profit in the Standby Power Division decreased $3,943, with margins decreasing from 17.1% to 14.5%. Price increases were more than offset by higher raw material costs, principally lead, resins, copper and steel. Average "LME" prices increased from an average of 43 cents per pound in the nine months ended October 31, 2005, to 55 cents per pound in the nine months ended October 31, 2006. Gross profit in the Power Electronics Division increased $962, with margins decreasing from 20.5% to 19.9%. Prior year results included charges for fixed asset impairments of $2,160 and inventory write-offs of $2,434 resulting from compliance with the European Union's RoHS legislation. Margins in the division have otherwise been negatively impacted by domestic sourcing of certain new business opportunities during the first quarter of fiscal 2007, other customer mix changes, costs associated with the Company's transfer of production to new Asian contract manufacturers and general increases in raw material and component costs. Gross profit in the Motive Power Division increased by $334, with margins increasing from 3.8% to 4.3%. This increase is primarily due to improved pricing, partially offset by higher lead costs as well as expenses incurred and higher unabsorbed overhead resulting from closing Huguenot, New York and the transfer of production to Reynosa, Mexico. Selling, general and administrative expenses for the nine months ended October 31, 2006, decreased $985 or 2% to $45,621 from $46,606. This decrease was primarily due to lower salary and fringe costs in the amount of $1,981, lower fees for outside professional services in the amount of $1,728, and lower amortization expense of $901. These decreases were partially offset by higher warranty expense of $1,268, as well as higher selling commissions and travel costs. The decrease in salary and fringes were primarily due to lower bonus and severance expenses. The decrease in professional fees was primarily due to lower Sarbanes-Oxley related expenses. The decrease in amortization was primarily due to the intangible asset impairments which took place during the third quarter of fiscal year 2006. Higher warranty costs principally reflect experience changes in the Motive Power Division. Research and development expenses for the nine months ended October 31, 2006, increased $2,731 or 14% to $21,584 from $18,853. As a percentage of sales, research and development expenses increased from 5.1% during the first nine months of fiscal year 2006 to 5.5% during the first nine months of fiscal year 2007. Fiscal year 2007 expenses include severance costs of $421 associated with the closure of the Company's design facility in Portland, Oregon. In addition higher costs were incurred during the first six months of fiscal year 2007 in connection with the Company's RoHS Compliance Programs. During the third quarter of fiscal years 2007 and 2006, the Company recorded impairments to goodwill in the amount of $13,947 and $13,674, respectively. During the third quarter of fiscal year 2006, the Company recorded impairments to identifiable intangible assets in the amount of $20,045. The Company had an operating loss during the first nine months of fiscal year 2007 in the amount of $20,812 as compared to $36,191 during the first nine months of fiscal year 2006. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Analysis of Change in Operating Income (Loss) Nine months Ended October 31, 2006 vs. Nine months Ended October 31, 2005
Standby Power Motive Power Electonics Power Division Division Division Consolidated ======================================================================================================================== Operating income (loss) - nine months ended October 31, 2005 $ 10,654 $(40,070) $ (6,775) $(36,191) Impairment of identifiable intangible assets - 3Q06 -- 20,045 -- 20,045 Impairment of goodwill - 3Q06 -- 13,674 -- 13,674 Impairment of goodwill - 3Q07 -- (13,947) -- (13,947) Impairment of fixed assets - 3Q06 -- 2,160 -- 2,160 Management severance costs - FY06 1,676 1,179 601 3,456 Management severance costs - FY07 (1,025) (246) (333) (1,604) Huguenot closure -- -- (2,690) (2,690) Portland closure costs - serverance -- (619) -- (619) Assimilation charges -- 770 -- 770 RoHS compliance - 3Q06 -- 2,434 -- 2,434 RoHS compliance - FY07 -- (704) -- (704) Contract manufacturers transition costs -- (1,816) -- (1,816) Lead - increased cost (12,625) -- (1,154) (13,779) Lead - hedge income 3,470 -- 26 3,496 Decrease (increase) in warranty expenses 814 82 (2,164) (1,268) Decrease in Sarbanes Oxley compliance costs 720 488 159 1,367 Pricing 7,658 -- 4,000 11,658 Environmental accruals -- -- 756 756 Volume/mix 5 (2,063) (635) (2,693) Other - including material costs (4,563) (474) (280) (5,317) ------------------------------------------------------------------------------------------------------------------------ Operating income (loss) - nine months ended October 31, 2006 $ 6,784 $(19,107) $ (8,489) $(20,812) ========================================================================================================================
