10-Q 1 d72671_10-q.txt QUARTERLY REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 2007. OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-9389 C&D TECHNOLOGIES, INC. (Exact name of Registrant as specified in its Charter) Delaware 13-3314599 (State of other jurisdiction of (I.R.S. Employer Incorporation or organization) Identification No.) 1400 Union Meeting Road Blue Bell, Pennsylvania 19422 (Address of principal executive office) (Zip Code) (215) 619-2700 (Registrant's telephone number, including area code) N/A -------------------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: YES |X| NO |_| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accepted filer and large accelerated filer" in Rule 12b-2 of the Exchange Act (Check one): Large accelerated filer Accelerated filer |X| Non-accelerated filer Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES |_| NO |X| Number of shares of the Registrant's Common Stock outstanding on July 31, 2007: 25,667,267 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES FORM 10-Q INDEX Part I FINANCIAL INFORMATION Item 1 Financial Statements (Unaudited) Consolidated Balance Sheets - July 31, 2007 and January 31, 2007 3 Consolidated Statements of Operations - Three and Six Months Ended July 31, 2007 and 2006 5 Consolidated Statements of Cash Flows - Six Months Ended July 31, 2007 and 2006 6 Consolidated Statements of Comprehensive (loss) income - Three and Six Months Ended July 31, 2007 and 2006 8 Notes to Consolidated Financial Statements 9 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 28 Item 3 Quantitative and Qualitative Disclosures about Market Risk 41 Item 4 Controls and Procedures 41 Part II OTHER INFORMATION Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 42 Item 6 Exhibits 43 SIGNATURES 44 EXHIBIT INDEX 45 2 PART I. FINANCIAL INFORMATION Item 1. Financial Statements C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except par value) (UNAUDITED) July 31, January 31, 2007 2007 -------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 5,046 $ 5,384 Accounts receivable, less allowance for doubtful accounts of $1,064 and $1,203 57,142 55,397 Inventories 67,859 57,041 Deferred income taxes 197 134 Prepaid taxes 2,561 2,634 Other current assets 4,186 6,121 Assets held for sale 122,925 125,485 -------------------------------------------------------------------------------- Total current assets 259,916 252,196 Property, plant and equipment, net 81,316 83,984 Deferred income taxes 642 531 Intangible and other assets, net 16,593 15,543 Goodwill 59,778 59,733 -------------------------------------------------------------------------------- TOTAL ASSETS $ 418,245 $ 411,987 -------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt $ 39,501 $ 1,286 Accounts payable 42,614 40,282 Book overdrafts 3,495 2,310 Accrued liabilities 13,473 13,708 Other current liabilities 8,836 28,983 Liabilities held for sale 36,212 36,532 -------------------------------------------------------------------------------- Total current liabilities 144,131 123,101 Deferred income taxes 9,346 9,155 Long-term debt 123,421 147,925 Other liabilities 31,193 28,591 -------------------------------------------------------------------------------- Total liabilities 308,091 308,772 -------------------------------------------------------------------------------- The accompanying notes are an integral part of these statements. Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. 3 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except par value) (UNAUDITED)
July 31, January 31, 2007 2007 -------------------------------------------------------------------------------------------------- Commitments and contingencies (see Note 10) Minority interest 11,846 7,548 Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 29,081,110 and 29,040,960 shares issued; 25,667,267 and 25,649,424 shares outstanding, respectively 291 290 Additional paid-in capital 74,776 74,188 Treasury stock, at cost, 3,413,843 and 3,391,536 shares, respectively (47,239) (47,110) Accumulated other comprehensive loss (14,423) (13,952) Retained earnings 84,903 82,251 -------------------------------------------------------------------------------------------------- Total stockholders' equity 98,308 95,667 -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 418,245 $ 411,987 --------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. The accompanying notes are an integral part of these statements. 4 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except per share data) (UNAUDITED)
Three months ended Six months ended July 31, July 31, 2007 2006 2007 2006 -------------------------------------------- NET SALES $ 94,590 $ 83,411 $ 183,055 $ 164,890 COST OF SALES 80,636 70,566 156,346 138,828 -------------------------------------------- GROSS PROFIT 13,954 12,845 26,709 26,062 OPERATING EXPENSES: Selling, general and administrative expenses 12,267 11,638 24,304 22,927 Research and development expenses 1,801 1,736 3,308 3,572 Gain on sale of Shanghai, China plant -- -- (15,162) -- -------------------------------------------- OPERATING (LOSS) INCOME FROM CONTINUING OPERATIONS (114) (529) 14,259 (437) -------------------------------------------- Interest expense, net 2,133 2,834 4,322 5,502 Other (income) expense, net (308) 445 (940) 717 -------------------------------------------- LOSS (INCOME) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND MINORITY INTEREST (1,939) (3,808) 10,877 (6,656) -------------------------------------------- Income tax provision (benefit) from continuing operations 346 155 403 (282) -------------------------------------------- (LOSS) INCOME FROM CONTINUING OPERATIONS BEFORE MINORITY INTEREST (2,285) (3,963) 10,474 (6,374) Minority interest (526) (102) 4,002 (315) -------------------------------------------- (LOSS) INCOME FROM CONTINUING OPERATIONS (1,759) (3,861) 6,472 (6,059) -------------------------------------------- (LOSS) INCOME FROM DISCONTINUED OPERATIONS BEFORE INCOME TAXES (1,219) 963 (3,167) (1,858) INCOME TAX PROVISION FROM DISCONTINUED OPERATIONS 104 699 2,257 2,706 -------------------------------------------- (LOSS) INCOME FROM DISCONTINUED OPERATIONS (1,323) 264 (5,424) (4,564) -------------------------------------------- NET (LOSS) INCOME $ (3,082) $ (3,597) $ 1,048 $ (10,623) ============================================ Income (loss) per share: Basic: --------- --------------------- ---------- Net (loss) income from continuing operations $ (0.07) $ (0.15) $ 0.25 $ (0.24) -------------------------------- ---------- Net (loss) income from discontinued operations $ (0.05) $ 0.01 $ (0.21) $ (0.18) -------------------------------- ---------- Net (loss) Income $ (0.12) $ (0.14) $ 0.04 $ (0.42) -------------------------------- ---------- Diluted: -------------------------------------------- Net (loss) income from continuing operations $ (0.07) $ (0.15) $ 0.22 $ (0.24) -------------------------------------------- Net (loss) income from discontinued operations $ (0.05) $ 0.01 $ (0.12) $ (0.18) -------------------------------------------- Net (loss) income $ (0.12) $ (0.14) $ 0.10 $ (0.42) -------------------------------------------- Dividends per share $ -- $ -- $ -- $ 0.01375 --------------------------------------------
Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. The accompanying notes are an integral part of these statements. 5 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Six months ended July 31, 2007 2006 ---------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income (loss) $ 1,048 $ (10,623) Net loss from discontinued operations (5,424) (4,564) ---------------------- Net income (loss) from continuing operations 6,472 (6,059) Adjustments to reconcile net (loss) to continuing operations net cash used in continuing operating activities: Minority interest 4,002 (315) Share-based compensation 315 174 Depreciation and amortization 6,341 6,557 Amortization of debt acquisition costs 791 583 Annual retainer to Board of Directors paid by the issuance of common stock 273 224 Deferred income taxes (267) 918 Gain on disposal of assets (15,174) (24) Changes in assets and liabilities: Accounts receivable (4,148) (9,081) Inventories (10,526) (137) Other current assets (2,138) 224 Accounts payable 435 (8,685) Accrued liabilities (294) 1,480 Income taxes payable 355 (267) Other current liabilities (365) (578) Funds provided to discontinued operations (3,844) (11,451) Other long-term assets 270 32 Other long-term liabilities 3,451 2,133 Other, net 1,306 403 ---------------------------------------------------------------------------------------------------------------------------- Net cash used in continuing operating activities (12,745) (23,869) Net cash provided by discontinued operating activities 713 5,358 ---------------------------------------------------------------------------------------------------------------------------- Net cash used in operating activities (12,032) (18,511) ---------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Acquisition of property, plant and equipment (4,316) (8,816) Proceeds from disposal of property, plant and equipment 1,893 30 ---------------------------------------------------------------------------------------------------------------------------- Net cash used in continuing investing activities (2,423) (8,786) Net cash used in discontinued investing activities (236) (1,431) ---------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,659) (10,217) ---------------------------------------------------------------------------------------------------------------------------- Cash flows from financing activities: Proceeds from new borrowings 14,107 24,924 Increase in book overdrafts 1,185 4,159 Financing cost of long term debt (459) (700) Proceeds from exercise of stock options -- 975 Purchase of treasury stock (130) (122) Common stock dividends paid -- (352) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by continuing financing activities 14,703 28,884 Net cash used in discontinued financing activities (405) (524) ---------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities 14,298 28,360 ---------------------------------------------------------------------------------------------------------------------------- Effect of exchange rate changes on cash and cash equivalents 127 225 ---------------------------------------------------------------------------------------------------------------------------- Decrease in cash and cash equivalents from continuing operations (338) (3,546) Cash and cash equivalents, beginning of period 5,384 17,439 ---------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 5,046 $ 13,893 ----------------------------------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. The accompanying notes are an integral part of these statements. 6 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED)
