C&D Technologies Reaches Agreement with Group of Noteholders on Financial Restructuring Plan; Reports Fiscal 2011 Second Quarter Results

September 16, 2010 by Jeff Shepard

C&D Technologies, Inc. announced financial results for the fiscal 2011 second quarter ended July 31, 2010.

Dr. Jeffrey A. Graves, President and CEO, said, "In the second quarter, we achieved positive improvements in our operational performance, excluding the impact of the non-cash goodwill impairment of $60 million, or approximately $46 million net of tax, and took steps to address our financial capital structure, which needs to be restructured. New product introductions, increased Asian market penetration, a focused pricing strategy and ongoing efficiency initiatives drove gross margins to 13.2% in the second quarter, up from 12.1% in the second quarter of fiscal year 2010 and 11.8% in the first quarter of fiscal 2011. The progress in margin improvement was dampened by the impact of a temporary labor disruption in our Asian operations during the second half of the quarter, which negatively impacted second quarter operating income by slightly more than an estimated $1 million, and was resolved by quarter end."

Dr. Graves continued, "We also believe our top line performance and operating results for the second quarter were negatively influenced by market uncertainties regarding our capital structure. We are taking steps to put in place an appropriate capital structure for our business, and today we separately announced a proposed financial restructuring plan. As we work to receive the necessary approvals and execute this proposed plan, we will remain focused on our day-to-day operations, continuing to deliver superior customer service and providing the industry leading product quality and innovation that has been the hallmark of C&D for over 100 years."

The company also announced that it has entered into a restructuring support agreement (the "RSA") with two noteholders who together hold approximately 56% of the aggregate principal amount of the company’s outstanding 5.25% convertible senior notes due 2025 and 5.50% convertible senior notes due 2026. Pursuant to the RSA, which sets forth the terms of the company’s capital restructuring plan, the company seeks to eliminate up to approximately $127 million in debt and related cash interest expense of more than $7 million annually through a registered exchange offer of its notes for up to 95% of the company’scommon stock on a post-restructuring basis (the "exchange offer"). Upon successful consummation of the exchange offer, the company would reduce its total debt from approximately $170 million to less than $45 million.

As an alternative to the exchange offer, the company has also agreed in the RSA to solicit consents from its noteholders and stockholders to approve a prepackaged plan of reorganization. In the event certain conditions to the exchange offer are not satisfied, and if a sufficient number and amount of holders of notes vote to accept the prepackaged plan, the company intends to pursue an in-court restructuring. If confirmed, the prepackaged plan would have principally the same effect as if 100% of the holders of notes had tendered their notes in the exchange offer; provided that if the stockholders do not approve the exchange offer, instead of receiving 5% of the company’s common stock on a post-restructuring basis, they will receive 2.5% of the company’s common stock and three-year warrants to purchase 5% of the company’s common stock having an aggregate strike price calculated based on a total enterprise value of $250.0 million.If all conditions to consummating the exchange offer, including the approval of the terms of the exchange offer by a majority of the company’s common stockholders and at least 95% participation by the noteholders in the exchange offer, are satisfied, the company will cease seeking support for the prepackaged plan.

"This plan is a positive resolution to address our capital structure and we believe it will put C&D in a stronger, financially healthier position for the future," said Dr. Graves. "The plan significantly reduces our debt level -- primarily accrued from past acquisitions and recent losses, which is unsustainable in the current economic climate -- and puts in place an appropriate capital structure for future growth and profitability. It preserves some value for current equity holders and enables both note and equity holders to have a stake in the Company’s future success. With an appropriate capital structure and greater financial flexibility, along with our market leadership, we believe C&D will be in a strong position going forward to serve our highly valued customers, take advantage of the North American market recovery and capitalize on growth opportunities in Asia."

The company does not anticipate any business interruption in its operations during the restructuring regardless of whether the company conducts its restructuring in or out of the Chapter 11 process. The company expects to move quickly through the reorganization process with its same commitment to quality, consistency and customer service as has been its hallmark for more than 100 years.

Under the proposed plan, the company will continue to manufacture its products and service customers in the normal course. All vendors and suppliers will continue to be paid in full under normal terms in the ordinary course of business. The proposed plan provides for all creditor classes (other than the notes), including general unsecured creditors, to be "unimpaired" - i.e., to be paid in full for all valid, outstanding claims upon consummation of the plan to the extent they have not been paid previously. Implementation of the transactions contemplated by the RSA are dependent on a number of factors and approvals, however, and there can be no assurance that the treatment of creditors outlined above will not change significantly.

Pursuant to the RSA, the supporting noteholders have agreed to, among other things, (1) support and use commercially reasonable efforts to complete the capital restructuring plan, including by tendering their notes into the exchange offer and voting in favor of the prepackaged plan; and (2) not exercise remedies or direct the trustee to exercise remedies under the indentures governing the notes for any default or event of default that has occurred or may occur thereunder. The RSA may be terminated by the Supporting Noteholders and the company upon the occurrence of certain events enumerated in the RSA. Additional details related to the restructuring plan can be found in the restructuring support agreement, which is included as an exhibit to Form 10-Q filed with the Securities and Exchange Commission (SEC).

The exchange offer is an out of court method of restructuring the company’s notes to address put-rights holders of the notes will have if the company’s common stock is delisted or suspended from trading for 60 days by the New York Stock Exchange. There exists a substantial risk that the company’s 30 day average market capitalization will fall below $15 million in the near term and, if it does, the New York Stock Exchange may initiate suspension and delisting proceedings in the company’s common stock.