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, 2004
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 No. 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3314599
(State or 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 an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES X NO ___
Number of shares of the Registrant's Common Stock outstanding on August
26, 2004: 25,363,017
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
July 31, 2004 and January 31, 2004................... 3
Consolidated Statements of Income - Three and Six
Months Ended July 31, 2004 and 2003.................. 5
Consolidated Statements of Cash Flows -
Six Months Ended July 31, 2004 and 2003.............. 6
Consolidated Statements of Comprehensive Income -
Three and Six Months Ended July 31, 2004 and 2003.... 7
Notes to Consolidated Financial Statements............ 8
Report of Independent Registered Public Accounting
Firm................................................. 18
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations... 19
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk............................... 26
Item 4 - Controls and Procedures.......................... 26
PART II. OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use
and Proceeds.................................... 27
Item 6 - Exhibits......................................... 28
SIGNATURES................................................... 29
EXHIBIT INDEX................................................ 30
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,
2004 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents................... $ 12,141 $ 12,306
Accounts receivable, less allowance for
doubtful accounts of $1,553 and $1,476,
respectively........................... 64,868 49,838
Inventories................................. 70,007 47,175
Deferred income taxes....................... 12,102 10,356
Other current assets........................ 2,156 1,262
------- -------
Total current assets............. 161,274 120,937
Property, plant and equipment, net................ 109,353 104,799
Intangible and other assets, net.................. 38,252 39,799
Goodwill.......................................... 174,899 120,415
------- -------
Total assets..................... $483,778 $385,950
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 1,355 $ -
Accounts payable............................ 31,957 22,246
Accrued liabilities......................... 23,448 19,495
Income taxes................................ 4,268 3,791
Other current liabilities................... 14,403 11,400
------- -------
Total current liabilities........ 75,431 56,932
Deferred income taxes ............................ 17,479 17,369
Long-term debt.................................... 94,679 19,620
Other liabilities................................. 15,493 14,310
------- -------
Total liabilities................ 203,082 108,231
The accompanying notes are an integral part of these statements.
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands, except par value)
(UNAUDITED)
July 31, January 31,
2004 2004
---- ----
Commitments and contingencies
Minority interest................................. 8,080 8,186
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 28,695,140 and
28,605,747 shares issued, respectively.. 287 286
Additional paid-in capital.................. 71,733 70,619
Treasury stock, at cost, 3,346,542 and
3,196,508 shares, respectively.......... (46,805) (44,481)
Accumulated other comprehensive
income.................................. 3,388 3,259
Retained earnings........................... 244,013 239,850
------- -------
Total stockholders' equity....... 272,616 269,533
------- -------
Total liabilities and
stockholders' equity........... $483,778 $385,950
======= =======
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales............................ $93,627 $81,364 $179,432 $158,732
Cost of sales........................ 74,106 62,286 143,370 122,662
------ ------ ------ ------
Gross profit..................... 19,521 19,078 36,062 36,070
Selling, general and
administrative expenses.......... 9,667 10,524 19,701 19,694
Research and development
expenses......................... 3,187 2,335 5,856 4,746
------ ------ ------ ------
Operating income................. 6,667 6,219 10,505 11,630
Interest expense, net................ 807 302 1,094 748
Other expense, net................... 499 312 1,059 582
------ ------ ------ ------
Income before income taxes and
minority interest............. 5,361 5,605 8,352 10,300
Provision for income taxes........... 2,132 2,074 3,239 3,811
------ ------ ------ ------
Net income before minority
interest...................... 3,229 3,531 5,113 6,489
Minority interest.................... 23 (49) (97) 87
------ ------ ------ ------
Net income....................... $ 3,206 $ 3,580 $ 5,210 $ 6,402
====== ====== ====== ======
Net income per share - basic......... $ .13 $ .14 $ .21 $ .25
====== ====== ====== ======
Net income per share - diluted....... $ .13 $ .14 $ .20 $ .25
====== ====== ====== ======
Dividends per share.................. $.02750 $.01375 $.04125 $.02750
====== ====== ====== ======
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,
2004 2003*
---- ----
Cash flows provided (used) by operating activities:
Net income........................................... $ 5,210 $ 6,402
Adjustments to reconcile net income to net
cash provided by operating activities:
Minority interest.............................. (97) 87
Depreciation and amortization.................. 11,209 11,440
Deferred income taxes.......................... 1,076 877
(Gain) loss on disposal of assets.............. (59) 47
Changes in:
Accounts receivable...................... (3,991) (3,539)
Inventories.............................. (5,110) 1,775
Other current assets..................... (54) 66
Accounts payable......................... 4,183 (1,936)
Accrued liabilities...................... 1,147 226
Income taxes payable..................... (1,899) 3,030
Other current liabilities................ (867) (1,519)
Other liabilities........................ 1,183 (1,118)
Other assets............................. 788 870
Deferred income taxes.................... 331 184
Other, net..................................... 659 362
------- -------
Net cash provided by operating activities................ 13,709 17,254
------- -------
Cash flows provided (used) by investing activities:
Acquisition of businesses, net....................... (75,024) -
Acquisition of property, plant and equipment......... (5,534) (1,821)
Proceeds from disposal of property, plant
and equipment..................................... 121 64
------- -------
Net cash used by investing activities.................... (80,437) (1,757)
------- -------
Cash flows provided (used) by financing activities:
Repayment of debt.................................... (75) (18,750)
Proceeds from new borrowings......................... 68,269 1,250
Financing costs of long-term debt.................... (263) -
Increase (decrease) in book overdrafts............... 1,305 (445)
Proceeds from issuance of common stock, net.......... 773 255
Purchase of treasury stock........................... (2,661) (3,181)
Payment of common stock dividends.................... (698) (704)
Payment of minority interest dividends............... (10) (207)
------- -------
Net cash provided (used) by financing activities......... 66,640 (21,782)
------- -------
Effect of exchange rate changes on cash.................. (77) 88
------- -------
Decrease in cash and cash equivalents.................... (165) (6,197)
Cash and cash equivalents at beginning
of period............................................. 12,306 12,966
------- -------
Cash and cash equivalents at end of period............... $ 12,141 $ 6,769
======= =======
SCHEDULE OF NON CASH INVESTING
AND FINANCIAL ACTIVITIES
Acquired businesses:
Estimated fair value of assets acquired............... $ 41,692 $ -
Goodwill and identifiable intangible assets........... 54,638 -
Cash paid, net of cash acquired....................... (75,024) -
------- -------
Liabilities assumed................................... $ 21,306 $ -
======= =======
Increase (decrease) in property, plant, and
equipment acquisitions in
accounts payable...................................... $ 421 $ (396)
======= =======
* Reclassified for comparative purposes.