Six months ended July 31, 2007 2006 -------------------------------------------------------------------------------------------------- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES Increase in property, plant and equipment acquisitions in accounts payable $ 2,002 $ 520
Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. The accompanying notes are an integral part of these statements. 7 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (Dollars in thousands) (UNAUDITED)
Three months ended Six months ended July 31, July 31, 2007 2006 2007 2006 ------------------------------------------------------------------------------------------------------------------------ NET (LOSS) INCOME $ (3,082) $ (3,597) $ 1,048 $ (10,623) Other comprehensive income (loss), net of tax: Net unrealized loss on derivative instruments (1,563) (2,874) (2,297) (7,027) Adjustment to recognize pension liability and net periodic pension cost 411 -- 850 -- Foreign currency translation adjustments 673 185 976 439 ------------------------------------------------------------------------------------------------------------------------ Total comprehensive (loss) income $ (3,561) $ (6,286) $ 577 $ (17,211) ------------------------------------------------------------------------------------------------------------------------
Certain classifications to these statements have been reflected for the presentation of the Power Electronics Division as discontinued operations as well as the change in method of accounting for inventories. See item 1, Note 1, Interim statements and basis of presentation and Note 2, Change in method of accounting. The accompanying notes are an integral part of these statements. 8 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 1. INTERIM STATEMENTS AND BASIS OF PRESENTATION The accompanying interim unaudited consolidated financial statements of C&D Technologies, Inc. (the "Company") have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, we do not include all the information and notes required for complete financial statements. In the opinion of management, the interim unaudited consolidated financial statements include all adjustments considered necessary for the fair statements of the financial position, results of operations and cash flows for the interim periods presented. The financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2007 Annual Report on Form 10-K dated April 16, 2007. Effective February 1, 2007, the Company has begun classifying certain costs, which were previously classified as cost of sales, as selling, general and administrative expenses. For comparative purposes, the three and six months ended July 31, 2006, have been revised to classify $1,397 and $2,725, respectively, of such costs as selling, general and administrative expenses which were previously classified as cost of sales. During the second quarter of fiscal year 2008, the Company committed to plans to sell the Power Electronics Division, thereby meeting the held for sale criteria set forth in Statement of Financial Accounting Standards ("SFAS") No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets". As a result of this decision, the Company presented in the July 31, 2007 Form 10-Q, the assets and liabilities of the Power Electronics Division as held for sale and presented the results of operations of the Power Electronics Division for the three and six months ended July 31, 2007 as discontinued operations. All corresponding prior year periods presented in July 31, 2007 Form 10-Q were retrospectively adjusted to reflect segregation of assets and liabilities of the Power Electronic Division as held for sale. In preparing the current segment disclosures, the Company determined that continuing operations consists of two segments, Standby Power and Motive Power. Indirect expenses, such as corporate overheads, which previously were allocated to our Power Electronic Division, are included within the results of our continuing operating segments. In accordance with Emerging Issues Task Force ("EITF") No. 87-24, "Allocation of Interest to Discontinued Operations", interest on debt that is required to be repaid as a result of the disposal transaction has been allocated to the discontinued operations. 2. CHANGE IN METHOD OF ACCOUNTING On September 7, 2007 the Company announced the change of method of accounting for its inventory from the last-in, first-out ("LIFO") to the first-in, first-out ("FIFO") method. In accordance with SFAS No. 154, "Accounting Changes and Error Corrections", the Company has retrospectively applied this change in method of inventory costing to all prior periods. See note 6, Inventories, for further discussion. 3. DISCONTINUED OPERATIONS AND ASSETS HELD FOR SALE On June 19, 2007, the Company entered into a definitive agreement with Murata Manufacturing Co., Ltd. of Japan ("Murata") pursuant to which the Company agreed to sell its Power Electronics Division ("PED"). The Power Electronics Division manufactures various devices relating to electronic power supply and conversion. On August 31, 2007, the Company completed the sale of the Power Electronics Division for $85,000, subject to post closing working capital adjustments. For financial reporting purposes, the assets, liabilities, results of operations and cash flows of this business have been segregated from those of continuing operations and are presented in the Company's consolidated financial statements as discontinued operations and assets and liabilities held for sale. Corresponding prior years were retrospectively adjusted to reflect segregation of assets and liabilities of the Power Electronic Division as held for sale. 9 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) The following summarizes the results of operations for the Power Electronics Division for the three and six months ended July 31, 2007 and 2006, respectively.
Three months ended Six months ended July 31, July 31, 2007 2006 2007 2006 ------------------------------------------ Net sales $ 41,149 $ 49,019 $ 83,493 $ 96,707 ------------------------------------------ Gross profit 8,514 12,845 16,871 21,974 ------------------------------------------ Operating (loss) income (30) 1,171 (989) (1,247) ------------------------------------------ Income taxes provision 104 699 2,257 2,706 ------------------------------------------ (Loss) income from discontinued operations $ (1,323) $ 264 $ (5,424) $ (4,564) ------------------------------------------
Assets and liabilities held for sale are comprised of the following: July 31, January 31, 2007 2007 ----------------------- Assets held for sale: Accounts receivable, net $ 29,613 $ 28,844 Inventories 40,487 42,965 Property, plant and equipment, net 16,639 16,831 Other assets, net 36,186 36,845 ----------------------- Total assets held for sale $ 122,925 $ 125,485 ======================= Liabilities held for sale: Short-term debt $ 4,807 $ 5,212 Accounts payable 15,101 13,933 Accrued liabilities 7,606 8,202 Other liabilities 8,698 9,185 ----------------------- Total liabilities held for sale $ 36,212 $ 36,532 ======================= 4. STOCK-BASED COMPENSATION The Company granted 36,000 and 315,334 stock option awards during the three and six months ended July 31, 2007, and 82,000 and 95,000 during the three and six months ended July 31, 2006, respectively. Under the provisions of SFAS No. 123R, the Company recorded $169 and $233, of stock compensation related to stock option awards in its unaudited consolidated statement of operations for the three and six months ended July 31, 2007, and $124 and $174 during the three and six months ended July 31, 2006, respectively. The impact on earnings per share for the three and six months ended July 31, 2007 and 2006 was less than $0.01. On March 12, 2007, the Company granted 84,600 restricted stock awards and 84,600 of performance shares to selected executives and other key employees under the Company's 2007 Stock Incentive Plan. The restricted stock awards vest ratably over four years and the expense is recognized over the vesting period. Compensation expense associated with restricted stock in the three and six months ended July 31, 2007, was $54 and $82, respectively. The performance shares vest at the end of the performance period upon the achievement of pre-established financial objectives. Compensation expense associated with performance shares in the three and six months ended July 31, 2007 was $(18) and $0, respectively. There were no restricted stock awards or performance shares granted in prior periods. 10 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) The following table summarizes information about the stock options outstanding at July 31, 2007:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------- ------------------------------------- Weighted- Average Weighted- Weighted- Weighted- Remaining Average Average Average Range of Number Contractual Exercise Number Contractual Exercise Exercise Prices Outstanding Life Price Exercisable Life Price -------------------------------------------------------------------------------------------------- $ 4.89 - $ 7.21 709,884 8.0 Years $ 6.05 371,351 8.1 Years $ 6.71 $ 7.81 - $ 9.18 533,735 8.5 Years $ 8.06 532,068 8.5 Years $ 8.06 $ 9.80 - $ 14.50 240,424 5.1 Years $ 11.32 240,424 5.1 Years $ 11.32 $ 14.94 - $ 22.31 891,244 4.9 Years $ 18.79 887,544 4.9 Years $ 18.80 $ 26.76 - $ 37.28 196,010 3.7 Years $ 32.64 196,010 3.7 Years $ 32.64 $ 48.44 - $ 55.94 48,700 3.0 Years $ 54.41 48,700 3.0 Years $ 54.41 -------------------------------------------------------------------------------------------------- Total 2,619,997 6.4 Years $ 14.17 2,276,097 6.1 Years $ 15.48 --------------------------------------------------------------------------------------------------
The estimated fair value of the options granted was calculated using the Black Scholes Merton option pricing model ("Black Scholes"). The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the estimated life of the option is based on U.S. Government Securities Treasury Constant Maturities over the contractual term of the equity instrument. Expected volatility is based on the historical volatility of the Company's stock. The Company uses the shortcut method described in Staff Accounting Bulletin No. 107 to determine the expected life assumption. The fair value of stock options granted during the three and six months ended July 31, 2007 and 2006 was estimated on the grant date using the Black-Scholes option pricing model with the following average assumptions.