Interest expense, net, increased $2,775 or 40% in the nine months ended October 31, 2006, primarily due to higher debt levels, coupled with a higher effective interest rate. Income tax expense of $3,000 was recorded in the first nine months of fiscal year 2007, compared to $17,706 in the comparable period of the prior fiscal year. Tax expense in the nine months ended October 31, 2006, is primarily due to a combination of tax expense in certain profitable foreign subsidiaries, and the impact of losses for which no tax benefit is recognized under SFAS No. 109. In the comparable period of the prior fiscal year, the Company wrote off a significant portion of its deferred tax assets and recorded valuation allowances against an additional portion of these deferred tax assets primarily due to the significant losses recognized in the fiscal year ended January 31, 2005, and the nine months ended October 31, 2005. 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, 2006, the joint venture had minority interest of $(371) compared to a minority interest of $(169) in the comparable period of the prior fiscal year. As a result of the above, a net loss of $33,966 was recorded as compared to a net loss of $60,642 in the prior year. On a per share basis, the net loss was $1.33 compared to $2.39 in the comparable period of the prior fiscal year. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Other Comprehensive Loss Other comprehensive loss was $33,632 in the nine months ended October 31, 2006, as compared to $59,226 in the comparable period of fiscal year 2006. This was primarily due to the Company's net loss of $33,966 during the period as compared to $60,642 during the comparable period of the prior fiscal year. Liquidity and Capital Resources Net cash used by operating activities was $13,132 for the nine months ended October 31, 2006, compared to net cash provided by operating activities of $17,780 in the comparable period of the prior fiscal year. The decrease in net cash provided by operating activities was primarily due to: (i) a higher net loss in fiscal 2007 than fiscal 2006, excluding non cash impairment charges and the write-off of deferred tax assets and (ii) a decrease of $5,077 in accounts payable in the first nine months of fiscal year 2007 as compared to an increase of $10,075 in the first nine months on fiscal year 2006. Inventory was a use of cash in both the nine months ended October 31, 2006 ($5,930) and the nine months ended October 31, 2005 ($4,884) as was accounts receivable reflecting stronger Power Electronics divisional performance in the third quarters of fiscal years 2007 and 2006. The decrease in accounts payable in the current fiscal year is due to the timing of cash payments and book overdraft activity. Net cash used by investing activities increased $14,472 to $19,499 in the first nine months of fiscal year 2007 as compared to $5,027 in the first nine months of the prior fiscal year, primarily due to expenditures on the construction of the Company's new battery manufacturing facility in Shanghai, China. The Company had net cash provided by financing activities of $19,745 in the first nine months of fiscal year 2007 as compared to net cash used in financing activities of $13,441 in the first nine months of the prior fiscal year. Current year financing activities included $17,428 in proceeds from new borrowings, primarily used to fund operations, including certain of the Company's manufacturing moves. Prior year financing activities included a decrease in book overdrafts of $7,711 and the reduction of long-term debt in the amount of $4,225. The Company's 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 October 31, 2006, the maximum availability calculated under the borrowing base including a $10,000 blocking provision was $56,224, of which $25,571 was funded, and $8,078 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 2.00% or Prime plus .50%. In accordance with the terms of the Credit Facility pricing structure, effective July 1, 2006, the interest rate increased to LIBOR plus 2.00% or Prime plus .50% as a result of a reduction in the average excess availability during the three months ended June 30, 2006. 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 fiscal year 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%. 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) 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 it's 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. On June 14, 2006, the Company executed a second amendment to both of these credit facilities. These amendments provided consent of the lenders to the sale of certain excess real property owned by one of our U.K. subsidiaries. Separately, the amendments deferred the first amendment requirement that the company provide a second mortgage on its Mansfield, Massachusetts, facility until such time as the first mortgage is satisfied. Capital expenditures incurred during the first nine months of fiscal year 2007 were primarily incurred for the construction of our new Shanghai joint-venture facility, to fund cost reduction programs, normal maintenance and regulatory compliance. Fiscal year 2007 capital expenditures are expected to be approximately $30,000 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. As of October 31, 2006, the Company did not meet the availability requirements to pay dividends. The Term Loan also includes a maximum leverage ratio. On October 24, 2006, C&D entered into an agreement with its second-lien lenders whereby the second-lien lenders have agreed to a waiver of the leverage ratio covenant of the Loan and Security Agreement, dated December 7, 2005, as amended, for October 31, 2006, until November 30, 2006. On November 21, 2006, the Company completed the private placement of $54,500 aggregate principal amount of 5.5% Convertible Senior Notes Due 2026. The Company used substantially all of the net proceeds to repay its $50,000 million secured term loan. As of October 31, 2006, the Company had $2,100 of letters of credit with other financial institutions that do not reduce the Company's availability under its Credit Facility. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) FORWARD-LOOKING STATEMENTS The Company is furnishing information that contains certain statements that are, or may be deemed to be, "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements, other than statements of historical facts, included herein are forward-looking statements. Included among forward-looking statements are, among other things, the following factors that could impact those statements: o fluctuations in prices and availability of raw materials, particularly lead; o the success of integration of acquired businesses and the ability to make additional acquisitions or form strategic alliances; o the outcome of our review of strategic alternatives for the Power Electronics business, including potential disruption to the business during the review period; o restrictive loan covenants may impact our ability to operate our business and to pursue business strategies; o we may have additional impairment charges; o economic conditions or market changes in certain market sectors in which the Company conducts business; o changes in pricing environment; o success or timing of new product development; o foreign operations; o delays in the relocation of our Shanghai facility or the failure to complete that relocation; o political, economic and social changes, or acts of terrorism or war; o reliance on third parties whose operations are outside our control; o success of maintaining our operations through capital expenditures; o success of productivity initiatives, including rationalizations, relocations or consolidations; o impact of changes in management; o costs of complying with environmental laws and regulations and liabilities; o customers that become insolvent or bankrupt; o successful collective bargaining with our unionized workforce; o changes in our product mix; o consolidation of existing enterprise resource planning systems; o failure of customers to renew supply agreements; o protection of our proprietary intellectual property and technology; o statements regarding the Company's business strategy, business plans or any other plans, forecasts or objectives, any or all of which are subject to change; o statements regarding any SEC or other governmental, regulatory, administrative or other public body actions, requirements, permits or decisions, and; o any other statements that relate to nonhistorical or future information. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) These forward-looking statements are often identified by the use of terms and phrases such as "achieve," "anticipate," "believe," "estimate," "expect," "forecast," "plan," "project," "propose," "strategy" and similar terms and phrases. Although the Company believes that the expectations reflected in these forward-looking statements are reasonable, they do involve assumptions, risks and uncertainties, and these expectations may prove to be incorrect. The reader should not place undue reliance on these forward-looking statements, which speak only as of the date of this report. 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" under Item 1A of Part II of this report and in Item 1A of the Company's Form 10-K report for the year ended January 31, 2006. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (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. From time to time, the Company has entered into non-deliverable forward contracts with certain financial counterparties to hedge our exposure to the fluctuations in the price of lead, the primary raw material component used in our Standby Power and Motive Power divisions. The Company employs hedge accounting in the treatment of these contracts. Changes in the value of the contracts are marked to market each month and the gains and losses are recorded in other comprehensive loss until they are released to the income statement through cost of goods sold in the same period as is the hedged item (lead). Additional disclosure regarding various market risks were set forth in the Company's fiscal year 2006 Annual Report on Form 10-K filed with the SEC. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) 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. 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. 