UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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
November 30, 2004: 28,714,963
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements (Unaudited)
Consolidated Balance Sheets -
October 31, 2004 and January 31, 2004................ 3
Consolidated Statements of Operations - Three and Nine
Months Ended October 31, 2004 and 2003............... 5
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 2004 and 2003.......... 6
Consolidated Statements of Comprehensive (Loss)
Income - Three and Nine Months Ended October 31, 2004
and 2003............................................. 8
Notes to Consolidated Financial Statements............ 9
Report of Independent Registered Public Accounting
Firm................................................. 22
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations... 23
Item 3 - Quantitative and Qualitative Disclosures
About Market Risk............................... 32
Item 4 - Controls and Procedures.......................... 32
PART II. OTHER INFORMATION
Item 2 - Unregistered Sales of Equity Securities and Use
and Proceeds.................................... 33
Item 6 - Exhibits......................................... 34
SIGNATURES................................................... 35
EXHIBIT INDEX................................................ 36
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)
October 31, January 31,
2004 2004
---- ----
ASSETS
Current assets:
Cash and cash equivalents................... $ 24,567 $ 12,306
Accounts receivable, less allowance for
doubtful accounts of $2,100 and $1,476,
respectively........................... 76,702 49,838
Inventories................................. 82,320 47,175
Deferred income taxes....................... 11,311 10,356
Other current assets........................ 2,178 1,262
------- -------
Total current assets............. 197,078 120,937
Property, plant and equipment, net................ 105,728 104,799
Intangible and other assets, net.................. 59,997 39,799
Goodwill.......................................... 195,136 120,415
------- -------
Total assets..................... $557,939 $385,950
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt............................. $ 1,875 $ -
Accounts payable............................ 43,506 22,246
Accrued liabilities......................... 31,379 19,495
Income taxes................................ 3,558 3,791
Other current liabilities................... 16,307 11,400
------- -------
Total current liabilities........ 96,625 56,932
Deferred income taxes ............................ 24,779 17,369
Long-term debt.................................... 131,308 19,620
Other liabilities................................. 31,238 14,310
------- -------
Total liabilities................ 283,950 108,231
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)
October 31, January 31,
2004 2004
---- ----
Commitments and contingencies
Minority interest................................. 8,063 8,186
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 28,713,533 and
28,605,747 shares issued, respectively.. 287 286
Additional paid-in capital.................. 71,935 70,619
Treasury stock, at cost, 3,367,251 and
3,196,508 shares, respectively.......... (47,126) (44,481)
Accumulated other comprehensive
income.................................. 4,170 3,259
Retained earnings........................... 236,660 239,850
------- -------
Total stockholders' equity....... 265,926 269,533
------- -------
Total liabilities and
stockholders' equity........... $557,939 $385,950
======= =======
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(UNAUDITED)
Three months ended Nine months ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales................................. $112,732 $84,870 $292,164 $243,602
Cost of sales............................. 103,824 65,214 247,194 187,876
------- ------ ------ -------
Gross profit.......................... 8,908 19,656 44,970 55,726
Selling, general and administrative
expenses.............................. 12,844 10,097 32,545 29,791
Research and development expenses......... 5,463 2,358 11,319 7,104
------- ------ ------ -------
Operating (loss) income............... (9,399) 7,201 1,106 18,831
Interest expense, net..................... 1,894 254 2,988 1,002
Other expense, net........................ 202 365 1,261 947
------- ------ ------ -------
(Loss) income before income taxes
and minority interest.............. (11,495) 6,582 (3,143) 16,882
(Benefit) provision for income taxes...... (4,126) 2,435 (887) 6,246
------- ------ ------ -------
Net (loss) income before
minority interest.................. (7,369) 4,147 (2,256) 10,636
Minority interest......................... (16) (56) (113) 31
------- ------ ------ -------
Net (loss) income..................... $ (7,353) $ 4,203 $(2,143) $ 10,605
======= ====== ====== =======
Net (loss) income per share - basic....... $ (.29) $ .16 $ (.08) $ .41
======= ====== ====== =======
Net (loss) income per share - diluted..... $ (.29) $ .16 $ (.08) $ .41