Three months ended July 31, Six months ended July 31, 2007 2006 2007 2006 ------------------------------------------------------------------------------------------- Risk-free interest rate 4.88% 4.96%-5.03% 4.45%-4.88% 4.66%-5.03% Dividend yield 0.00% 0.00% 0.00% 0.00%-0.66% Volatility factor 49.45% 47.31%-52.53% 49.25%-49.45% 47.31%-54.25% Expected lives 5 Years 5-6 Years 5 Years 5-6 Years
5. NEW ACCOUNTING PRONOUNCEMENTS In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" which establishes a framework for measuring fair value in accordance with generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial position and results of operations. 11 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -- Including an Amendment of FASB Statement No. 115". The Statement permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. This statement is effective for reporting periods beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial position and results of operations. 6. INVENTORIES Inventories consisted of the following: July 31, January 31, 2007 2007 -------------------------------------------------------------------------- Raw materials $ 19,265 $ 14,669 Work-in-process 20,446 15,943 Finished goods 28,148 26,429 -------------------------------------------------------------------------- Total $ 67,859 $ 57,041 -------------------------------------------------------------------------- On September 7, 2007 the Company changed the method of accounting for its inventory from the last-in, first-out ("LIFO") method to the first-in, first-out ("FIFO") method. With the divestiture of the Company's Power Electronics Division which was announced on August 31, 2007, the Company's remaining business is all battery-related, and as a result the Company believes the FIFO inventory method provides better comparability with industry peers, more accurate matching of the company's revenues and expenses, a relevant and meaningful balance sheet valuation methodology and a more efficient financial closing process. In accordance with Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections", the Company has retrospectively applied this change in method of inventory costing. 12 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) The impact of the change in method on certain financial statement line items is as follows:
Three months Six months ended ended July 31, July 31, 2006 2006 ------------------------- Statement of earnings data: As originally reported- reclassified to present continuing operations Cost of sales $ 69,685 $ 140,950 Operating income (loss) 352 (2,559) Income taxes provision (benefit) 155 (282) Loss from continuing operations (2,980) (8,181) Net loss (3,607) (12,265) Basic loss per share- continuing operations $ (0.12) $ (0.32) Diluted loss per share- continuing operations $ (0.12) $ (0.32) Basic and diluted net loss per share $ (0.14) $ (0.48) Effect of Change - Increase (decrease) Cost of sales 881 (2,122) Operating (loss) income (881) 2,122 Income taxes -- -- (Loss) income from continuing operations (881) 2,122 Net loss 10 1,642 Basic (loss) earnings per share- continuing operations $ (0.03) $ 0.08 Diluted (loss) earnings per share- continuing operations $ (0.03) $ 0.08 Basic and diluted net loss per share $ -- $ 0.06 As revised Cost of sales $ 70,566 $ 138,828 Operating loss (529) (437) Income taxes 155 (282) Loss from continuing operations (3,861) (6,059) Net loss (3,597) (10,623) Basic loss per share- continuing operations $ (0.15) $ (0.24) Diluted loss per share- continuing operations $ (0.15) $ (0.24) Basic and diluted net loss per share $ (0.14) $ (0.42)
13 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED)
As of January 31, 2007 ----------- Balance sheet data: As originally reported- reclassified to present continuing operations Inventory $ 48,019 Total assets $ 400,210 Retained earnings $ 70,474 Total liabilities and stockholders' equity $ 400,210 Effect of change Inventory $ 9,022 Total assets 11,777 Retained earnings (11,777) Total liabilities and stockholders' equity $ (11,777) As revised Inventory $ 57,041 Total assets 411,987 Retained earnings 82,251 Total liabilities and stockholders' equity $ 411,987
Six Months Ended July 31, 2006 ------------ Statement of Cash Flows data: As originally reported- reclassified to present continuing operations Net cash used in continuing operations $ (25,991) Change in inventories $ (11,203) Net loss $ (8,181) Effect of change Net cash used in continuing operations $ 2,122 Change in inventories $ 2,122 Loss from continuing operations $ 2,122 As revised Net cash used in continuing operations $ (23,869) Change in inventories $ (9,081) Loss from continuing operations (6,059)
14 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) Had the Company continued to apply the LIFO method of accounting, the impact on the statement of operations would have resulted in a decrease to operating income of $8,358 and $9,781 ($8,358 and $9,781, net of tax) and a decrease in basic (losses) earnings per share of approximately $0.33 and $0.38 for the three and six months ended July 31, 2007, respectively. The impact on diluted (losses) earnings per share would have been approximately $0.22 for the six months ended July 31, 2007. 7. OTHER CURRENT LIABILITIES AND OTHER LIABILITIES During fiscal year 2005, the Company received $15,547 (which was included in other current liabilities at January 31, 2007) from the Chinese government as partial payment for the Company's old joint venture battery facility located in Shanghai. The Company used these funds for the construction of a new battery manufacturing facility in Shanghai, which was completed during the first quarter of fiscal year 2008. This payment, along with a final payment of $1,850 received during the first quarter of fiscal year 2008, was recognized as income, net of the book value of assets disposed and other exit costs, when the old facility was transferred to the Chinese government during the first quarter of fiscal year 2008. During the first quarter of fiscal 2008 the Company recognized a gain of $15,162 on this transaction. 8. INCOME TAXES Effective at the beginning of the first quarter of fiscal year 2008, the Company adopted Financial Interpretation ("FIN") No. 48, "Accounting for Uncertainty in Income Taxes-an interpretation of FASB Statement No. 109." FIN No. 48 contains a two-step approach to recognizing and measuring uncertain tax positions accounted for in accordance with SFAS No. 109, "Accounting for Income Taxes." The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely of being realized upon ultimate settlement. As a result of the implementation of FIN No. 48, the Company decreased the liability for net unrecognized tax benefits by $1,604 and accounted for the reduction as a cumulative effect of a change in accounting principle that resulted in an increase to retained earnings of $1,604. The total amount of gross unrecognized tax benefits as of the date of adoption was $932, which if recognized, approximately $530 would be recorded as a benefit to income taxes on the statement of operations, therefore, would impact the effective tax rate. The Company recognized $233 of previously unrecognized tax benefits as a discrete item in the first quarter of fiscal year 2008 as the result of the expiration of the statute of limitation with respect to a jurisdiction for which it had taken a benefit for an uncertain tax position on a filed return. The Company historically classified unrecognized tax benefits in current taxes payable, or as a direct offset to deferred taxes to the extent the uncertain tax position impacted a net operating loss. As a result of adoption of FIN No. 48, unrecognized tax benefits in the amount of $436 were reclassified and included within other liabilities in the Company's consolidated balance sheet as of April 30, 2007. The Company's policy to include interest and penalties related to unrecognized tax benefits within the provision for income taxes on the consolidated financial statements of income did not change as a result of implementing the provisions of FIN No. 48. As of the date of adoption of FIN No. 48, the Company had accrued $120 for the payment of interest and penalties relating to unrecognized tax benefits. Interest of $123 was included as part of the increase to retained earnings as a result of adoption of FIN No. 48. The Company files U.S. federal, state and foreign tax returns. The Company and its subsidiaries are subject to U.S. federal income tax as well as income tax of multiple foreign and state jurisdictions. The Company has substantially concluded all U.S. federal income tax matters for years through fiscal year 2005. With few exceptions the Company is no longer subject to state or foreign examinations for years prior to fiscal year 2002. Due to the Company's federal, state and foreign net operating loss carryforwards, any future adjustments to the unrecognized tax benefit will have an immaterial impact on the Company's effective tax rate due to the valuation allowance, 15 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) which fully offsets the tax benefit related to the net operating losses. The Company does not expect its unrecognized tax benefit to change significantly during the next twelve months.
Six months ended July 31, 2007 2006 ------------------------------------------------------------------------------------ Provision (benefit) for income taxes from continuing operations $ 403 $ (282) Effective income tax rate 3.7% (4.2)%
The effective tax rates for continuing operations were 3.7% and (4.2)% for the six months ended July 31, 2007 and 2006, respectively. Tax expense in the six months ended July 31, 2007 is due to a combination of tax expense in certain profitable foreign subsidiaries and the lack of tax benefit recognized in certain jurisdictions where the Company incurred a loss, in addition to the local tax exemption on proceeds received related to the relocation of the Shanghai facility. In the jurisdictions where the Company incurred a loss, the Company recorded an increase to its valuation allowance. The effective tax rate in the six months ended July 31, 2006 benefited from the adjustment of previously recorded tax reserves, due to the expiration of the statute of limitations for the tax years to which the reserves related. The U.S. tax impact from the involuntary conversion gain of its facilities in China, was offset by a decrease in our valuation allowance and was treated as a discrete event during the first quarter of fiscal year 2008 and is reflected within the effective income tax rate for the six months ended July 31, 2007. The Company has significant federal and state net operating losses carryforwards available, which begin to expire in varying amounts from December 31, 2009 to January 31, 2027. The Company is currently undertaking an analysis to determine if the future use or the amount if any of its loss carryforwards could be restricted as a result of possible recent changes in ownership as defined by rules and limitations, set out in Section 382 of the Internal Revenue code. 16 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 9. NET INCOME (LOSS) PER COMMON SHARE Basic earnings (loss) per common share was computed using net income and the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share was computed using net income and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock awards using the treasury stock method, as well as the assumed conversion of debt using the if-converted method. The following table sets forth the computation of basic and diluted earnings (loss) per common share from continuing operations.