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(UNAUDITED)
Three months ended Six months ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income............................................... $3,206 $3,580 $5,210 $6,402
Other comprehensive income (loss), net of tax:
Net unrealized gain on derivative instruments.......... 157 150 340 121
Foreign currency translation adjustments............... 762 164 (211) (710)
----- ----- ----- -----
Total comprehensive income............................... $4,125 $3,894 $5,339 $5,813
===== ===== ===== =====
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim consolidated financial statements of C&D
Technologies, Inc. (together with its operating subsidiaries, the "Company")
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report to Stockholders for the
fiscal year ended January 31, 2004. The January 31, 2004 amounts were derived
from the Company's audited financial statements. The consolidated financial
statements presented herein are unaudited but, in the opinion of management,
include all necessary adjustments (which comprise only normal recurring items)
required for a fair presentation of the consolidated financial position as of
July 31, 2004 and the related consolidated statements of income and
comprehensive income for the three and six month periods ended July 31, 2004 and
2003 and the related consolidated statements of cash flows for the six-month
periods ended July 31, 2004 and 2003. However, interim results of operations may
not be indicative of results for the full fiscal year. The accompanying interim
consolidated financial statements of the Company have been prepared in
conformity with accounting principles generally accepted in the United States of
America.
2. PROPOSED ACCOUNTING PRONOUNCEMENT
In March 2004, the Financial Accounting Standards Board ("FASB") issued an
exposure document entitled "Share-Based Payment - an amendment of Statements No.
123 and 95 (Proposed Statement of Financial Accounting Standards)." The Proposed
Statement would eliminate the ability to account for share-based compensation
transactions using Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees" and generally require that such
transactions be accounted for using a fair-value-based method. This accounting
treatment, if approved, could result in significant compensation expense. The
Proposed Statement, if adopted, would be applied to public entities
prospectively for fiscal years beginning after December 15, 2004, as if all
share-based compensation awards granted, modified, or settled after December 15,
1994, had been accounted for using the fair-value method of accounting.
Retrospective application of the Proposed Statement is not permitted.
3. CASH AND CASH EQUIVALENTS
The Company's cash management program utilizes zero balance accounts.
Accordingly, all book overdraft balances have been reclassified to accounts
payable and amounted to $6,226 and $4,921 at July 31, 2004 and January 31, 2004,
respectively.
4. INVENTORIES
Inventories consisted of the following:
July 31, January 31,
2004 2004
---- ----
Raw materials............................ $26,859 $17,961
Work-in-progress......................... 14,307 10,667
Finished goods........................... 28,841 18,547
------ ------
$70,007 $47,175
====== ======
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. INCOME TAXES
A reconciliation of the provision for income taxes from the statutory rate
to the effective rate is as follows:
Six months ended
July 31,
2004 2003
---- ----
U.S. statutory income tax....................... 35.0% 35.0%
State tax, net of federal income tax benefit.... 1.3 1.0
Tax effect of foreign operations................ (0.5) 0.6
Increase in valuation allowance................. 5.2 -
Resolution of state tax audits.................. (2.5) -
Other........................................... 0.3 0.4
---- ----
38.8% 37.0%
==== ====
The increase in tax valuation allowance is related to United States foreign
tax credits for unremitted earnings of a controlled foreign subsidiary.
6. NET INCOME PER COMMON SHARE
Net income per share - basic is based on the weighted average number of
shares of Common Stock outstanding. Net income per share - diluted reflects the
potential dilution that could occur if stock options were exercised. Weighted
average common shares and common shares - diluted were as follows:
Three months ended Six months ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Weighted average shares
of common stock
outstanding................................... 25,305,795 25,554,863 25,351,724 25,601,418
Assumed exercise of stock
options, net of shares
assumed reacquired............................ 118,608 101,355 152,437 106,077
---------- ---------- ---------- ----------
Weighted average common
shares - diluted.............................. 25,424,403 25,656,218 25,504,161 25,707,495
========== ========== ========== ==========
During the three months ended July 31, 2004 and 2003 there were 2,760,731
and 2,500,293 outstanding employee stock options, respectively, that were
out-of-the-money and therefore excluded from the calculation of the dilutive
effect of employee stock options. During the six months ended July 31, 2004 and
2003 there were 1,513,444 and 2,484,293 outstanding employee stock options,
respectively, that were out-of-the-money and therefore excluded from the
calculation of the dilutive effect of employee stock options.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES
Legal:
In March 2003, the Company was sued in an action captioned United States of
America v. C&D Technologies, Inc., in the United States District Court for the
Southern District of Indiana, for alleged violations of the Clean Water Act by
virtue of alleged violations of permit effluent and pretreatment discharge
limits at our plant in Attica, Indiana. The complaint requests injunctive relief
and civil penalties of up to the amounts provided by statute.
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 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").
The Company, along with numerous other parties, has been requested to
provide information to the United States Environmental Protection Agency (the
"EPA") in connection with investigations of the source and extent of
contamination at three lead smelting facilities (the "Third Party Facilities")
to which the Company had made scrap lead shipments for reclamation prior to the
date of the acquisition.
The Company and four other potentially responsible parties ("PRPs") agreed
upon a cost sharing arrangement for the design and remediation phases of a
project related to one of the Third Party Facilities, the former NL Industries
site in Pedricktown, New Jersey, acting pursuant to a Consent Decree. The PRPs
identified and sued additional PRPs for contribution. In April 2002, one of the
original four 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. This resulted in a pro
rata increase in the liabilities of the other PRPs, including the Company. As a
result of the approval of its plan of re-organization for emergence from
bankruptcy on April 21, 2004, this liability will be discharged in exchange for
common stock of a value equal to a percentage of Exide's total liability, which
the Company does not expect to be material.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The Company also responded to requests for information from the EPA and the
state environmental agency with regard to another Third Party Facility, the
"Chicago Site," in October 1991.
In August 2002, the Company was notified of its involvement as a PRP at the
NL Atlanta, Northside Drive Superfund site. The Company is currently in
negotiations with the other PRPs with respect to this site regarding its share
of the allocated liability, which the Company expects to be de minimis.