======= ====== ====== =======
Dividends per share....................... $ - $.01375 $.04125 $ .04125
======= ====== ====== =======
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
Nine months ended
October 31,
2004 2003*
---- ----
Cash flows provided (used) by operating activities:
Net (loss) income.................................... $ (2,143) $ 10,605
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Minority interest.............................. (113) 31
Depreciation and amortization.................. 17,730 17,033
Deferred income taxes.......................... (3,720) 1,320
Impairment of assets........................... 9,602 -
Write-off of acquired in-process research and
development................................. 440 -
(Gain) loss on disposal of assets.............. (66) 59
Changes in, net of effects of acquisitions:
Accounts receivable...................... (1,918) (5,896)
Inventories.............................. (5,655) 3,332
Other current assets..................... (205) (134)
Accounts payable......................... 7,763 (458)
Accrued liabilities...................... 4,539 2,072
Income taxes payable..................... (1,511) 5,190
Other current liabilities................ 1,074 867
Other liabilities........................ 1,314 (1,771)
Other assets............................. 814 1,432
Deferred income taxes.................... 223 257
Other, net..................................... 1,672 (1,119)
------- -------
Net cash provided by operating activities................ 29,840 32,820
------- -------
Cash flows provided (used) by investing activities:
Acquisition of businesses, net of cash acquired...... (128,301) (11,984)
Acquisition of property, plant and equipment......... (8,734) (2,792)
Proceeds from disposal of property, plant
and equipment..................................... 15,703 64
------- -------
Net cash used by investing activities.................... (121,332) (14,712)
------- -------
Cash flows provided (used) by financing activities:
Repayment of debt.................................... (438) (20,000)
Proceeds from new borrowings......................... 106,190 -
Financing costs of long-term debt.................... (753) (75)
Increase in book overdrafts.......................... 1,809 352
Proceeds from issuance of common stock............... 913 479
Purchase of treasury stock........................... (2,983) (3,503)
Payment of common stock dividends.................... (1,047) (1,056)
Payment of minority interest dividends............... (10) (207)
------- -------
Net cash provided (used) by financing activities......... 103,681 (24,010)
------- -------
Effect of exchange rate changes on cash.................. 72 184
------- -------
Increase (decrease) in cash and cash equivalents......... 12,261 (5,718)
Cash and cash equivalents at beginning
of period............................................. 12,306 12,966
------- -------
Cash and cash equivalents at end of period............... $ 24,567 $ 7,248
======= =======
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(UNAUDITED)
Nine months ended
October 31,
2004 2003*
---- ----
SCHEDULE OF NON CASH INVESTING
AND FINANCIAL ACTIVITIES
Acquired businesses:
Estimated fair value of assets acquired............... $ 76,969 $ 10,886
Goodwill.............................................. 74,598 -
Identifiable intangible assets........................ 22,552 3,898
Cash paid, net of cash acquired....................... (128,301) (11,984)
------- -------
Liabilities assumed................................... $ 45,818 $ 2,800
======= =======
Decrease in property, plant, and equipment acquisitions
in accounts payable................................... $ (32) $ (371)
======= =======
* Reclassified for comparative purposes.
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 Nine months ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Net (loss) income........................................ $(7,353) $4,203 $(2,143) $10,605
Other comprehensive (loss) income, net of tax:
Net unrealized (loss) gain on derivative instruments... (40) 108 300 229
Foreign currency translation adjustments............... 822 1,629 611 919
----- ----- ----- ------
Total comprehensive (loss) income........................ $(6,571) $5,940 $(1,232) $11,753
===== ===== ===== ======
The accompanying notes are an integral part of these statements.
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim 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
October 31, 2004 and the related consolidated statements of operations and
comprehensive (loss) income for the three and nine month periods ended October
31, 2004 and 2003 and the related consolidated statements of cash flows for the
nine-month periods ended October 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. STOCK-BASED COMPENSATION PLANS
Under APB 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
(loss) income. The following table illustrates the effect on net (loss) income
and (loss) income 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, generally three years.