Three months ended Three months ended July 31, July 31, 2007 2006 2007 2006 ------------------------------------------------------------------------------------------------------------------------------------ Numerator: Numerator for basic (loss) earnings per common share - income from continuing operations $ (1,759) $ (3,861) $ 6,472 $ (6,059) Effect of dilutive securities: -- -- Interest expense on Convertible Notes -- -- 3,515 -- Numerator for diluted (loss) earnings per common share - net income (loss) from continuing operations $ (1,759) $ (3,861) $ 9,987 $ (6,059) ========================================================== Denominator: Denominator for basic earnings per common share- weighted average common share 25,661,127 25,595,674 25,655,962 25,541,240 Effect of dilutive securities: Convertible Notes -- -- 20,120,932 -- Employee stock awards -- -- 32 -- Employee stock options -- -- 104 -- ---------------------------------------------------------- Dilutive potential common shares -- -- 20,121,068 -- Denominator for diluted earnings per common share - adjusted weighted average common shares and assumed conversions 25,661,127 25,595,674 45,777,030 25,541,240 ---------------------------------------------------------- Basic (loss) earnings per common share from continuing operations $ (0.07) $ (0.15) $ 0.25 $ (0.24) ---------------------------------------------------------- Diluted (loss) earnings from common share from continuing operations $ (0.07) $ (0.15) $ 0.22 $ (0.24) ----------------------------------------------------------
Due to a net loss in the three months ended July 31, 2007 and 2006, 137 and 19,980, respectively, of dilutive securities issuable in connection with stock option plans have been excluded from the diluted loss per share calculation because their effect would reduce the net loss per share. Due to a net loss during the six months ended July 31, 2006, 77,828 of dilutive securities issuable in connection with stock option plans have been excluded from the diluted loss per share calculation because their effect would reduce the net loss per share. Additionally, 20,120,932 and 8,854,785 of dilutive securities issuable in connection with convertible bonds have been excluded from the diluted loss per share calculation for the three months ended July 31, 2007 and for the three and six months ended July 31, 2006, respectively, because their effect would reduce the loss per share. During the six months ended July 31, 2007, there were 2,347,997 outstanding employee stock options that were out of the money and therefore excluded from the calculation of the dilutive effect of employee stock options. In accordance with SFAS No. 128 "Earnings per Share" for the computation of diluted earnings per share for the six months ended July 31, 2007, the (loss) earnings per share for discontinued operations and net income per share was included regardless of its effect, because the income from continuing operation was dilutive. 17 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 10. CONTINGENT LIABILITIES Legal In January 1999, the Company received notification from the U.S. Environmental Protection Agency ("EPA") of alleged violations of permit effluent and pretreatment discharge limits at its plant in Attica, Indiana. The Company submitted a compliance plan to the EPA in April 2002. The Company engaged in negotiations with both the EPA and U.S. Department of Justice ("DOJ") through March 2003 regarding a potential resolution of this matter. The government filed suit against the Company in March 2003 in the United States District Court for the Southern District of Indiana for alleged violations of the Clean Water Act. The parties reached a settlement, and agreed to the terms of a Consent Decree, with an agreed civil penalty of $1,600. The Court entered and the Company paid the Consent Decree during the fourth quarter of fiscal year 2007. In addition to payment of the civil penalty, the Consent Decree requires the Company to implement a Compliance Work Plan for completing implementation of certain compliance measures set forth in the Consent Decree. These compliance measures are required to be implemented by the Company in accordance with a schedule approved by the EPA. The Compliance Work Plan and schedule are fully enforceable parts of the Consent Decree. The Consent Decree also requires certain pretreatment compliance measures, including the continued operation of a wastewater pretreatment system, which was previously installed at the Attica facility. The Consent Decree further requires certain National Pollution Discharge Elimination System ("NPDES") compliance measures, including testing, sampling and reporting requirements relating to a NPDES storm water monitoring system at the facility. Additionally, the Consent Decree provides for stipulated penalties for noncompliance with the requirements of the Consent Decree. The Company does not expect that the Consent Decree will have a material adverse effect on its business, financial condition or results of operations. Environmental The Company is subject to extensive and evolving environmental laws and regulations regarding the clean-up and protection of the environment, worker health and safety and the protection of third parties. These laws and regulations include, but are not limited to (i) requirements relating to the handling, storage, use and disposal of lead and other hazardous materials in manufacturing processes and solid wastes; (ii) record keeping and periodic reporting to governmental entities regarding the use and disposal of hazardous materials; (iii) monitoring and permitting of air emissions and water discharge; and (iv) monitoring worker exposure to hazardous substances in the workplace and protecting workers from impermissible exposure to hazardous substances, including lead, used in our manufacturing process. Notwithstanding the Company's efforts to maintain compliance with applicable environmental requirements, if injury or damage to persons or the environment arises from hazardous substances used, generated or disposed of in the conduct of the Company's business (or that of a predecessor to the extent the Company is not indemnified therefor), the Company may be held liable for certain damages, the costs of investigation and remediation, and fines and penalties, which could have a material adverse effect on the Company's business, financial condition, or results of operations. However, under the terms of the purchase agreement with Allied Corporation ("Allied") for the acquisition (the "Acquisition") of the Company (the "Acquisition Agreement"), Allied was obligated to indemnify the Company for any liabilities of this type resulting from conditions existing at January 28, 1986, that were not disclosed by Allied to the Company in the schedules to the Acquisition Agreement. These obligations have since been assumed by Allied's successor in interest, Honeywell ("Honeywell"). C&D is participating in the investigation of contamination at several lead smelting facilities ("Third Party Facilities") to which C&D allegedly made scrap lead shipments for reclamation prior to the date of the acquisition. Pursuant to a 1996 Site Participation Agreement, as later amended in 2000, the Company and several other potentially responsible parties ("PRP"s) agreed upon a cost sharing allocation for performance of remedial activities required by the United States EPA Administrative Order Consent Decree entered for the design and remediation phases at the former NL Industries, Inc. ("NL") site in Pedricktown, New Jersey. In April 2002, one of the original PRPs, Exide Technologies (Exide), filed for relief under Chapter 11 of Title 11 of the United States Code. In August 2002, Exide notified the PRPs that it would no longer be taking an active role in any further action at the site and discontinued its financial participation, resulting in a pro rata increase in the cost participation of the other PRPs, including the Company, for which the Company's allocated share rose from 5.25% to 7.79%. 18 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. NL and Norfolk Southern Railway Company have been conducting a removal action on the site, preliminary to remediation. The Company, along with other PRPs, continues to negotiate with NL at this site regarding the Company's share of the allocated liability. The Company is aware of the existence of contamination at its former Huguenot, New York, facility, which is expected to require expenditures for further investigation and remediation. The site is listed by the New York State Department of Environmental Conservation ("NYSDEC") on its registry of inactive hazardous waste disposal sites due to the presence of fluoride and other contaminants in and underlying a lagoon used by a previous owner of this site, Avnet, Inc., for disposal of wastewater. Contamination is present at concentrations that exceed state groundwater standards. In 2002, the NYSDEC issued a Record of Decision ("ROD") for the soil remediation portion of the site. A ROD for the ground water portion has not yet been issued by the NYSDEC. In 2005, the NYSDEC also requested that the parties engage in a Feasibility Study, which the parties are conducting in accordance with a NYSDEC approved work plan. In February 2000, the Company filed suit against Avnet, Inc., and in December 2006, the parties executed a settlement agreement which provides for a cost sharing arrangement with Avnet bearing a majority of the future costs associated with the investigation and remediation of the lagoon-related contamination. C&D, together with Johnson Controls, Inc. ("JCI"), is conducting an assessment and remediation of contamination at and near its facility in Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of this project was completed as of October 2001. Under the purchase agreement with JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment and remediation, with a maximum liability of $1,750 (ii) any environmental liabilities at the facility that are not remediated as part of the ongoing cleanup project and (iii) environmental liabilities for any new claims made after the fifth anniversary of the closing, i.e. March 2004, that arise from migration from a pre-closing condition at the Milwaukee facility to locations other than the Milwaukee facility, but specifically excluding liabilities relating to pre-closing offsite disposal. JCI retained the environmental liability for the off-site assessment and remediation of lead. In March 2004, the Company entered into an agreement with JCI to continue to share responsibility as set forth in the original purchase agreement. The Company continues to negotiate with JCI regarding the allocation of costs for assessment and remediation of certain off-site chlorinated volatile organic compounds ("CVOC"s) in groundwater. In February 2005, the Company received a request from the EPA to conduct exploratory testing to determine if the historical municipal landfill located on the Company's Attica, Indiana, property is the source of elevated levels of trichloroethylene detected in two city wells downgradient of the Company's property. EPA advised that it believes the former landfill is subject to remediation under the Resource Conservation and Recovery Act ("RCRA") corrective action program. The Company conducted testing in accordance with an investigation work plan and submitted the test results to EPA. EPA thereafter notified the Company that EPA also wanted it to embark upon a more comprehensive RCRA investigation to determine whether there have been any releases of other hazardous waste constituents from its Attica facility and, if so, to determine what corrective measure may be appropriate. In January 2007, the Company agreed to an Administrative Order on Consent with EPA to investigate, and remediate if necessary, site conditions at the facility. A Current Conditions Report, detailing potential areas for investigation, has been completed for the Attica site and submitted to the EPA. The scope of any potential exposure is not defined at this time. The Company has conducted site investigations at its Conyers, Georgia facility, and has detected chlorinated solvents in groundwater and lead in soil both onsite and