The Company is also aware of the existence of contamination at its
Huguenot, New York facility, which is expected to require expenditures for
further investigation and remediation. The site is listed by the New York State
Department of Environmental Conservation ("NYSDEC") on its registry of inactive
hazardous waste disposal sites due to the presence of fluoride and other
contaminants in amounts that exceed state groundwater standards, and the agency
has issued a Record of Decision for the soil remediation portion of the site. A
final remediation plan for the ground water portion has not yet been finalized
with or approved by the State of New York. In February 2000, C&D filed suit
against the prior owner of the site, Avnet, Inc. ("Avnet"), which is ultimately
expected to bear some, as yet undetermined, share of the costs associated with
remediation of contamination in place at the time the Company acquired the
property. The parties are attempting to resolve the matter through mediation and
jointly working with NYSDEC to explore alternative methods of resolution,
failing which C&D intends to aggressively pursue all available legal remedies
against Avnet. Should the parties fail to reach a mediated settlement and unless
an alternative resolution can be achieved, NYSDEC may conduct the remediation
and seek recovery from the parties.
The Company, together with Johnson Controls, Inc. ("JCI"), is conducting an
assessment and remediation of contamination at 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, the
Company 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 current
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 has retained all other environmental
liabilities, including off-site assessment and remediation. In March 2004, the
Company entered into an agreement with JCI to continue to share responsibility
as set forth in the original purchase agreement.
In January 1999, the Company received notification from the 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 Department of
Justice through March 2003 regarding a potential resolution of this matter. The
government filed suit against the Company in March 2003 for alleged violations
of the Clean Water Act. The complaint requests injunctive relief and civil
penalties of up to the amounts provided by statute. The Company anticipates that
the matter will result in a penalty assessment and compliance obligations. The
Company will continue to seek a negotiated or mediated resolution, failing which
it intends to vigorously defend the action.
The Company accrues reserves for liabilities in the Company's consolidated
financial statements and periodically reevaluates the reserved amounts for these
liabilities in view of the most current information available in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies." As of July 31, 2004, accrued environmental reserves totaled
$2,624, consisting of $2,297 in other current liabilities and $327 in other
liabilities. Based on currently available information, management of 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 the Company's business, financial condition or
results of operations.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
8. OPERATIONS BY INDUSTRY SEGMENT
Effective February 1, 2004, the Company combined the Dynasty and Powercom
divisions into the newly created Standby Power Division. The results of the
prior year have been reclassified for comparative purposes.
The Company has the following three reportable business segments:
The Standby Power Division manufactures and markets integrated reserve
power systems and components for the standby power market, which includes
telecommunications, uninterruptible power supplies, cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television ("CATV") signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large original equipment manufacturers ("OEMs") of
telecommunications and networking equipment, as well as office and industrial
equipment. In addition, as a result of recent acquisitions, the division also
manufactures power conversion products sold into military and CATV applications
as well as digital panel meters and data acquisition components.
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles, and, to a lesser extent,
OEMs.
Summarized financial information related to the Company's business segments
for the three and six months ended July 31, 2004 and 2003 is shown below:
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
-------- ----------- -------- ------------
Three months ended July 31, 2004:
Net sales................................ $ 61,494 $19,049 $13,084 $ 93,627
Operating income (loss).................. $ 5,761 $ 2,935 $(2,029) $ 6,667
Three months ended July 31, 2003:
Net sales................................ $ 59,364 $10,042 $11,958 $ 81,364
Operating income (loss).................. $ 8,259 $ (391) $(1,649) $ 6,219
Six months ended July 31, 2004:
Net sales................................ $122,384 $30,222 $26,826 $179,432
Operating income (loss).................. $ 11,153 $ 3,226 $(3,874) $ 10,505
Six months ended July 31, 2003:
Net sales................................ $114,816 $19,078 $24,838 $158,732
Operating income (loss).................. $ 15,808 $ (985) $(3,193) $ 11,630
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
9. DERIVATIVE INSTRUMENTS
The following table includes the Company's interest rate swaps as of July
31, 2004 and January 31, 2004. These interest rate swaps are designated as cash
flow hedges and, therefore, changes in their fair value, net of tax, are
recorded in accumulated other comprehensive income.
Fixed Variable Fair Fair
Interest Interest Value Value
Notional Origination Maturity Rate Rate At At
Amount Date Date Paid Received 7/31/04 1/31/04
- -------- ----------- -------- -------- -------- -------- -------
$20,000 04/16/01 04/11/06 5.56% LIBOR $(856) $(1,486)
$10,000 07/29/04 08/02/07 3.70% LIBOR (62) -
---- ------
$(918) $(1,486)
==== ======
The Company does not invest in derivative securities for speculative
purposes, but does enter into hedging arrangements in order to reduce its
exposure to fluctuations in interest rates 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 Company did not apply hedge accounting to
currency forward contracts with a combined fair value of $(651) and $(923) as of
July 31, 2004 and January 31, 2004. Changes in the fair value of these currency
forward contracts are recorded in other expense, net.
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. STOCK-BASED COMPENSATION PLANS
Under ABP No. 25, if the exercise price of the Company's employee stock
options equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
As the exercise price of all options granted under the Company's stock
option plans was equal to the market price of the underlying common stock on the
grant date, no stock-based employee compensation cost is recognized in net
income. The following table illustrates the effect on net income and earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123, "Accounting for Stock-Based Compensation" as amended, to options
granted under the stock option plans. For purposes of this pro-forma disclosure,
the estimated value of the options is amortized to expense over the options'
vesting periods. Because the estimated value is determined as of the date of
grant, the actual value ultimately realized by the employee may be significantly
different.