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 Nine months ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Net (loss) income - as reported.............................. $(7,353) $4,203 $(2,143) $10,605
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects................. 920 876 2,863 2,946
----- ----- ----- -----
Net (loss) income - pro forma................................ $(8,273) $3,327 $(5,006) $7,659
===== ===== ===== =====
Net (loss) income per common share - basic - as reported..... $ (0.29) $ 0.16 $ (0.08) $ 0.41
Net (loss) income per common share - basic - pro forma....... $ (0.33) $ 0.13 $ (0.20) $ 0.30
Net (loss) income per common share - diluted - as reported... $ (0.29) $ 0.16 $ (0.08) $ 0.41
Net (loss) income per common share - diluted - pro forma..... $ (0.33) $ 0.13 $ (0.20) $ 0.30
Weighted average fair value of options
granted during the period.................................. $ 9.24 * $ 9.09 $ 7.79
* There were no options granted during the third quarter of fiscal year 2004.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
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 any interim or annual period beginning after June 15, 2005.
3. NEW ACCOUNTING PRONOUNCEMENT
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of Accounting Research Bulletin ("ARB") No. 43, Chapter 4," which
adopts wording from the International Accounting Standards Board's ("IASB")
International Accounting Standard ("IAS") No. 2 "Inventories" in an effort to
improve the comparability of cross-border financial reporting. The FASB and IASB
both believe the standards have the same intent; however, an amendment to the
wording was adopted to avoid inconsistent application. The new standard
indicates that abnormal freight, handling costs, and wasted materials (spoilage)
are required to be treated as current period charges rather than as a portion of
inventory cost. Additionally, the standard clarifies that fixed production
overhead should be allocated based on the normal capacity of a production
facility. The statement is effective for the Company beginning in fiscal year
2007. Adoption is not expected to have a material impact on the Company's
consolidated earnings, financial position or cash flows.
4. 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 $6,730 and $4,921 at October 31, 2004 and January 31,
2004, respectively.
5. INVENTORIES
Inventories consisted of the following:
October 31, January 31,
2004 2004
---- ----
Raw materials............................ $33,847 $17,961
Work-in-progress......................... 13,904 10,667
Finished goods........................... 34,569 18,547
------ ------
$82,320 $47,175
====== ======
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
6. INCOME TAXES
A reconciliation of the (benefit) provision for income taxes from the
statutory rate to the effective rate is as follows:
Nine months ended
October 31,
2004 2003
---- ----
U.S. statutory income tax....................... 35.0% 35.0%
State tax, net of federal income tax benefit.... 16.4 1.2
Tax effect of foreign operations................ (2.3) -
Increase in valuation allowance................. (19.1) -
Resolution of state tax audits.................. 3.8 -
Tax effect of write-off of acquired in-process
research and development...................... (4.9) -
Other........................................... (0.7) 0.8
---- ----
28.2% 37.0%
==== ====
The change in the effective tax rate is due to: (i) a net loss before
income taxes in the current fiscal year as compared to net income before taxes
in the comparable period of the prior year; (ii) the valuation allowance in the
current year related to United States foreign tax credits for unremitted
earnings of a controlled foreign subsidiary; (iii) the state tax benefit from
the impairment of fixed assets in conjunction with a significant amount of
foreign earnings; (iv) the tax effect of the write-off of non-deductible
acquired in-process research and development related to the Datel acquisition,
and (v) the tax effect from the resolution of state tax audits.
7. NET (LOSS) INCOME PER COMMON SHARE
Net (loss) income per share - basic is based on the weighted average number
of shares of Common Stock outstanding. Net (loss) 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 Nine months ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Weighted average shares
of common stock
outstanding................................... 25,348,104 25,495,740 25,350,509 25,565,778
Assumed exercise of stock
options, net of shares
assumed reacquired............................ - * 261,032 - * 157,729
---------- ---------- ---------- ----------
Weighted average common
shares - diluted.............................. 25,348,104 25,756,772 25,350,509 25,723,507
========== ========== ========== ==========
*Due to a loss during the period, zero incremental shares are included
because the effect would be anti-dilutive.