offsite. The Company has recently initiated remediation of the chlorinated solvents in accordance with a Corrective Action Plan, which was approved by the Georgia Department of Natural Resources in January 2007. Additionally, the Company completed remediation of on-site lead impacted soils identified in the site investigations. In September 2005, an adjoining landowner filed suit against the Company alleging, among other things, that it was allowing lead contaminated stormwater runoff to leave its property and contaminate the adjoining property. In March 2007, the parties executed a settlement agreement with the Company agreeing to purchase a parcel of land between its property and plaintiff's property and to use the transferred parcel to construct a bioremediation area to prevent potential future lead contamination to plaintiff's property. However, in July 2007, the Company received notice from plaintiff that plaintiff's property was allegedly more contaminated than previously contemplated and that plaintiff intends to pursuer the litigation. The Company accrues reserves for liabilities in its consolidated financial statements and periodically reevaluates the reserved amounts for these liabilities in view of the most current information available in accordance with SFAS No. 5, 19 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) "Accounting for Contingencies." As of July 31, 2007 and January 31, 2007, accrued environmental reserves totaled $1,692 and $2,192, respectively, consisting of $969 and $1,469 in other current liabilities and $723 and $723 in other liabilities. Based on currently available information, the Company believes that appropriate reserves have been established with respect to the foregoing contingent liabilities and that they are not expected to have a material adverse effect on its business, financial condition or results of operations. 20 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 11. OPERATIONS BY REPORTABLE SEGMENT As a result of the Company's sale of its Power Electronic Division, the composition of the Company's reportable segments has changed. The Company has the following continuing operations reportable business segments: The Standby Power Division manufactures and markets integrated reserve power systems and components for the standby power market, which includes telecommunications, uninterruptible power supplies, cable and utilities. Integrated reserve power systems monitor and regulate electric power flow and provide backup power in the event of a primary power loss or interruption. The Standby Power Division also produces the individual components of these systems, including reserve batteries, power rectifiers, system monitors, power boards and chargers. Major applications of these products include wireless and wireline telephone infrastructure, cable television signal powering, corporate data center powering and computer network backup for use during power outages. The Motive Power Division manufactures complete systems and individual components (including power electronics and batteries) to power, monitor, charge and test the batteries used in electric industrial vehicles, including fork-lift trucks, automated guided vehicles and airline ground support equipment. These products are marketed to end users in a broad array of industries, dealers of fork-lift trucks and other material handling vehicles and, to a lesser extent, original equipment manufactures. Certain expenses, such as corporate overheads, which previously were allocated to the Power Electronic Division, are now included within the results of the continuing operating segments. For the three and six months ended July 31, 2006, the gross profit for the Standby Power Division has decreased by $402 and $1,160 and operating income by $768 and $1,905, respectively, from the company's previously reported results. For the three and six months ended July 31, 2006, the gross profit for the Motive Power Division has decreased by $124 and $357 and operating income by $291 and $700, respectively, from the company's previously reported results. 21 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) Summarized financial information related to the Company's continuing business segments for the three and six months ended July 31, 2007 and 2006, is shown below. All sales between business segments have been eliminated. Standby Motive Three months ended July 31, 2007 Power (1) Power Consolidated -------------------------------------------------------------------------------- Net sales $ 80,951 $ 13,639 $ 94,590 Gross profit $ 12,053 $ 1,901 $ 13,954 Operating income (loss) $ 2,657 $ (2,771) $ (114) Three months ended July 31, 2006 -------------------------------------------------------------------------------- Net sales $ 69,279 $ 14,132 $ 83,411 Gross profit $ 12,154 $ 691 $ 12,845 Operating income (loss) $ 2,673 $ (3,202) $ (529) Six months ended July 31, 2007 -------------------------------------------------------------------------------- Net sales $ 156,595 $ 26,460 $ 183,055 Gross profit $ 23,560 $ 3,149 $ 26,709 Operating income (loss) $ 19,740 $ (5,481) $ 14,259 Six months ended July 31, 2006 -------------------------------------------------------------------------------- Net sales $ 135,990 $ 28,900 $ 164,890 Gross profit $ 24,019 $ 2,043 $ 26,062 Operating income (loss) $ 5,025 $ (5,462) $ (437) (1) Standby Power operating income in the six months ended July 31, 2007 includes a $15,162 gain on the sale of the Company's old Shanghai, China plant. Many of the Company's facilities manufacture products for more than one segment. Therefore, it is not practical to disclose asset information (assets, expenditures for long-lived assets) on a segment basis. 22 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 12. DERIVATIVE INSTRUMENTS The Company is exposed to various market risks. The primary financial risks include fluctuations in certain commodity prices and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. The Company does not invest in derivative instruments for speculative purposes, but does enter into hedging arrangements in order to reduce its exposure to fluctuations in the price of lead as well as to fluctuations in exchange rates. The Company applies hedge accounting in accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," whereby the Company designates each derivative as a hedge of (i) the fair value of a recognized asset or liability or of an unrecognized firm commitment (fair value hedge); or (ii) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized asset or liability (cash flow hedge). From time to time, however, the Company may enter into derivatives that economically hedge certain of its risks, even though hedge accounting is not allowed by SFAS No. 133 or is not applied by the Company. In these cases, there generally exists a natural hedging relationship in which changes in fair value of the derivative, that are recognized currently in earnings, act as an economic offset to changes in the fair value of the underlying hedged item(s). The following table provides the fair value of the Company's derivative contracts which include foreign exchange contracts and forward commodity contracts. July 31, January 31, 2007 2007 --------------------- ---------------------- Carrying Carrying Amount Fair Value Amount Fair Value -------------------------------------------------------------------------- Commodity hedges $ 2,380 $ 2,380 $ 4,890 $ 4,890 Foreign exchange hedges $ (245) $ (245) $ 117 $ 117 -------------------------------------------------------------------------- The commodity forwards are designated as cash flow hedges. Therefore, changes in their fair value, net of tax, are recorded in accumulated other comprehensive income and released to earnings in the period the hedged item is recognized. Hedge accounting was not applied by the Company for its foreign exchange contracts; however, a natural hedging relationship exists between the underlying hedged items and the derivative instrument itself. Changes in fair value of the foreign exchange contracts are recorded in earnings each period. 23 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 13. WARRANTY The Company provides for estimated product warranty expenses when the related products are sold. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows: Six months ended July 31, 2007 2006 ------------------------------------------------------------------ Balance at beginning of period $ 7,760 $ 7,324 Current year provisions 5,090 3,405 Expenditures (3,163) (4,098) Effect of foreign currency translation 1 3 ------------------------------------------------------------------ Balance at end of period $ 9,688 $ 6,634 ------------------------------------------------------------------ As of July 31, 2007, accrued warranty obligations of $9,688 include $3,508 in current liabilities and $6,180 in other liabilities. As of January 31, 2007, accrued warranty obligations of $7,760 include $2,890 in current liabilities and $4,870 in other liabilities. 24 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 14. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS Effective for fiscal year 2007, the Company adopted the provisions of SFAS No. 158. SFAS No. 158 requires that the funded status of defined benefit postretirement plans be recognized on the Company's consolidated balance sheets, and the changes in the funded status be reflected in comprehensive income. The Company follows SFAS No. 132 (revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits." This standard requires the disclosure of the components of net periodic benefit cost recognized during interim periods.
Pension Benefits Postretirement Benefits ------------------- ------------------------ Three months ended Three months ended July 31, July 31, 2007 2006 2007 2006 ----------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 325 $ 423 $ 23 $ 39 Interest cost 1,045 1,052 57 60 Expected return on plan assets (1,217) (1,212) -- -- Amortization of prior service costs 1 4 (6) (7) Recognized actuarial loss/(gain) 411 539 (1) 2 Curtailment 22 12 -- (36) Special termination benefit 173 -- -- -- ----------------------------------------------------------------------------------------- Net periodic benefit cost $ 760 $ 818 $ 73 $ 58 -----------------------------------------------------------------------------------------
Pension Benefits Postretirement Benefits ------------------- ------------------------ Six months ended Six months ended July 31, July 31, 2007 2006 2007 2006 ----------------------------------------------------------------------------------------- Components of net periodic benefit cost: Service cost $ 765 $ 878 $ 61 $ 89 Interest cost 2,140 2,096 122 123 Expected return on plan assets (2,436) (2,425) -- -- Amortization of prior service costs 4 7 (11) (14) Recognized actuarial loss/(gain) 850 1,056 (2) 2 Curtailment 22 13 -- (36) Special termination benefit 173 -- -- -- ----------------------------------------------------------------------------------------- Net periodic benefit cost $ 1,518 $ 1,625 $ 170 $ 164 -----------------------------------------------------------------------------------------