35 PART II. OTHER INFORMATION Item 1A - Risk Factors FLUCTUATIONS IN PRICES AND AVAILABILITY OF RAW MATERIALS, PARTICULARLY LEAD, COULD INCREASE OUR COSTS OR CAUSE DELAYS IN SHIPMENTS, WHICH WOULD ADVERSELY IMPACT OUR RESULTS OF OPERATIONS. Our operating results could be adversely affected by increases in the cost of raw materials, particularly lead, the primary component cost of our battery products, or other product parts or components. Lead represented approximately 32% of our combined Standby and Motive cost of sales for the nine months ended October 31, 2006. Lead market prices per pound averaged $0.22, $0.20, $0.25, $0.41 and $0.45 per pound in fiscal years 2002, 2003, 2004, 2005 and 2006, respectively, and $0.55 for the nine months ended October 31, 2006. Lead traded as high as $0.81 per pound on December 5, 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 $1.5 million for our Standby Power and Motive Power divisions. We have lead escalator clauses in certain of our customer contracts which allow us to offset the increase in lead costs through higher revenue-generally on a lag basis. Also, during fiscal 2007 we have announced several price increases and in November 2006 implemented a lead surcharge to mitigate the impact of the higher lead costs on our results of operations. A significant increase in the price of one or more raw materials, parts or components or the inability to successfully implement price increases / surcharges to mitigate such cost increases could have a material adverse effect on our results of operations. Additionally, we have instituted lead hedging programs to mitigate our exposure to volatility in the price of lead. To the extent lead market prices decline in the future, we may be obligated to purchase a portion of our lead requirements at higher prices than are then available in the market. Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate supply and delivery of raw materials, including lead and other product parts or components from our suppliers or from internal manufacturing capacity. Although we work closely with both our internal and external suppliers (and, as to the continuing availability of lead, our industry associations) to avoid encountering unavailability or shortages, we may encounter them in the future. The cessation, reduction or interruption of supply of raw materials, product parts or components could have a material adverse effect on our operations. The loss of a key supplier or the inability to obtain certain key products or components could cause delays or reductions in shipments of our products, which could negatively affect customer satisfaction, thereby reducing our revenues, or could increase our costs. WE MAY PURSUE STRATEGIC ALTERNATIVES FOR THE POWER ELECTRONICS DIVISION, INCLUDING THE POSSIBLE SALE OF THE DIVISION, WHICH COULD DISRUPT OUR BUSINESS AND MAY UNFAVORABLY IMPACT OUR FUTURE FINANCIAL PERFORMANCE. We are evaluating strategic alternatives for our Power Electronics Division, including the possible sale of the business. Any such strategic alternative, including the possible sale of the Division, may involve risks and uncertainties that could disrupt our business and may unfavorably impact our future financial performance. There can be no assurance that any specific strategic alternative or transaction involving our Power Electronics Division will occur or, if one is undertaken, of its potential terms or timing. With any strategic alternative, including a sale of the Division, there are risks that future operating results could be unfavorably impacted if targeted objectives, such as cost savings, are not achieved or if other business disruptions occur as a result of implementing the strategic alternative or activities related to the strategic alternative. Restrictive loan covenants associated with certain of our debt instruments may impact our ability to operate our business and to pursue our business strategies, and our failure to comply with these covenants could result in an acceleration of our indebtedness. 36 RESTRICTIVE LOAN COVENANTS MAY IMPACT OUR ABILITY TO OPERATE OUR BUSINESS AND TO PURSUE OUR BUSINESS STRATEGIES, AND OUR FAILURE TO COMPLY WITH THESE COVENANTS COULD RESULT IN AN ACCELERATION OF OUR INDEBTEDNESS. Our $75,000,000 principal amount Line of Credit Facility ("Credit Facility"), the indenture governing our 5.25% Convertible Senior Notes Due 2025 ("2005 Notes") and the indenture governing our 5.50% Convertible Senior Notes Due 2026 ("2006 Notes"), contain certain covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The Credit Facility and the indentures governing our 2005 Notes and 2006 Notes restrict, among other things, our ability and the ability of our subsidiaries to: o incur additional indebtedness or enter into sale and leaseback transactions; o pay dividends or make distributions on our capital stock or certain other restricted payments or investments; o purchase or redeem stock; o issue stock of our subsidiaries; o make investments and extend credit; o engage in transactions with affiliates; o transfer and sell assets; o effect a consolidation or merger or sell, transfer, lease or otherwise dispose of all or substantially all of our assets; and o create liens on our assets to secure debt. Our liquidity derived from the Credit Facility is based on availability determined by a borrowing base. The availability is calculated monthly and is dependent upon our eligible receivables, inventory and certain equipment. We may not be able to maintain adequate levels of eligible assets to support our required liquidity. In addition, our Credit Facility requires us to meet certain financial ratios. Our ability to comply with these provisions may be affected by events beyond our control, and we may not be able