Due to net losses in the three and nine months ended October 31, 2004, the
effect of the potential common shares resulting from the assumed exercise of
stock options, net of shares assumed reacquired was excluded, as the effect
would have been anti-dilutive.
During the three months and nine months ended October 31, 2003, there were
1,519,266 outstanding employee stock options that were out-of-the-money and
therefore excluded from the calculation of the dilutive effect of employee stock
options.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
8. 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 is expected to 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.
12
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.
In October 2004, the Company accrued estimated environmental clean-up and
impaired equipment decontamination charges of $3,881 associated with the
impairment charges related to the Leola, Pennsylvania and Huguenot, New York
facilities, the timing for which has not been ascertained.
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 October 31, 2004, accrued environmental reserves totaled
$6,273, consisting of $5,596 in other current liabilities and $677 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 potential settlements are not expected to
have a material adverse effect on the Company's business, financial condition or
results of operations.
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
9. OPERATIONS BY REPORTABLE 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 ("UPS"), cable and utilities.
Integrated reserve power systems monitor and regulate electric power flow and
provide backup power in the event of a primary power loss or interruption. The
Standby Power Division also produces the individual components of these systems,
including reserve batteries, power rectifiers, system monitors, power boards and
chargers. Major applications of these products include wireless and wireline
telephone infrastructure, cable television ("CATV") signal powering, corporate
data center powering and computer network backup for use during power outages.
The Power Electronics Division manufactures and markets custom, standard
and modified-standard electronic power supply systems, including DC to DC
converters, for large original equipment manufacturers ("OEMs") of
telecommunications and networking equipment, as well as office and industrial
equipment. In addition, 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 nine months ended October 31, 2004 and 2003 is shown below:
Standby Power Motive
Power Electronics Power
Division Division Division Consolidated
-------- ----------- -------- ------------
Three months ended October 31, 2004:
Net sales................................ $ 62,225 $35,571 $14,936 $112,732
Operating (loss) income.................. $ (5,300) $ 1,169 $(5,268) $ (9,399)
Three months ended October 31, 2003:
Net sales................................ $ 60,075 $ 9,450 $15,345 $ 84,870
Operating income (loss).................. $ 7,795 $ 401 $ (995) $ 7,201
Nine months ended October 31, 2004:
Net sales................................ $184,609 $65,793 $41,762 $292,164
Operating income (loss).................. $ 5,853 $ 4,395 $(9,142) $ 1,106
Nine months ended October 31, 2003:
Net sales................................ $174,891 $28,528 $40,183 $243,602
Operating income (loss).................. $ 23,603 $ (584) $(4,188) $ 18,831
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. DERIVATIVE INSTRUMENTS
The following table includes the Company's interest rate swaps as of
October 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 (loss) income.
Fixed Variable Fair Fair
Interest Interest Value Value
Notional Origination Maturity Rate Rate At At
Amount Date Date Paid Received 10/31/04 1/31/04
- -------- ----------- -------- -------- -------- -------- -------
$20,000 04/16/01 04/11/06 5.56% LIBOR $(831) $(1,486)
$10,000 07/29/04 08/02/07 3.70% LIBOR (155) -
---- ------
$(986) $(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 $(200) and $(923) as of
October 31, 2004 and January 31, 2004. Changes in the fair value of these
currency forward contracts are recorded in other expense, net.
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:
Nine months ended
October 31,
2004 2003
---- ----
Balance at beginning of period......................... $ 9,759 $10,599
Opening balance sheet liability of acquired companies.. 393 -
Current period provisions.............................. 3,376 3,909
Expenditures........................................... (4,214) (6,682)
------ ------
Balance at end of period............................... $ 9,314 $ 7,826
====== ======
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
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.