The Company estimates that it will be required to make contributions of approximately $1,763 to its U.S. pension plans for fiscal year 2008. The Company also expects to make contributions totaling approximately $338 to the two Company sponsored postretirement benefit plans during fiscal year 2008. 25 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 15. RESTRUCTURING During fiscal year 2007, the Company implemented organizational and operational changes to streamline and rationalize its structure in an effort to simplify the organization and eliminate redundant costs. On April 6, 2006, the Company announced the closure of its Motive Power manufacturing facility in Huguenot, New York, and the transfer of production to Reynosa, Mexico. As a result of this decision, the Company recorded severance accruals in the three months ended April 30, 2006 of $168, in its consolidated statements of operations. These charges relate to work force reductions of approximately 136 employees. All cash payments were completed by April 30, 2007. During the fourth quarter of fiscal year 2007, the Company recorded severance charges of $2,387 in its financial statements within its Standby Power Division. These charges relate to workforce reduction of approximately 223 employees at the Company's joint venture in China. All employee termination and cash payments were completed by April 30, 2007. On April 16, 2007 the Company announced its decision to close its Standby Power Division manufacturing facility in Conyers, Georgia and the transfer of its production to Leola, Pennsylvania. As a result of this action, the Company recorded severance charges of $320 and $538 in its financial statements during the three and six months ended July 31, 2007. These charges were included in the cost of sales on the consolidated statement of operations. Further severance charges of approximately $28 are expected to be incurred in the third quarter of fiscal year 2008. In addition the Company incurred approximately $200 of special pension termination benefits and approximately $400 of other cost relating to the closure of Conyers. Additionally, approximately $1,595 is expected to be incurred during the third and fourth quarters of fiscal year 2008, related to the relocation of certain equipment from Conyers to Leola and other closure costs. A reconciliation of the beginning and ending severance liability and related activity is shown below. Balance at Balance at January 31, Provision July 31, 2007 Additions Expenditures 2007 --------------------------------------------------------------- Severance $ 626 $ 538 $ 851 $ 313 --------------------------------------------------------------- Total $ 626 $ 538 $ 851 $ 313 --------------------------------------------------------------- 26 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 16. SUBSEQUENT EVENTS On August 31, 2008, the Company announced the completion of the sale of its Power Electronic Division to Murata Manufacturing Co., Ltd of Japan for $85,000 cash, subject to working capital adjustments. The agreement to sell this business was previously announced on June 19, 2007. The Company used a portion of the sale proceeds to repay in full outstanding borrowings under its Credit facility. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Item 2. Three Months Ended July 31, 2007, compared to Three Months Ended July 31, 2006 During the second quarter of fiscal year 2008, the Company committed to plans to sell the Power Electronics Division, thereby meeting the held for sale criteria set forth in SFAS No. 144 "Accounting for the Impairment of Disposal of Long-Lived Assets". As a result of this decision, the Company presented in the July 31, 2007 Form 10-Q, the assets and liabilities of the Power Electronics Division as held for sale and presented the results of operations of the Power Electronics Division for the three and six months ended July 31, 2007 as discontinued operations. All corresponding prior year periods presented in the July 31, 2007 Form 10-Q were retrospectively adjusted to reflect segregation of assets and liabilities of the Power Electronic Division as held for sale. In preparing our current segment disclosures, the Company determined that continuing operations consists of two segments, Standby Power and Motive Power. Indirect expenses, such as corporate overheads, which previously were allocated to our Power Electronic Division, are included within the results of our continuing operating segments. In accordance with EITF No. 87-24, "Allocation of Interest to Discontinued Operations", interest on debt that is required to be repaid as a result of the disposal transaction has been allocated to the discontinued operations On September 7, 2007 the Company announced the change of method of accounting for its inventory from the last-in, first-out ("LIFO") to the first-in, first-out ("FIFO") method. In accordance with Statement of Financial Accounting Standards No. 154, "Accounting Changes and Error Corrections", the Company has retrospectively applied this change in method of inventory costing to all prior periods. See item 1, note 6, Inventories, for further discussion. Within the following discussion, unless otherwise stated, "quarter" and "three-month" period" refer to the second quarter of fiscal year 2008. All comparisons are with the corresponding period in the prior fiscal year, unless otherwise stated. Continuing operations Net sales in the second quarter of fiscal year 2008 increased $11,179 or 13% to $94,590 from $83,411 in the second quarter of fiscal year 2007. This increase resulted from higher sales in the Standby Power Division while sales were lower in the Motive Power Division. Sales in the Standby Power Division increased $11,672 or 17%, primarily due to increased pricing coupled with strong volume in the UPS and Cable markets. Motive Power Division sales decreased $493 or 3% primarily as increased pricing was more than offset by lower volume compared to the second quarter of fiscal year 2007. Gross profit in the second quarter of fiscal year 2008 increased $1,109 or 9% to $13,954 from $12,845. Margins decreased from 15.4% to 14.8% in the second quarter of fiscal year 2008. Gross profit in the Standby Power Division decreased $101 with margins decreasing to 14.9% from 17.5%. Price increases and benefits from the Company's cost reduction programs were offset by higher raw material costs, principally lead, resins, copper and steel. Average London Metal Exchange ("LME") prices increased from an average of 48 cents per pound in the second quarter of fiscal year 2007 to $1.15 per pound in the second quarter of fiscal year 2008. Lead traded as high as $1.58 per pound on July 23, 2007. Second quarter fiscal year 2008 results also included severance and other costs associated with the closure of the Division's Conyers, Georgia facility of $924. Gross profit in the Motive Power Division increased $1210 with margins increasing from 4.9% to 13.9%. This improvement is primarily due to the prior year impact of costs incurred associated with the closure of the Company's Huguenot, New York manufacturing facility. Excluding these charges, lower volumes and higher lead costs, net of pricing recoveries negatively impacted Motive Power gross profit performance. Selling, general and administrative expenses in the second quarter of fiscal year 2008 increased $629 or 5% to $12,267 from $11,638 primarily as a result of higher warranty costs in the Motive Power Division due to higher current lead prices. As a percentage of sales selling, general and administrative expenses were 13.0% and 14.0% in the second quarter of fiscal 2008 and 2007, respectively. 28 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Research and development expenses in the second quarter of fiscal year 2008 increased $65 or 4% to $1,801 from $1,736. As a percentage of sales, research and development expenses decreased from 2.1% in the second quarter of fiscal year 2007 to 1.9% in the second quarter of fiscal year 2008. Operating loss from continuing operations in the second quarter of fiscal year 2008 was decreased $415 or 78% to $114 from $529. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Analysis of Change in Operating Income (Loss) from continuing operations Second Quarter of Fiscal Year 2008 vs. Second Quarter of Fiscal Year 2007 Standby Motive Power Power Division Division Consolidated -------------------------------------------------------------------------------- Operating income (loss) 2Q 07 $ 2,673 $ (3,202) $ (529) Lead costs, net (7,230) (702) (7,932) Price / volume 6,891 709 7,600 Huguenot closure -- 1,111 1,111 Conyers closure (924) -- (924) Warranty (388) (918) (1,306) Fiscal year 2007 management changes 419 97 516 Other net, including cost reduction programs 1,216 134 1,350 ------------------------------------------------------------------------------- Operating income (loss) 2Q 08 $ 2,657 $ (2,771) $ (114) ------------------------------------------------------------------------------- Interest expense, net in the second quarter of fiscal year 2008 decreased $701 or 25% to $2,133 from $2,834 in the second quarter of fiscal year 2007, primarily due to a lower effective interest rate resulting from last year's convertible notes refinancing. Other income was $308 in the second quarter of fiscal year 2008 compared to other expense of $445 in the second quarter of fiscal year 2007. The difference was primarily due to $499 of foreign exchange gains in the second quarter of fiscal year 2008 compared to $226 of foreign exchange losses in the second quarter of fiscal year 2007. Income tax expense from continuing operations of $346 was recorded in the second quarter of fiscal year 2008, compared to $155 in the second quarter of fiscal year 2007. Tax expense in the second quarter of both fiscal years 2008 and 2007, is primarily due to foreign taxes on profits which were not offset by losses for which no tax benefit is recognized under SFAS No. 109. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by the Company. In the second quarter of fiscal year 2008, the joint venture had a benefit of $526 compared to a benefit of $102 in the second quarter of fiscal year 2007. As a result of the above, a loss from continuing operations of $1,759 was recorded in the second quarter of fiscal year 2008 as compared to a net loss of $3,861 in the prior year. Discontinued operations Loss from discontinued operations before income taxes was $1,219 in the second quarter of fiscal year 2008 as compared to income of $963 in the second quarter of fiscal year 2007. Income tax expense from discontinued operations of $104 was recorded in the second quarter of fiscal year 2008, compared to income tax expense of $699 in the second quarter of fiscal year 2007. Net loss from discontinued operations in the second quarter of fiscal year 2008 was $1,323 compared to an income of $264 in the second quarter of fiscal year 2007. The deterioration was driven primarily by unfavorable product mix, pricing changes and manufacturing moves partially offset by fiscal 2008 savings associated with the closure of the Company's Milwaukie, Oregon facility as well as fiscal 2007 costs incurred in connection with the Company's RoHS Compliance Programs. As a result of the above, net loss of $3,082 was recorded as compared to a net loss of $3,597 in the prior year. On a per share basis, the net loss from continuing operations was $0.07 in the second quarter of fiscal year 2008 compared to a net loss of $0.15 in the second quarter of fiscal year 2007, basic and diluted, respectively. The net loss from discontinued operations was 30 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) $0.05 compared to net income of $0.01 in the second quarter of fiscal year 2007, basic and fully diluted. The net loss on a per share basis was $0.12 compared to $0.14 in the second quarter of fiscal year 2007, basic and diluted. 31 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Other Comprehensive Loss Other comprehensive loss decreased by $2,725 in the second quarter of fiscal year 2008 to $3,561 from a loss of $6,286 in the second quarter of fiscal year 2007. This decrease was primarily due to a decrease in net loss of $515 coupled with a lower unrealized loss on derivative instruments of $1,563 compared to $2,874 in second quarter of fiscal year 2007. 