Three months ended Six months ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Net income - as reported................................ $3,206 $3,580 $5,210 $6,402
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects............ 1,028 1,052 1,943 2,070
----- ----- ----- -----
Net income - pro forma.................................. $2,178 $2,528 $3,267 $4,332
===== ===== ===== =====
Net income per common share - basic - as reported....... $ 0.13 $ 0.14 $ 0.21 $ 0.25
Net income per common share - basic - pro forma......... $ 0.09 $ 0.10 $ 0.13 $ 0.17
Net income per common share - diluted - as reported..... $ 0.13 $ 0.14 $ 0.20 $ 0.25
Net income per common share - diluted - pro forma....... $ 0.09 $ 0.10 $ 0.13 $ 0.17
Weighted average fair value of options
granted during the period............................. $ 8.02 $ 6.96 $ 9.08 $ 7.74
SFAS No. 123 requires the use of option pricing models that were not
developed for use in valuing employee stock options. The Black-Scholes
option-pricing model was developed for use in estimating the fair value of
short-lived exchange traded options that have no vesting restrictions and are
fully transferable. In addition, option-pricing models require the input of
highly subjective assumptions, including the option's expected life and the
price volatility of the underlying stock. Because changes in the subjective
input assumptions can materially affect the fair value estimate, in the opinion
of management, the existing models do not necessarily provide a reliable single
measure of the fair value of employee stock options.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
11. 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,
2004 2003
---- ----
Balance at beginning of period......................... $ 9,759 $10,599
Opening balance sheet liability of acquired companies.. 393 -
Current period provisions ............................. 2,557 2,280
Expenditures .......................................... (2,842) (4,382)
------ ------
Balance at end of period............................... $ 9,867 $ 8,497
====== ======
12. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Effective January 31, 2004, the Company adopted 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 Pension Benefits Postretirement Benefits
------------------ ----------------------- ------------------ -----------------------
Three Months ended Three months ended Six Months ended Six months ended
July 31, July 31, July 31, July 31,
------------------ ----------------------- ------------------ -----------------------
2004 2003 2004 2003 2004 2003 2004 2003
---- ---- ---- ---- ---- ---- ---- ----
Service Cost........................ $ 384 $ 378 $25 $ 43 $ 859 $ 756 $ 78 $ 86
Interest Cost....................... 976 955 40 63 1,946 1,911 103 126
Expected return on plan assets...... (1,222) (1,030) - - (2,435) (2,061) - -
Amortization of prior service cost.. 4 5 27 29 9 10 57 58
Recognized actuarial loss (gain).... 373 353 (3) (1) 744 705 - (2)
------ ------ -- --- ------ ------ --- ---
Net periodic benefit cost........... $ 515 $ 661 $89 $134 $ 1,123 $ 1,321 $238 $268
====== ====== == === ====== ====== === ===
Assuming that the actual return on plan assets is consistent with the
expected annualized rate of 8.5% for the remainder of fiscal 2005, and that
interest rates remain constant, the Company would not be required to make any
contributions to its pension plans for fiscal 2005. The Company expects to make
discretionary contributions totaling approximately $2,600 to its pension plans.
The Company also expects to make contributions totaling approximately $229 to
the two Company sponsored postretirement benefit plans.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
13. ACQUISITIONS
On May 27, 2004, the Company acquired Celab Limited ("Celab") for
approximately $10,500 net of approximately $4,700 in cash acquired, plus
additional acquisition related costs. Celab, based in Hampshire, United Kingdom,
is a provider of power conversion products, predominantly sold into military,
CATV and telecommunications applications in Europe. The acquisition of Celab is
expected to provide a platform for expanded sales to the military. This
acquisition was funded with the Company's working capital funds and its existing
credit agreement.
On June 30, 2004, the Company acquired Datel Holding Corporation and its
subsidiaries ("Datel") for an aggregate purchase price of approximately $74,800
plus additional acquisition related costs. The purchase price consisted of a
$66,400 cash payment as well as the assumption of approximately $8,400 in debt.
Cash acquired in the Datel acquisition was approximately $3,100. Datel is a
Mansfield, Massachusetts-based manufacturer of primarily DC to DC converters,
with additional product offerings in data acquisition components and digital
panel meters. The acquisition of Datel is expected to provide the Company with a
broader product offering, access to a diverse group of OEM customers as well as
an expanded international footprint, notably, including operations in Japan.
On June 30, 2004 the Company entered into an amended and restated revolving
credit facility, with a maturity date of June 30, 2009. The financing was
arranged by Banc of America Securities LLC. Under the updated agreement, the
amount of the facility was increased to $175,000 from $100,000 with the option
under certain conditions, to increase the facility to $200,000. The facility was
increased to $200,000 on August 3, 2004 at the Company's request.
The two acquisitions referred to above are included in the Power
Electronics Division for reporting purposes. At July 31, 2004, the
purchase-price allocations to the assets acquired and liabilities assumed for
both acquisitions completed during the second quarter of fiscal 2005 are
preliminary and subject to the finalization of independent appraisals of
acquired tangible and intangible assets, which may include in-process research
and development, which, if identified, would result in a change to earnings upon
finalization. The purchase price for these acquisitions was preliminarily
allocated as follows:
Accounts receivable.................... $11,170
Inventory.............................. 17,725
Other current assets................... 840
Deferred income tax assets............. 3,049
Property, plant and equipment, net..... 8,836
Other assets, net...................... 71
Goodwill and intangible assets, net.... 54,638
Short-term debt........................ (1,355)
Accounts payable....................... (4,118)
Accrued liabilities.................... (2,359)
Income taxes........................... (2,571)
Other current liabilities.............. (3,856)
Deferred income tax liabilities........ (6)
Long-term debt......................... (7,040)
------
Total purchase price................... $75,024
======
16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The following unaudited pro forma financial information combines the
consolidated results of operations as if the Datel and Celab acquisitions had
occurred as of the beginning of the periods presented. Pro forma adjustments
include only the effects of events directly attributed to a transaction that are
factually supportable. The pro forma adjustments contained in the table below
include interest expense on the acquisition debt and related income tax effects.
(Unaudited)
Three Months Ended Six Months Ended
July 31, July 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales ................... $106,744 $97,625 $212,559 $191,217
Net income .................. $ 3,247 $ 3,379 $ 5,810 $ 5,904
Net income per common
share - basic ............ $ 0.13 $ 0.13 $ 0.23 $ 0.23
Net income per common
share - diluted .......... $ 0.13 $ 0.13 $ 0.23 $ 0.23
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisitions been consummated
as of the beginning of the periods presented, nor is such information indicative
of future operating results.
14. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
With respect to the unaudited financial information of the Company for the
three and six month periods ended July 31, 2004 and 2003, the Company's
Independent Registered Public Accounting Firm, in their report dated August 26,
2004, appearing herein, state that they did not audit and they do not express an
opinion on the unaudited financial information. Accordingly, the degree of
reliance on their report on such information should be restricted in light of
the limited nature of the review procedures applied. The Independent Registered
Public Accounting Firm is not subject to the liability provisions of Section 11
of the Securities Act of 1933 for their report on the unaudited financial
information because that report is not a "report" within the meaning of Sections
7 and 11 of the Act.