Postretirement Postretirement
Benefits Benefits
------------------ -----------------
Three months ended Nine months ended
October 31, October 31,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost.......................... $ 40 $ 43 $118 $129
Interest Cost......................... 52 63 155 189
Amortization of prior service cost.... 29 28 86 86
Recognized actuarial gain............. (1) - (1) (2)
-- --- --- ---
Net periodic benefit cost............. $120 $134 $358 $402
=== === === ===
Pension Benefits Pension Benefits
------------------ -----------------
Three Months ended Nine Months ended
October 31, October 31,
------------------ -----------------
2004 2003 2004 2003
---- ---- ---- ----
Service Cost........................ $ 430 $ 378 $ 1,289 $ 1,134
Interest Cost....................... 974 956 2,920 2,867
Expected return on plan assets...... (1,217) (1,031) (3,652) (3,092)
Amortization of prior service cost.. 5 4 14 14
Recognized actuarial loss........... 372 352 1,116 1,057
------ ------ ------ -----
Net periodic benefit cost........... $ 564 $ 659 $ 1,687 $ 1,980
====== ====== ====== =====
The Company is not required to make any contributions to its pension plans
for fiscal 2005. In the three month period ended October 31, 2004, the Company
made a discretionary contribution of $596 to one of its pension plans. The
Company expects to make additional discretionary contributions of approximately
$2,400 to its pension plans in the fourth quarter of fiscal 2005, assuming the
discount rate remains at 6%.
The Company also expects to make contributions totaling approximately $229
to the two Company sponsored postretirement benefit plans.
16
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 of approximately $400, primarily related to
legal fees and due diligence. 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 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 of approximately $800, primarily
related to legal fees, audit fees, due diligence and appraisals. 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. The independent appraisal of the
acquired Datel tangible and intangible assets included technology of $11,200
with an 11 year expected useful life, customer relationships of $8,900 with a 20
year expected useful life, trades names of $2,400 with a 25 year expected useful
life, and acquired in-process research and development of $440, which lastly,
resulted in a charge to operations of this amount in the three month period
ending October 31, 2004.
On September 30, 2004, the Company acquired the Power Systems division of
Celestica, Inc., which the Company now operates as "CPS", a Toronto,
Ontario-based manufacturer, for approximately $52,400 plus additional
acquisition related costs of approximately $900, primarily related to legal
fees, consulting fees, audit fees, due diligence and appraisals. CPS develops DC
to DC converters and AC to DC power supplies which are sold on a direct basis to
large computing and communications OEMs. The acquisition of CPS is expected to
provide the Company with a broader product offering, access to an expanded group
of OEM customers and additional low-cost engineering resources in mainland
China. This acquisition was funded with the Company's expanded revolving credit
facility.
To finance the acquisitions, 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.
17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
The three acquisitions referred to above are included in the Power
Electronics Division for reporting purposes. At October 31, 2004, the
purchase-price allocations to the assets acquired and liabilities assumed for
the CPS acquisition completed during the third quarter of fiscal 2005 is
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 charge to earnings upon
finalization. The purchase price for these acquisitions was preliminarily
allocated as follows:
Accounts receivable.................... $ 26,310
Inventory.............................. 29,320
Other current assets................... 738
Deferred income tax assets............. 2,231
Property, plant and equipment.......... 17,734
Other assets........................... 636
Goodwill............................... 74,598
Identifiable intangible assets......... 22,552
Short-term debt........................ (1,355)
Accounts payable....................... (11,884)
Accrued liabilities.................... (7,777)
Income taxes........................... (1,697)
Other current liabilities.............. (3,857)
Deferred income tax liabilities........ (12,185)
Long-term debt......................... (7,063)
-------
Total purchase price................... $128,301
=======
18
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, Celab and CPS 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 amortization of intangibles, depreciation adjustments due to the
write-up of property, plant and equipment to estimated fair market value,
interest expense on the acquisition debt and related income tax effects.
Additional pro forma adjustments include the elimination of CPS divestiture
related costs of $1,200 and a conciliatory claim settlement of $3,500 made by
Celestica, Inc. to preserve a key customer relationship of the parent company.