32 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Six Months Ended July 31, 2007, compared to Six months Ended July 31, 2006 Continuing operations Net sales for the six months ended July 31, 2007 increased $18,165 or 11% to $183,055 from $164,890 in the six months ended July 31, 2006. This increase resulted from higher sales and pricing in the Standby Power Division while sales were lower in the Motive Power Division. Sales in the Standby Power Division increased $20,605 or 15%, primarily due to increased pricing and strong volume in the UPS and cable markets. Motive Power Division sales decreased $2,440 or 8% with increased pricing offset by lower volume compared to the second quarter of fiscal year 2007. Gross profit for the six months ended July 31, 2007 increased $647 or 2% to $26,709 from $26,062. Margins decreased from 15.8% to 14.6%. Gross profit in the Standby Power Division decreased $459 with margins decreasing to 15.0% from 17.7%. Price increases and benefits from the Company's cost reduction programs were offset by higher raw material costs, principally lead, resins, copper and steel. Average London Metal Exchange ("LME") prices increased from an average of 52 cents per pound in the six months ended July 31, 2006 to $1.01 per pound in the six months ended July 31, 2007. Six months ended July 31, 2007 results included severance costs and other costs associated with the closure of the Division's Conyers, Georgia facility of $1,142. Gross profit in the Motive Power Division increased $1,106, with margins increasing from 7.1% to 11.9%. This improvement is primarily due to the prior year impact of costs associated with the closure of the Company's Huguenot, New York manufacturing facility. Excluding these charges, lower volumes, higher lead costs, net of pricing recoveries and warranty more than offset the savings realized from the Company's cost reduction programs. Selling, general and administrative expenses for the six months ended July 31, 2007, increased $1,377 or 6.0% to $24,304 from $22,927 primarily as a result of higher Motive Power Division warranty costs. As a percentage of sales selling, general and administrative expenses were 13.3% and 13.9% in the six months ended July 31, 2007 and 2006, respectively. Research and development expenses for the six months ended July 31, 2007 decreased $264 or 7% to $3,308 from $3,572. As a percentage of sales, research and development expenses decreased from 2.2% in the six months ended July 31, 2006 to 1.8% in the six months ended July 31, 2007. During the six months ended July 31, 2007, the Company recognized a gain of $15,162 from the sale of its old joint venture manufacturing facility in Shanghai, China. Operating income from continuing operations for the six months of fiscal year 2008 was $14,259 compared to an operating loss of $437 in the second quarter of fiscal year 2007. 33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Analysis of Change in Operating Income (Loss) from continuing operations Six months ended July 31, 2007 vs. Six months ended July 31, 2006
Standby Motive Power Power Division Division Consolidated --------------------------------------------------------------------------------------------------- Operating income (loss) Six months ended July 31, 2006 $ 5,025 $ (5,462) $ (437) Lead costs, net (12,629) (1,132) (13,761) Price / volume 11,356 625 11,981 Gain on sale of Shanghai, China plant 15,162 -- 15,162 Conyers closure (1,142) -- (1,142) Huguenot closure -- 1,219 1,219 Warranty (416) (1,268) (1,684) Fiscal year 2007 management changes 870 181 1,051 Other net, including cost reduction programs 1,514 356 1,870 --------------------------------------------------------------------------------------------------- Operating income (loss) 2Q Six months ended July 31, 2007 $ 19,740 $ (5,481) $ 14,259 ---------------------------------------------------------------------------------------------------
Interest expense, net for the six months ended July 31, 2007, decreased $1,180 or 21% to $4,322 from $5,502 in the six months ended July 31, 2006, primarily due to a lower effective interest rate resulting from last year's convertible notes refinancing. Other income was $940 for the six months ended July 31, 2007, compared to other expense $717 in the six months ended July 31, 2006. The difference was primarily due to $1,269 of foreign exchange gains in the second quarter of fiscal year 2008 compared to $372 of foreign exchange losses in the second quarter of fiscal year 2007. Income tax expense from continuing operations of $403 was recorded in six months ended July 31, 2007, compared to an income tax benefit of $282 in the six months ended July 31, 2006. Tax expense in the six months ended July 31, 2007 is primarily due to foreign taxes on profits which were not offset by losses for which no tax benefit is recognized under SFAS No. 109. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by the Company. In the six months ended July 31, 2007, the joint venture had minority interest of $4,002 compared to a benefit of $315 in the six months ended July 31, 2006. Approximately, $5,003 of the increase in minority interest was the result of the $15,162 gain recognized on the sale of our old manufacturing plant in Shanghai, China. As a result of the above, income from continuing operations of $6,472 was recorded compared to a loss of $6,059 in the prior year. Discontinued operations Loss from discontinued operations before income taxes was $3,167 compared to a loss of $1,858 for the six months ended July 31, 2006. Income tax expense from discontinued operations of $2,257 was recorded, compared to $2,706 for the six months ended July 31, 2006. Net loss from discontinued operations for the six months ended July 31, 2007 was $5,424 compared to $4,564 in the prior year. The increase in net loss was primarily driven by unfavorable product mix, pricing changes partially offset by fiscal 2008 savings associated with the closure of the Company's Milwaukie, Oregon facility as well as fiscal 2007 costs incurred in connection with the Company's RoHS Compliance Programs and manufacturing moves. As a result of the above, net income of $1,048 was recorded as compared to a net loss of $10,623 in the prior year. On a per share basis, the net income from continuing operations was $0.25 and $0.22 for basic and diluted, respectively, compared to a net loss of $0.24 for the six months ended July 31, 2006. The net loss for discontinued operations was $0.21 and $0.12 for basic and diluted, respectively, compared to a net loss of $0.18 for the six months ended July 31, 2006, basic and diluted. Net 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) income on a per share basis was $0.04 and $0.10 basic and diluted, respectively, compared to a net loss of $0.42 in the prior year, basic and diluted. 35 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Other Comprehensive Income (Loss) The Company recorded other comprehensive income of $577 for the six months ended July 31, 2007 as compared to a comprehensive loss of $17,211 in the six months ended July 31, 2006. This increase was primarily due to net income of $1,048 in the six months ended July 31, 2007 as compared to a net loss of $10,623 in the comparable period at the previous fiscal year. This was coupled with lower unrealized loss on derivative instruments of $2,297 compared to $7,027 in second quarter of fiscal year 2007. 36 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Liquidity and Capital Resources Net cash used in operating activities from continuing operations was $12,745 for the six months ended July 31, 2007, compared to $23,869 in the comparable period of the prior fiscal year. The improvement is a result of i) a decrease in cash use for accounts payable due primarily to the timing of payments to our vendors, ii) a decrease in cash used for accounts receivable due primarily to improved days sales outstanding in our Standby Power Division partially offset by increased sales, and iii) a decrease in cash used to fund discontinued operations. These improvements were partially offset by inventory increases, principally attributable to higher lead and other raw material costs. Net cash provided by discontinued operations was $713 and $5,358 in the six months ended July 31, 2007 and 2006, respectively. Net cash used by continuing investing activities decreased $6,363 or 72% to $2,423 in the six months ended July 31, 2007 from $8,786 in the six months ended July 31, 2006. Acquisition of property, plant and equipment was $4,316 during the first six months of fiscal 2008 as compared to $8,816 during the first six months of fiscal year 2007. The decrease in capital spending is due to the completion of our new manufacturing facility in Shanghai, China during fiscal year 2007. During the first six months of fiscal year 2008, we had proceeds from the disposal of property, plant and equipment in the amount of $1,893. We received $1,850 from the last installment on the sale of our old battery plant in Shanghai, China. Net cash used in discontinued investing activities was $236 and $1,431 in the six months ended July 31, 2007 and 2006, respectively. Net cash provided by continuing operations financing activities decreased $14,181 or 49% to $14,703 for the six months ended July 31, 2007, compared to $28,884 in the comparable period of the prior fiscal year. Proceeds from borrowings under the Company's revolving credit facility were the primary source of cash provided by financing activities in both fiscal years 2008 and 2007. The primary purpose of the new borrowings in each of the fiscal years was to fund operations - both continuing and discontinued. Net cash used in discontinued financing activities for the six months ended July 31, 2007 and 2006 was $405 and $524, respectively. On April 13, 2007, the Company executed a fourth amendment to its Credit Facility. The amendment enhanced the Company's borrowing capacity and resultant availability through changes and modifications of previously excluded collateral. In addition, the amendment provided for a reduction in the availability block to $10,000, a reset of fixed coverage ratio covenants, which are only tested on a going forward basis to the extent excess availability falls below a defined threshold of $10,000, previously $15,000 and an increase in the permitted foreign indebtedness basket. On June 19, 2007, the Company entered into a definitive agreement with Murata pursuant to which the Company agreed to sell its Power Electronics Division. On August 31, 2007, the Company completed the sale of the Power Electronics Division for $85,000, subject to post closing working capital adjustments. Proceeds from the sale were used to pay in full existing borrowings under the Company's Credit Facility, with the balance currently held as short term cash investments. As of July 31, 2007, the maximum availability calculated under the borrowing base was $71,952, of which $39,501 was funded, and $5,375 was utilized for letters of credit. As provided under the Credit Facility, excess borrowing capacity will be available for future working capital needs and general corporate purposes. Availability under the Company's Credit Facility as of August 31, 2007, was similarly adjusted to reflect the sale of certain PED assets which were previously reflected in the Company's borrowing base. The Company estimates that recalculated availability under the Credit Facility, undrawn except for outstanding letters of credit as of September 7, 2007, was approximately $44,500. Cash from operations and availability under the amended Credit Facility is expected to be sufficient to meet our ongoing cash needs for working capital requirements, restructuring, capital expenditures and debt service for at least the next twelve months. Capital expenditures during the first six months of fiscal year 2008 were primarily for cost reduction programs, normal maintenance and regulatory compliance. We estimate capital spending for fiscal year 2008 to be in the range of $12,000 to $15,000, for similar purposes as well as the move of manufacturing from Conyers, Georgia to Leola, Pennsylvania. 37 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) New Accounting Pronouncements In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 157, "Fair Value Measurements" which establishes a framework for measuring fair value in accordance with generally accepted accounting principles ("GAAP"), and expands disclosures about fair value measurements. SFAS No. 157 applies under other accounting pronouncements that require or permit fair value measurements and, accordingly, SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company does not expect the adoption of SFAS No. 157 to have a material impact on its financial position and results of operations. In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities -- Including an Amendment of FASB Statement No. 115". The Statement permits entities to choose, at specified election dates, to measure many financial instruments and certain other items at fair value that are not currently measured at fair value. Unrealized gains and losses on items for which the fair value option has been elected would be reported in earnings at each subsequent reporting date. SFAS No. 159 also establishes presentation and disclosure requirements in order to facilitate comparisons between entities choosing different measurement attributes for similar types of assets and liabilities. SFAS No. 159 does not affect existing accounting requirements for certain assets and liabilities to be carried at fair value. This statement is effective for reporting periods beginning after November 15, 2007. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its financial position and results of operations. 38 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements we make. We may, from time to time, make written or verbal forward-looking statements. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," "guidance," "forecast," "plan," "outlook" and similar expressions in filings with the Securities and Exchange Commission ("SEC"), in our press releases and in oral statements made by our representatives, identify statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act") and are intended to come within the safe harbor protection provided by those sections. The forward-looking statements are based upon management's current views and assumptions regarding future events and operating performance, and are applicable only as of the dates of such statements. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risk and uncertainties that could cause our actual results to differ materially from anticipated results. Examples of forward-looking statements include, but are not limited to: o projections of revenues, cost of raw materials, income or loss, earnings or loss per share, capital expenditures, growth prospects, dividends, the effect of currency translations, capital structure and other financial items; o statements of plans, strategies and objectives made by our management or board of directors, including the introduction of new products, cost savings initiatives or estimates or predictions of actions by customers, suppliers, competitors or regulating authorities; o statements of future economic performance; and o statements regarding the ability to obtain amendments under our debt agreements. We caution you not to place undue reliance on these forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements include, but are not limited to, those factors discussed under Item 1A - Risk Factors, Item 7 - Management's Discussion and Analysis of Financial Conditions and Results of Operations and Item 8 - Financial Statements and Supplementing Data of our Form 10-K for the fiscal year ended January 31, 2007, and the following general factors: o our ability to implement and fund based on current liquidity, business strategies and restructuring plans; o our substantial debt and debt service requirements, which may restrict our operational and financial flexibility, as well as impose significant interest and financing costs; o restrictive loan covenants may impact our ability to operate our business and pursue business strategies; o the litigation proceedings to which we are subject, the results of which could have a material adverse effect on us and our business; o our exposure to fluctuations in interest rates on our variable debt; o the realization of the tax benefits of our net operating loss carry forwards, which is dependent upon future taxable income; o the fact that lead, a major constituent in most of our products, experiences significant fluctuations in market price and is a hazardous material that may give rise to costly environmental and safety claims; o our ability to successfully pass along increased material costs to our customers; o failure of our customers to renew supply agreements; o competitiveness of the battery markets in North America, Europe and Asia; o the substantial management time and financial and other resources needed for our consolidation and rationalization of acquired entities; o political, economic and social changes, or acts of terrorism or war; o successful collective bargaining with our unionized workforce; o risks involved in our foreign operations such as disruption of markets, changes in import and export laws, currency restrictions, currency exchange rate fluctuations and possible terrorist attacks against the United States interests; o our ability to maintain and generate liquidity to meet our operating needs; o we may have additional impairment charges; 39 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) o our ability to acquire goods and services and/or fulfill labor needs at budgeted costs; o economic conditions or market changes in certain market sectors in which we conduct business; o our success or timing of new product development; o changes in our product mix; o success of productivity initiatives, including rationalizations, relocations or consolidations; o impact of changes in our management; o costs of our compliance with environmental laws and regulations and resulting liabilities; o our ability to protect our proprietary intellectual property and technology; and o possible post-closing working capital adjustments to the purchase price in accordance with the Purchase Agreement for the sale of Power Electronics Division. The Company's actual results could differ materially from those anticipated in these forward-looking statements as a result of a variety of factors, including those discussed in "Risk Factors" included in the Company's Form 10-K annual report for the year ended January 31, 2007. 40 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (continued) (Dollars in thousands, except per share data) Item 3. Quantitative and Qualitative Disclosure about Market Risk The Company is exposed to various market risks. The primary financial risks include fluctuations in interest rates, certain raw material commodity prices, and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. It does not invest in derivative instruments for speculative purposes, but enters into hedging arrangements in order to reduce its exposure to fluctuations in interest rates, the price of lead, as well as to fluctuations in exchange rates. On occasion, the Company has entered into non-deliverable forward contracts with certain financial counterparties to hedge our exposure to the fluctuations in the price of lead, the primary raw material component used in our Standby Power and Motive Power Divisions. The Company employs hedge accounting in the treatment of these contracts. Changes in the value of the contracts are marked to market each month and the gains and losses are recorded in other comprehensive loss until they are released to the income statement through cost of goods sold in the same period as is the hedged item (lead). Additional disclosure regarding various market risks were set forth in the Company's fiscal year 2007 Annual Report on Form 10-K filed with the SEC. Item 4. Controls and Procedures: Management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by it in the reports that it files or submits under the Exchange Act and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company's management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding timely disclosures. Internal Control over Financial Reporting: There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting. 41 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Issuer Purchases of Equity Securities:
Maximum Number Total Number (or Approximate of Shares Dollar Value) of Total Number Publicly Announced Shares that May Yet of Shares Average Price Plans Be Purchased Under the Period Purchased Paid per Share or Programs Plans or Programs ----------------------------------------------------------------------------------------------------- May 1 - May 31, 2007 748 $ 5.35 -- 1,000,000 June 1 - June 30, 2007 19,526 $ 5.89 -- 1,000,000 July 1 - July 31, 2007 1,722 $ 5.23 -- 1,000,000 -------------------------------------- ------------------ Total 21,996 -- -------------------------------------- ------------------
On September 30, 2004, the Board of Directors authorized a new stock repurchase program. Under the program, the Company is permitted to repurchase up to 1 million shares of C&D Technologies common stock having a total purchase price of no greater than $25 million. This program entirely replaces and supersedes all previously authorized stock repurchase programs. All of the shares purchased during the first quarter of fiscal year 2008 were purchased pursuant to the Company's deferred compensation plan. Restrictions on Dividends and Treasury Stock Purchases: Our Credit Facility limits restricted payments including dividends and Treasury Stock purchases to no more than $250,000 for Treasury Stock in any one calendar year and $1,750,000 for dividends for any one calendar year subject to adjustments of up to $400,000 per year in the case of the conversion of debt to stock per the terms of our convertible offerings. These restricted payments can only occur with prior notice to the lenders and provided that there is a minimum of $30,000,000 in excess availability for a period of thirty days prior to the dividend. The Company may declare and pay a dividend provided these conditions are met and there does not exist an event of default. 42 Item 6. Exhibits.
Incorporated by Reference ------------------------------------- Exhibit Exhibit Filed Number Exhibit Description Form Date Number Herewith ----------------------------------------------------------------------------------------------------- 10.1 Consent and amendment No. 6 to Loan and security X agreement, dated as of August 30, 2007, by and among Wachovia Bank, National Association, in its capacity as agent, C&D Technologies, Inc., a Delaware corporation, C&D Technologies (Datel), Inc., a Delaware corporation, C&D Technologies (CPS) LLC, a Delaware limited liability company, C&D Charter Holdings, Inc., a Delaware corporation, C&D Dynamo Corporation, a Delaware corporation, Dynamo Acquisition Corporation, a Delaware corporation, C&D International Investment Holdings Inc., a Delaware corporation and Datel Holding Corporation, a Delaware corporation. 10.2 Purchase and Sale agreement dated as of June 19, 8-K 8/31/2007 99.1 2007, between C&D Technologies, Inc., a Delaware corporation, and Murata Manufacturing Co., Ltd., a corporation organized under the laws of Japan. 18.1 Letter regarding change in accounting principles X 31.1 Rule 13a-14(a)/15d-14(a) Certification of the X President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice X President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Section 1350 Certification of the President and X Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Section 1350 Certification of the Vice President X and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
43 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. C&D TECHNOLOGIES, INC. September 7, 2007 By: /s/ Jeffrey A. Graves ---------------------------------- Jeffrey A. Graves President, Chief Executive Officer and Director (Principal Executive Officer) September 7, 2007 By: /s/ Ian J. Harvie ---------------------------------- Ian J. Harvie Vice President Finance and Chief Financial Officer (Principal Financial Officer) September 7, 2007 By: /s/ Neil E. Daniels ---------------------------------- Neil E. Daniels Vice President Corporate Controller and Treasurer (Principal Accounting Officer) 44 EXHIBIT INDEX 10.1 Consent and amendment No. 6 to Loan and security agreement, dated as of August 30, 2007, by and among Wachovia Bank, National Association, in its capacity as agent, C&D Technologies, Inc., a Delaware corporation, C&D Technologies (Datel), Inc., a Delaware corporation, C&D Technologies (CPS) LLC, a Delaware limited liability company, C&D Charter Holdings, Inc., a Delaware corporation, C&D Dynamo Corporation, a Delaware corporation, Dynamo Acquisition Corporation, a Delaware corporation, C&D International Investment Holdings Inc., a Delaware corporation and Datel Holding Corporation, a Delaware corporation. 18.1 Letter regarding change in accounting principles 31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Section 1350 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Section 1350 Certification of the Vice President and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 45