17
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of C&D Technologies, Inc.:
We have reviewed the accompanying consolidated balance sheet of C&D
Technologies, Inc. and its subsidiaries (the "Company") as of July 31, 2004, and
the related consolidated statements of income and comprehensive income for each
of the three-month and six-month periods ended July 31, 2004 and 2003, and the
consolidated statement of cash flows for the six-month periods ended July 31,
2004 and 2003. These interim financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with the standards of the Public
Company Accounting Oversight Board (United States). A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with the
standards of the Public Company Accounting Oversight Board, the objective of
which is the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying consolidated interim financial statements for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We previously audited in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated balance
sheet as of January 31, 2004, and the related consolidated statements of income,
stockholders' equity, comprehensive income, and of cash flows for the year then
ended (not presented herein), and in our report dated March 12, 2004 we
expressed an unqualified opinion on those consolidated financial statements. In
our opinion, the information set forth in the accompanying consolidated balance
sheet as of January 31, 2004, is fairly stated in all material respects in
relation to the consolidated balance sheet from which it has been derived.
/s/ PricewaterhouseCoopers LLP
September 14, 2004
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(Dollars in thousands, except per share data)
Item 2.
Within the following discussion, unless otherwise stated, "quarter" and
"six-month period", refer to the second quarter of fiscal 2005 and the six
months ended July 31, 2004. All comparisons are with the corresponding period in
the prior year, unless otherwise stated.
Two acquisitions occurred during the second quarter of fiscal 2005. On May
27, 2004 we acquired Celab Limited ("Celab"), based in Hampshire, United
Kingdom, a provider of power conversion products, predominately sold into
military, CATV and telecommunications applications in Europe. On June 30, 2004
we acquired Datel Holding Corporation and its subsidiaries ("Datel"), a
Mansfield, Massachusetts-based manufacturer of DC to DC converters, data
acquisition components and digital meters. For reporting purposes, these
acquisitions are part of the Power Electronics Division.
Net sales for the second quarter of fiscal 2005 increased $12,263 or 15% to
$93,627 from $81,364 in the second quarter of fiscal 2004. This increase
resulted primarily from the aforementioned acquisitions and improved customer
demand for products of all three divisions. Sales of the Power Electronics
Division increased $9,007 or 90%, due to net sales of $7,385 recorded by the
acquired entities, coupled with higher sales recorded by the legacy portion of
the Power Electronics Division, which increased by $1,622 or 16%, primarily due
to higher DC to DC converter sales. Sales by the Standby Power Division
increased $2,130 or 4%, primarily due to increased sales to the UPS market,
partially offset by continued weakness in the telecommunications market. Motive
Power divisional sales increased $1,126 or 9%, primarily due to higher sales of
both batteries and chargers. Net sales for the six-month period ended July 31,
2004 increased $20,700 or 13% to $179,432 from $158,732. This increase resulted
primarily from improved customer demand for products of all three divisions,
coupled with sales recorded by the recent acquisitions. Sales of the Power
Electronics Division increased $11,144 or 58%, primarily due to the
aforementioned acquisitions that occurred during the second quarter of fiscal
2005, coupled with increased DC to DC converter sales by the legacy portion of
the Power Electronics Division. Standby Power divisional sales increased $7,568
or 7%, mainly due to increased sales to the UPS market, partially offset by
lower sales to the telecommunications market. Sales of the Motive Power Division
increased $1,988 or 8%, primarily due to higher sales of both batteries and
chargers.
Gross profit for the second quarter of fiscal 2005 increased $443 or 2% to
$19,521 from $19,078 in the prior year. The gross margin decreased from 23.4% to
20.8%. Gross profit declined in the Standby Power and Motive Power divisions,
primarily as a result of an increase in our cost of lead and integration costs
related to the start-up of our Reynosa, Mexico facility which was purchased in
September 2003. During the quarter, the spot price of lead averaged 40 cents per
pound, versus 22 cents in last year's second quarter. At our current quarterly
run rate, a one-cent fluctuation in the price of lead has an approximately
$1,600 impact on operating earnings. During the quarter, we recorded
approximately $1,100 in Reynosa, Mexico integration costs, primarily for
rigging, transportation and severance. Gross profit in the Power Electronics
Division increased primarily due to our recent acquisitions, coupled with
increased sales by the legacy portion of the Power Electronics Division. Gross
profit for the six months ended July 31, 2004 declined $8 to $36,062 from
$36,070. The gross margin decreased from 22.7% to 20.1%. Similar to the quarter,
gross profit in the Standby Power and Motive Power divisions declined primarily
as a result of the increase in the cost of lead and integration costs related to
the start-up of our Reynosa, Mexico facility. Gross profit in the Power
Electronics Division increased primarily as a result of our acquisitions coupled
with increased sales by the legacy portion of the Power Electronics Division.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Selling, general and administrative expenses for the second quarter of
fiscal 2005 decreased $857 or 8%. This decrease was primarily due to lower
payroll related costs of $920, lower due diligence costs of $331 and lower
warranty costs of $316, partially offset by selling, general and administrative
expenses of the recent acquisitions. Selling, general and administrative
expenses for the six-month period ended July 31, 2004 were flat primarily as a
result of lower payroll related costs of $700, offset by higher warranty costs
of $264 coupled with selling, general and administrative costs of the recent
acquisitions.
Research and development expenses for the second quarter of fiscal 2005
increased $852 or 36%. As a percentage of sales, research and development
expenses increased from 2.9% of sales in the second quarter of 2004 to 3.4% in
the second quarter of fiscal 2005. Research and development expenses for the
six-month period increased $1,110 or 23%. As a percentage of sales, research and
development expenses increased from 3.0% during the first six months of fiscal
2004 to 3.3% during the first six months of fiscal 2005.
Operating income for the second quarter of fiscal 2005 increased $448 or 7%
to $6,667 from $6,219 in the comparable quarter of the prior year. This increase
was the result of operating income generated by the Power Electronics Division
as compared to an operating loss in the comparable period of the prior fiscal
year, partially offset by lower operating income generated by the Standby Power
Division, coupled with a higher operating loss in the Motive Power Division.
Operating income for the six months ended July 31, 2004 decreased $1,125 or 10%
to $10,505 from $11,630 in the comparable period of the prior year. This
decrease was the result of lower operating income in the Standby Power Division,
coupled with a higher operating loss in the Motive Power Division, partially
offset by operating income generated by the Power Electronics Division as
compared to an operating loss in that division in the comparable period of the
prior fiscal year.
Interest expense, net, increased $505 for the quarter and $346 for the six
months ended July 31, 2004, primarily due to higher average debt balances
outstanding during the periods due to funds borrowed to finance the Celab and
Datel acquisitions.