(Unaudited)
Three Months Ended Nine Months Ended
October 31, October 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales.................... $128,483 $121,359 $392,437 $353,393
Net (loss) income............ $(13,594) $ 1,289 $ (9,533) $ 5,002
Net (loss) income per common
share - basic............. $ (0.54) $ 0.05 $ (0.38) $ 0.20
Net (loss) income per common
share - diluted........... $ (0.54) $ 0.05 $ (0.38) $ 0.19
The pro forma net income includes the following significant nonrecurring
charges incurred by CPS prior to the acquisition in the three months and nine
months ended October 31, 2004:
Accrual for inventory obsolescence....... $ 7,900
Severance and related benefits........... 2,800
Other costs.............................. 600
------
Total.................................... $11,300
======
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. IMPAIRMENT OF FIXED ASSETS
During the third quarter of fiscal 2005, the Company substantially
completed the transition of its Motive Power V-Line(R) and former Standby Power
HD products (now replaced by the MSE and msEndur(TM)) to the Company's Reynosa,
Mexico facility. As a result of the completion of feasibility analyses and
successful product start-up testing, the Company recorded impairment charges
related to machinery and equipment of $9,488, consisting of $6,293 in Leola,
Pennsylvania (recorded in the Company's Standby Power Division) and $3,195 in
Huguenot, New York (recorded in the Company's Motive Power Division). These
charges are included in cost of sales on the Consolidated Statement of
Operations. These impairment charges were primarily related to the equipment
associated with the HD product line in Leola and the V-Line products
manufactured in Huguenot. In general, older, excess and/or immovable
manufacturing equipment was replaced by more modern production equipment located
in the Company's Reynosa, Mexico facility. The Leola impairment charge also
included certain equipment related to the Round Cell product line, for which
sales have declined as a result of being displaced by the Company's other
flooded products manufactured at another facility. Additionally, one of the
Company's buildings in Leola has been reclassified as held for sale. This
building, which had a book value of $2,014 at October 31, 2004, has been written
down to $1,900, a loss of $114.
19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
15. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS:
Trade accounts receivable are recorded at the invoiced amount and do not
bear interest. The allowance for doubtful accounts is the Company's best
estimate of the amount of probable credit losses in the Company's existing
accounts receivable. The Company determines the allowance based on historical
write-off experience by industry and regional economic data. The Company reviews
its allowance for doubtful accounts quarterly. Past due balances over 90 days
and over a specified amount are reviewed individually for collectibility. All
other balances are reviewed on a pooled basis by age and type of receivable.
Account balances are charged off against the allowance when the Company believes
it is probable the receivable will not be recovered. The Company does not have
any off-balance-sheet credit exposure related to its customers.
Receivables consist of the following at October 31, 2004 and January 31, 2004.
October 31, January 31,
2004 2004
---- ----
Trade receivables........................ $72,628 $45,396
Notes receivable......................... 2,639 2,323
Other.................................... 3,535 3,595
Allowance for doubtful accounts.......... (2,100) (1,476)
------ ------
Total receivables........................ $76,702 $49,838
====== ======
Following are the changes in the allowance for doubtful accounts during the
periods ended:
October 31, October 31,
2004 2003
---- ----
Balance at beginning of period........... $1,476 $1,906
Additions................................ 26 46
Write-offs net of recoveries............. (127) (364)
Opening balance sheet of acquired
companies............................. 725 -
----- -----
Balance at end of period................. $2,100 $1,588
===== =====
16. DEBT
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 and CPS 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. The Company was in
compliance with its loan agreement covenants at October 31, 2004.
20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
17. REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
With respect to the unaudited financial information of the Company for the
three and nine month periods ended October 31, 2004 and 2003, the Company's
Independent Registered Public Accounting Firm, in their report dated December
10, 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.
21
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 October 31, 2004,
and the related consolidated statements of operations and comprehensive (loss)
income for each of the three-month and nine-month periods ended October 31, 2004
and 2003, and the consolidated statement of cash flows for the nine-month
periods ended October 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
Philadelphia, Pennsylvania
December 10, 2004
22
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
"nine-month period", refer to the third quarter of fiscal 2005 and the nine
months ended October 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, based in Hampshire, United Kingdom, a provider of
power conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004 we acquired Datel, a
Mansfield, Massachusetts-based manufacturer of DC to DC converters, data
acquisition components and digital meters.