to meet the financial ratios. Rising prices of lead and other commodities and other circumstances have resulted in us obtaining amendments to our financial covenants in the past. 37 Any breach of the covenants in our Credit Facility or the indentures governing our 2005 Notes and 2006 Notes could cause a default under our Credit Facility and other debt (including the 2005 and 2006 Notes), which would restrict our ability to borrow under our Credit Facility, thereby significantly impacting our liquidity. If there were an event of default under any of these debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to these debt instruments to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under these debt instruments if accelerated upon an event of default or, in the case of the 2005 Notes and 2006 Notes, following certain fundamental changes. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our Credit Facility or the indentures governing the 2005 Notes and 2006 Notes, the lenders under our Credit Facility or the holders of the 2005 Notes and 2006 Notes could institute foreclosure proceedings against the assets securing borrowings under those facilities. DELAYS IN THE RELOCATION OF OUR SHANGHAI FACILITY OR THE FAILURE TO COMPLETE THAT RELOCATION MAY ADVERSELY AFFECT OUR BUSINESS AND RESULTS OF OPERATIONS. The government in the Peoples Republic of China has notified our joint venture that it is required to relocate our Shanghai facility, for which the Chinese government has paid the joint venture approximately $15.5 million to effect the relocation and the construction of a new facility with an additional $1.7 million payable by the Chinese government upon the transfer of the Shanghai facility to the Chinese government on or about February 2007. We anticipate commencing production in the new facility in the first quarter of fiscal year 2008. Delays in or failure to complete the relocation and construction of the new facility, as well as labor disruptions or stoppages relating to the relocation and related reductions in workforce, may inhibit our ability to complete orders and deliver products to our customers, and delays in or a failure to complete the relocation would require us to move production of some products to other facilities, which would adversely impact our operations and hinder our growth. Also, this relocation will require us to build up higher levels of inventory to enable us to continue to satisfy customer demand during the transition period, which will require a higher investment in working capital and affect our financial position. Furthermore, recent changes in the tax legislation in the Peoples Republic of China have effectively increased the cost basis of product manufactured at our Shanghai facility and exported from China by over 10%. Absent price increases to our customers, this would impact profitability of our Shanghai facility and may also impact the competitiveness of this operation versus alternative manufacturing locations. 38 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities:
Total Number of Maximum Number Shares Purchased (or Approximate as Part of Publicly Dollar Value) of Total Number Announced Shares that May Yet of Shares Average Price Plans Be Purchased Under Period Purchased Paid per Share or Programs the Plans or Programs ====================================================================================================================== August 1 - August 31, 2006 -- -- -- 1,000,000 September 1 - September 30, 2006 -- -- -- 1,000,000 October 1 - October 31, 2006 -- -- -- 1,000,000 ------------------------------------------------------ -------------- Total -- -- ======================================================================================================================
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. Restrictions on Dividends and Treasury Stock Purchases: The Company entered into two new credit facilities on December 7, 2005. Both agreements limit 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 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 $30,000,000 in excess availability for a period of thirty days prior to the dividend. The Term Loan also includes a maximum leverage ratio. The Company may declare and pay a dividend provided these conditions are met and there does not exist an event of default. As of October 31, 2006, the Company did not meet the availability requirements to make these restricted payments. 39 Item 6. 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). 32.1 Section 1350 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Section 1350 Certification of the Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 40 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 7, 2006 By: /s/ Jeffrey A. Graves ------------------------------------ Jeffrey A. Graves President, Chief Executive Officer and Director (Principal Executive Officer) December 7, 2006 By: /s/ Ian J. Harvie ------------------------------------ Ian J. Harvie Vice President, Finance and Chief Financial Officer (Principal Financial Accounting Officer) December 7, 2006 By: /s/ Neil E. Daniels ------------------------------------ Neil E. Daniels Vice President, Corporate Controller and Treasurer (Principal Accounting Officer) 41 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. 42