Income tax expense for the second quarter of fiscal 2005 increased $58 from
the comparable period of the prior year as the result of a higher effective
income tax rate, partially offset by lower income before income taxes. Income
tax expense for the six-month period ended July 31, 2004 decreased $572 due to
lower income before income taxes, partially offset by a higher effective income
tax rate. The effective tax rate consists of statutory rates adjusted for the
tax impacts of foreign operations and other permanent items including changes in
our tax reserve. The effective tax rate for the second quarter of fiscal 2005
was 39.8% as compared to 37.0% in the comparable period of the prior fiscal
year. For the six months ended July 31, 2004, the effective tax rate was 38.8%
as compared to 37.0% in the comparable period of the prior fiscal year. Our tax
rate has increased primarily due to the increased earnings by one of our foreign
entities relative to our United States based entities. Consistent with our
January 31, 2004 year-end, we established a valuation allowance for the foreign
tax credits related to this foreign entity. As the earnings of this entity
increased, the valuation allowance increased resulting in a higher effective tax
rate.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China that is not owned by C&D. The joint
venture had a net income in the second quarter of fiscal 2005 versus a net loss
in the second quarter of fiscal 2004. For the six months ended July 31, 2004,
the joint venture had a net loss as compared to net income in the comparable
period of the prior fiscal year.
As a result of all of the above, for the second quarter of fiscal 2005, net
income decreased $374 or 10% to $3,206 or $0.13 per share - basic and $0.13 per
share - diluted. For the six-month period, net income decreased $1,192 or 19% to
$5,210 or $0.21 per share - basic and $0.20 per share - diluted.
Future Outlook
For the first half of fiscal 2005, sales grew appreciably. Our earnings
continue to be negatively affected by higher raw material pricing as well as the
anticipated plant startup costs as we continue the transition of our Standby
Power HD product line (manufactured in Leola, Pennsylvania) and our Motive Power
V-Line(R) (manufactured in Huguenot, New York) operations to Reynosa, Mexico.
However, overall, financial results improved from the previous quarter, and we
expect this trend to continue into the next quarter, as the transition costs to
our Reynosa, Mexico facility wind down. Accordingly, based on the assumption
that lead pricing remains constant, as to which there can be no assurance, we
are projecting diluted earnings per share in the range of $0.13 to $0.17 for the
third quarter. Currently, we are hedged on approximately 20% of our core lead
requirements through June 2005, and monitor the lead market for favorable buying
opportunities. The third quarter projection does not include any provisions for
potential asset impairments whether related to our Huguenot, New York and/or our
Leola, Pennsylvania facilities or otherwise (for which we cannot with certainty
predict the magnitude or timing of such outcomes). In addition, this estimate
does not include potential effects associated with the finalization of
independent appraisals of acquired tangible and intangible assets related to our
recent acquisitions, which may include in-process research and development
which, if identified, would result in a change to earnings upon finalization.
Liquidity and Capital Resources
Net cash provided by operating activities decreased $3,545 or 21% to
$13,709 for the six-month period ended July 31, 2004 compared to $17,254 in the
same period of the prior year. This decrease in net cash provided by operating
activities was primarily due to: (i) an increase in inventories in the six
months ended July 31, 2004 versus a decrease in the six months ended July 31,
2003; (ii) a decrease in income taxes payable in the six-month period ending
July 31, 2004 versus an increase in the comparable period of the prior year
(primarily due to the receipt of income tax refunds of approximately $2,300 in
the first six months of fiscal 2004); and (iii) lower net income in the first
half of fiscal 2005 as compared to the first half of fiscal 2004. These changes,
resulting in lower net cash provided by operating activities, were partially
offset by (i) an increase in accounts payable in the six months ended July 31,
2004 as compared to a decrease in the six months ended July 31, 2003; and (ii)
an increase in other liabilities in the six-month period ending July 31, 2004
versus a decrease in the comparable period of the prior year.
Net cash used by investing activities increased $78,680 or 4,478% to
$80,437 in the first six months of fiscal 2005 as compared to $1,757 in the
comparable period of the prior fiscal year, primarily due to the acquisition of
Celab and Datel in the current fiscal year.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
C&D had net cash provided by financing activities of $66,640 in the six
months ended July 31, 2004 as compared to net cash used by financing activities
of $21,782 in the comparable period of the prior fiscal year. Current year
financing activities included $68,269 from new borrowings primarily used to
finance the acquisitions of Celab and Datel. This was partially offset by $2,661
used to acquire treasury stock. Prior year net cash used by financing activities
included $18,750 for the reduction of debt and $3,181 for the purchase of
treasury stock.
On June 30, 2004 the Company entered into an amended and restated revolving
credit facility, with a maturity date of June 30, 2009. The financing was
arranged by Banc of America Securities LLC. Under the updated agreement, the
amount of the facility was increased to $175,000 from $100,000 with the option,
under certain conditions, to increase the facility to $200,000. The facility was
increased to $200,000 on August 3, 2004 at the Company's request. The credit
agreement included lender approval of the Datel acquisition as well as other
potential acquisitions. The agreement also includes a $50,000 sub limit for
loans in certain foreign currencies. The interest rates are determined by the
Company's leverage ratio and are available at LIBOR plus 1.00% to LIBOR plus
2.25% or Prime, to Prime plus .75%. The initial loans are priced at LIBOR plus
2.25% or Prime plus .75%. The rates may be adjusted based on the leverage ratio
calculated after the conclusion of each quarter commencing with the third
quarter of this fiscal year. The agreement requires the Company to pay a fee of
..25% to .50% per annum on any unused portion of the facility, based on the
leverage ratio.
The revolving credit facility includes a letter of credit facility not to
exceed $25,000 and swingline loans not to exceed $10,000. The credit agreement
contains restrictive covenants that require the Company to maintain minimum
ratios such as fixed charge coverage and leverage ratios as well as minimum
consolidated net worth. These covenants permit the Company to pay dividends so
long as there are no defaults under the credit agreement. Subject to that
restriction and the provisions of Delaware law, our Board of Directors currently
intends to continue paying dividends. We cannot assure you that we will continue
to do so since future dividends will depend on our earnings, financial condition
and other factors.
We were in compliance with our loan agreement covenants at July 31, 2004.