On September 30, 2004, we acquired the Power Systems division of Celestica,
Inc., which we now operate as "CPS", a Toronto, Ontario-based manufacturer. CPS
develops DC to DC converters and AC to DC power supplies which are sold on a
direct basis to large computing and communications OEMs. For reporting purposes,
these three acquisitions are part of the Power Electronics Division.
Net sales for the third quarter of fiscal 2005 increased $27,862 or 33% to
$112,732 from $84,870 in the third quarter of fiscal 2004. This increase
resulted primarily from the aforementioned acquisitions. Sales of the Power
Electronics Division increased $26,121 or 276%, primarily due to net sales of
$24,292 recorded by the acquired entities during the quarter, coupled with
higher sales by the legacy portion of the Power Electronics Division, which
increased $1,829 or 19%, primarily due to higher DC to DC converter sales. Sales
by the Standby Power Division increased $2,150 or 4%, primarily due to increased
sales to the UPS market, partially offset by continued weakness in the
telecommunications market. Motive Power divisional sales decreased $409 or 3%,
primarily due to lower battery sales.
Net sales for the nine-month period ended October 31, 2004 increased
$48,562 or 20% to $292,164 from $243,602. This increase resulted primarily from
sales recorded by the recent acquisitions coupled with improved customer demand
for products of all three divisions. Sales of the Power Electronics Division
increased $37,265 or 131%, primarily due to net sales of $31,677 recorded by the
aforementioned acquisitions during fiscal 2005, coupled with higher sales by the
legacy portion of the Power Electronics Division which increased $5,588 or 20%,
primarily due to higher DC to DC converter sales. Standby Power divisional sales
increased $9,718 or 6%, mainly due to increased sales to the UPS and CATV
markets, partially offset by lower sales to the telecommunications market. Sales
of the Motive Power Division increased $1,579 or 4%, primarily due to higher
sales of both batteries and chargers.
Gross profit for the third quarter of fiscal 2005 decreased $10,748 or 55%
to $8,908 from $19,656 in the prior year. The gross margin decreased from 23.2%
to 7.9%. Gross profit declined in the Standby Power and Motive Power divisions,
primarily as a result of non-cash impairment charges at our Leola, Pennsylvania
and Huguenot, New York facilities totaling $9,602, and associated estimated
environmental clean-up and impaired equipment decontamination charges at these
two facilities in the amount of $3,881, coupled with an increase in the cost of
lead of approximately $7,324. During the quarter, the spot price of lead
averaged 42 cents per pound, versus 24 cents in last year's third quarter and 40
cents per pound during the second quarter of fiscal 2005. Gross profit in the
Power Electronics Division increased during the third quarter primarily due to
the results of the recent acquisitions, coupled with the favorable impact of
increased sales by the legacy portion of the Power Electronics Division.
23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued
(Dollars in thousands, except per share data)
Gross profit for the nine months ended October 31, 2004 declined $10,756 or
19% to $44,970 from $55,726 with margins decreasing from 22.9% to 15.4%. Similar
to the third quarter, gross profit in the Standby Power and Motive Power
divisions declined primarily as a result of non-cash impairment charges at our
Leola, Pennsylvania and Huguenot, New York facilities totaling $9,602, and
associated environmental clean-up charges at these two facilities in the amount
of $3,881, coupled with an increase in the cost of lead of approximately
$20,098. Additionally, there were rigging, transportation and severance costs
related to the transfer of production to our Reynosa, Mexico facility of
approximately $1,368. Gross profit in the Power Electronics Division increased
primarily due to the results of the acquisitions coupled with the favorable
impact of increased sales by the legacy portion of the Power Electronics
Division.
Selling, general and administrative expenses for the third quarter of
fiscal 2005 increased $2,747 or 27%. This increase was primarily due to
incremental selling, general and administrative expenses of $3,580 related to
the recent acquisitions and corporate-wide Sarbanes-Oxley Act internal control
compliance costs of $1,096, partially offset by lower warranty costs of $847 and
lower commissions of $738 (primarily in the Motive Power and Standby Power
divisions).