The availability under this agreement is expected to be sufficient to meet our
ongoing cash needs for working capital requirements, debt service, capital
expenditures and possible strategic acquisitions. Capital expenditures during
fiscal 2004 were incurred to fund cost reduction programs, normal maintenance
and regulatory compliance. Fiscal 2005 capital expenditures are expected to be
less than $10,000 primarily to fund investment in our Reynosa, Mexico facility,
as well as cost reduction programs, normal maintenance and regulatory
compliance.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
PROPOSED ACCOUNTING PRONOUNCEMENT
In March 2004, the FASB issued an exposure document entitled "Share-Based
Payment - an amendment of Statements No. 123 and 95 (Proposed Statement of
Financial Accounting Standards)." The Proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB Opinion
No. 25, "Accounting for Stock Issued to Employees" and generally require that
such transactions be accounted for using a fair-value-based method. This
accounting treatment, if approved, could result in significant compensation
expense. The Proposed Statement, if adopted, would be applied to public entities
prospectively for fiscal years beginning after December 15, 2004, as if all
share-based compensation awards granted, modified, or settled after December 15,
1994, had been accounted for using the fair-value method of accounting.
Retrospective application of the Proposed Statement is not permitted.
FORWARD-LOOKING STATEMENTS
Statements and information contained in this Quarterly Report on Form 10-Q
that are not historical facts are "forward-looking" statements made pursuant to
the safe-harbor provisions of the Private Securities Litigation Act of 1995.
Forward-looking statements may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "intends," "may," "projects," "estimates,"
"believes" or other words of similar meaning. All statements that address
expectations or projections about the future, including, but not limited to,
statements about our strategy for growth, goals, trends, product development,
market position, market conditions, expenditures, sales and financial results,
are forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events and involve a number of risks and
uncertainties. We cannot guarantee that these assumptions and expectations are
accurate or will occur. We caution readers not to place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
Quarterly Report on Form 10-Q, and we undertake no obligation to update or
revise these statements to reflect events or circumstances occurring after the
date of this Quarterly Report on Form 10-Q.
o We operate worldwide and derive a portion of our revenue from sales outside
the United States. Changes in the laws or policies of governmental and
quasi-governmental agencies, as well as social and economic conditions, in
the countries in which we operate (including the United States) could
affect our business and our results of operations. In addition, economic
factors (including inflation and fluctuations in interest rates and foreign
currency exchange rates) and competitive factors (such as price competition
and business combinations of competitors) or a decline in industry sales or
cancelled or delayed orders due to economic weakness or changes in economic
conditions, either in the United States and other countries in which we
conduct business could affect our results of operations.
o Terrorist acts or acts of war, whether in the United States or abroad,
could cause damage or disruption to our operations, our suppliers, channels
to market or customers, or could cause costs to increase, or create
political or economic instability, any of which could have a material
adverse effect on our business.
o Our results of operations could be adversely affected by conditions in the
domestic and global economies or the markets in which we conduct business,
such as telecommunications, UPS, CATV, switchgear and control, material
handling and military.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
o Our ability to grow earnings could be affected by increases in the cost of
raw materials, particularly lead, the primary component cost of our battery
products, or other product parts or components. We may not be able to fully
offset the effects of higher costs of raw materials through price increases
to customers or productivity improvements. A significant increase in the
price of one or more raw materials, parts or components could have a
material adverse effect on our operations.
o Our ability to meet customer demand depends, in part, on our ability to
obtain timely and adequate supply and delivery of raw materials, including
lead, which is the primary component cost of our battery products or other
product parts or components from our suppliers and internal manufacturing
capacity. Although we work closely with both our internal and external
suppliers (and, as to the continuing availability of lead, our industry
associations) to avoid encountering unavailability or shortages, there can
be no assurance that we will not encounter them in the future. The
cessation, reduction or interruption of supply of raw materials (including
lead), product parts or components, could have a material adverse effect on
our operations.
o Our growth objectives are largely dependent on our ability to renew our
pipeline of new products and to bring these products to market. This
ability may be adversely affected by difficulties or delays in product
development, such as the inability to: introduce viable new products;
successfully complete research and development projects or integrate
purchased or licensed technology; obtain adequate intellectual property
protection; or gain market acceptance of the new products. Our growth could
also be affected by competitive products and technologies.
o As part of our strategy for growth, we have made and may continue to make
acquisitions, and in the future, may make divestitures and form strategic
alliances. There can be no assurance that these will be completed or
beneficial to us. Acquisitions present significant challenges and risks
relating to the integration of the business into our company, and there can
be no assurance that we will manage acquisitions successfully.
o We have undertaken and may continue to undertake productivity initiatives,
including, among others, re-organizations and facility rationalizations to
improve performance or generate cost savings. In addition, we may from time
to time relocate or consolidate one or more of our operations. There can be
no assurance that any planned performance improvements or cost savings from
such activities will be realized or that delays or other interruptions in
production or delivery of products will not occur as the result of any
rationalization, relocation or consolidation. A rationalization, relocation
or consolidation could also cause asset impairments. Further, there can be
no assurance that any of these initiatives will be completed or beneficial
to us.
o Our facilities are subject to a broad array of environmental laws and
regulations. The costs of complying with complex environmental laws and
regulations, as well as participation in voluntary programs, are
significant and will continue to be so for the foreseeable future. We are
also subject to potentially significant fines and penalties for
non-compliance with applicable laws and regulations. Our accruals for such
costs and liabilities may not be adequate since the estimates on which the
accruals are based depend on a number of factors including, but not limited
to, the nature of the problem, the complexity of the issues, the nature of
the remedy, the outcome of discussions with regulatory agencies and/or the
government or third parties and, as applicable, other PRPs at multiparty
sites, the number and financial viability of other PRPs and risks
associated with litigation.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
o We are exposed to the credit risk of our customers, including risk of
insolvency and bankruptcy. Although we have programs in place to monitor
and mitigate the associated risk, there can be no assurance that such
programs will be effective in reducing our credit risks or risks associated
with potential bankruptcy of our customers.
o Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims adverse to
us. These could potentially include, but are not limited to, the following:
product liability, contract, employment-related, labor relations, personal
injury or property damage, stockholder claims and claims arising from any
injury or damage to persons, property or the environment from hazardous
substances used, generated or disposed of in the conduct of our business
(or that of a predecessor to the extent we are not indemnified for those
liabilities).
o Our performance depends on our ability to attract and retain qualified
personnel. We cannot assure that we will be able to continue to attract or
retain qualified personnel. A portion of the Company's workforce is
unionized. From time to time, we engage in collective bargaining
negotiations with the unions that represent them. If we are unable to reach
agreement with any of our unionized work groups on future negotiations
regarding the terms of their collective bargaining agreements, or if
additional segments of our workforce become unionized, we may be subject to
work interruptions or stoppages. Strikes or labor disputes with our
unionized employees may adversely affect our ability to conduct our
business.
o Our revolving credit facility permits dividends to be paid on our Common
Stock as long as there is no default under that agreement. Subject to that
restriction and the provisions of Delaware law, our Board of Directors
currently intends to continue paying dividends. We cannot assure you that
we will continue to do so since future dividends will depend on our
earnings, financial condition and other factors.
o Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than anticipated.
Our profit margins vary among products, customers and geographic markets.
Consequently, if our mix of any of these is substantially different from
what is anticipated in any particular period, our earnings could be lower
than anticipated.
o In spite of having a disaster recovery plan in place, infrastructure
failures could have a material adverse effect on our business. We are
highly dependent on our systems infrastructure in order to achieve our
business objectives. If we experience a problem that impairs our
infrastructure, such as a power outage, computer virus, intentional
disruption of information technology systems by a third party, equipment
failure or telephone system failure, the resulting disruptions could impede
our ability to book or process orders, manufacture and ship products in a
timely manner or otherwise carry on our business in the ordinary course.
Any such events could cause us to lose significant customers or revenue and
could require us to incur significant expense to eliminate these problems
and address related security concerns.
The foregoing list of important factors is not all-inclusive, or
necessarily in order of importance.
25
Item 3. Quantitative and Qualitative Disclosure About Market Risk
We are exposed to various market risks. The primary financial risks include
fluctuations in interest rates and changes in currency exchange rates. We manage
these risks by using derivative instruments. We do not invest in derivative
securities for speculative purposes, but do enter into hedging arrangements in
order to reduce our exposure to fluctuations in interest rates as well as to
fluctuations in exchange rates. Our financial instruments subject to interest
rate risk consist of debt instruments and interest rate swap contracts. The debt
instruments are subject to variable rate interest, and therefore the market
value is not sensitive to interest rate movements. Interest rate swap contracts
are used to manage our exposure to fluctuations in interest rates on our
underlying variable rate debt instruments. Additional disclosure regarding our
various market risks are set forth in our fiscal 2004 Form 10-K filed with the
Securities and Exchange Commission.
Item 4. Disclosure Controls and Procedures:
Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, has evaluated the effectiveness of our disclosure
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, our Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, our
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by us in the reports that we file or submit under the Exchange Act.
Internal Control over Financial Reporting:
There have not been any changes in our 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, our internal
control over financial reporting other than in connection with the acquisition
of Datel. On June 30, 2004 we acquired Datel and concurrently assumed all the
accounting functions of Datel. We do not believe that this change has materially
affected, or is reasonably likely to materially affect the Company's internal
control over financial reporting.
26
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use and Proceeds
Issuer Purchases of Equity Securities:
Maximum Number
(or Approximate
Total Number of Dollar Value) of
Total Number Shares Purchased as Shares that May Yet
of Shares Average Price Part of Publicly Announced Be Purchased Under the
Period Purchased Paid per Share Plans or Programs Plans or Programs
-------- ------------- --------------- ---------------------------- -------------------------
May 1 - May 31, 2004 84,124 $14.69 77,900 159,100
June 1 - June 30, 2004 341 $16.85 - 159,100
July 1 - July 31, 2004 328 $17.49 - 159,100
------ ------
Total 84,793 77,900
====== ======
Our share repurchase program was approved by our Board of Directors and
publicly announced on July 24, 2002. The program authorizes the repurchase of up
to 1,000,000 shares of our common stock (having a total purchase price of no
greater than $35,000,000)from time to time, directly or through brokers or
agents, and has no expiration date. Of the total shares purchased, 77,900 were
purchased pursuant to the July 24, 2002 repurchase program and 6,893 were
purchased through deferred compensation plans.
27
Item 6. Exhibits.
10.1 Amended and Restated Credit Agreement dated as of June 30, 2004
among C&D Technologies, Inc. and Certain of its Subsidiaries as
the Borrowers, the Subsidiaries Identified Herein as the
Guarantors, Citizens Bank as Syndication Agent, LaSalle Bank
National Association as Co-Agent, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer and the
Other Lenders Party Hereto Arranged By Banc of America Securities
LLC as Sole Lead Arranger and Sole Book Manager (filed herewith).
10.2 Assignment and Assumption dated as of August 3, 2004 by and
between Bank of America, N.A. and Sovereign Bank (filed
herewith).
10.3 Lender Joinder Agreement dated as of August 3, 2004 among C&D
Technologies, Inc. and Certain of its Subsidiaries as the
Borrowers, and Calyon New York Branch as the New Lender and Bank
of America N.A., as Administrative Agent (filed herewith).
10.4 Lender Joinder Agreement dated as of August 3, 2004 among C&D
Technologies, Inc. and Certain of its Subsidiaries as the
Borrowers, and Sovereign Bank as the New Lender and Bank of
America N.A., as Administrative Agent (filed herewith).
15 Awareness Letter of Independent Registered Public Accounting Firm
(filed herewith).
31.1 Rule 13a-14(a)/15d-14(a) Certification of the President and Chief
Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
31.2 Rule 13a-14(a)/15d-14(a) Certification of the Vice President and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 (filed herewith).
32.1 Section 1350 Certification of the President and Chief Executive
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
32.2 Section 1350 Certification of the Vice President and Chief
Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (filed herewith).
28
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 14, 2004 BY: /s/ Wade H. Roberts, Jr.
---------------------------------
Wade H. Roberts, Jr.
President, Chief Executive
Officer and Director
(Principal Executive Officer)
September 14, 2004 BY: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
29
EXHIBIT INDEX
10.1 Amended and Restated Credit Agreement dated as of June 30, 2004
among C&D Technologies, Inc. and Certain of its Subsidiaries as
the Borrowers. The Subsidiaries Identified Herein as the
Guarantors, Citizens Bank as Syndication Agent, LaSalle National
Bank National Association as Co-Agent, Bank of America, N.A., as
Administrative Agent, Swing Line Lender and L/C Issuer and the
Other Lenders Party Hereto Arranged By Banc of America Securities
LLC as Sole Lead Arranger and Sole Book Manager.
10.2 Assignment and Assumption dated as of August 3, 2004 by and
between Bank of America, N.A. and Sovereign Bank.
10.3 Lender Joinder Agreement dated as of August 3, 2004 among C&D
Technologies, Inc. and Certain of its Subsidiaries as the
Borrowers and Calyon New York Branch as the New Lender and Bank
of America, N.A., as Administrative Agent.
10.4 Lender Joinder Agreement dated as of August 3, 2004 among C&D
Technologies, Inc. and Certain of its Subsidiaries as the
Borrowers and Sovereign Bank as the New Lender and Bank of
America, N.A., as Administrative Agent.
15 Awareness Letter of Independent Registered Public Accounting
Firm.
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.
30