Selling, general and administrative expenses for the nine-month period
ended October 31, 2004 increased $2,754 or 9%. This increase was also primarily
due to the recent acquisitions, which incurred selling, general and
administrative expenses of $4,538, coupled with Sarbanes-Oxley compliance costs
of $1,362, partially offset by lower compensation related expenses of $1,021 and
lower commissions of $1,345.
Research and development expenses for the third quarter of fiscal 2005
increased $3,105 or 132%. As a percentage of sales, research and development
expenses increased from 2.8% of sales in the third quarter of fiscal 2004 to
4.8% in the third quarter of fiscal 2005. This increase was primarily the result
of the recent acquisitions, which had research and development expenses of
$2,843 during the quarter, including the expensing of acquired in-process
research and development in the amount of $440 related to the Datel acquisition.
Research and development expenses for the nine-month period increased
$4,215 or 59%. As a percentage of sales, research and development expenses
increased from 2.9% during the first nine months of fiscal 2004 to 3.9% during
the first nine months of fiscal 2005. Consistent with the quarter, the increase
was primarily the result of $3,328 of research and development expenses incurred
by our recent acquisitions, including the aforementioned expensing of acquired
in-process research and development related to the Datel acquisition.
Operating (loss) income for the third quarter of fiscal 2005 decreased
$16,600 to an operating loss of $(9,399) from operating income of $7,201 in the
comparable quarter of the prior year. This decrease was the result of an
operating loss generated by the Standby Power Division as compared with
operating income in the comparable period of the prior year, coupled with a
higher operating loss in the Motive Power Division, partially offset by higher
operating income generated by the Power Electronics Division.
Operating income for the nine months ended October 31, 2004 decreased
$17,725 or 94% to $1,106 from $18,831 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.
24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Below is a summary of key items affecting operating (loss) income for the
three months and nine months ended October 31,:
Analysis of Change in Operating (Loss) Income
Fiscal Year 2005 vs. 2004
Three-months Nine-months
ended ended
October 31, October 31,
------------ -----------
Operating income - fiscal 2004......................... $ 7,201 $ 18,831
Motive Power Division
Operations........................................ 1,666 3,740
Lead impact....................................... (1,297) (3,315)
Reynosa rigging, transportation and severance..... (47) (784)
Impairments and related environmental
clean-up charges............................. (4,595) (4,595)
Standby Power Division
Operations........................................ 1,980 8,505
Lead impact....................................... (6,027) (16,783)
Reynosa rigging, transportation and severance..... (160) (584)
Impairments and related environmental
clean-up charges............................. (8,888) (8,888)
Power Electronics Division
Operations - legacy............................... 164 3,174
Operations - acquisitions......................... 604 1,805
----- -------
Operating (loss) income - fiscal 2005.................. $(9,399) $ 1,106
====== =======
Interest expense, net, increased $1,640 for the quarter and $1,986 for the
nine months ended October 31, 2004, primarily due to higher average debt
balances outstanding during the periods due to funds borrowed to finance the
Celab, Datel and CPS acquisitions.
Income tax expense for the third quarter of fiscal 2005 decreased $6,561
from the comparable period of the prior year as the result of a net loss before
income taxes in the current quarter as compared to net income before income
taxes in the comparable period of the prior year, partially offset by a lower
effective income tax rate. Income tax expense for the nine-month period ended
October 31, 2004 decreased $7,133 also due to a net loss before income taxes as
compared by net income in the comparable period of the prior year. 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 third quarter of fiscal 2005 was 35.9% as compared to
37.0% in the comparable period of the prior fiscal year. For the nine months
ended October 31, 2004, the effective tax rate was 28.2% as compared to 37.0% in
the comparable period of the prior fiscal year. The change in the effective tax
rate is due to: (i) a net loss before income taxes in the current quarter as
compared to net income before taxes in the comparable period of the prior year;
(ii) the valuation allowance recorded in the current year related to United
States foreign tax credits for unremitted earnings of a controlled foreign
subsidiary; (iii) the state tax benefit from the impairment of fixed assets in
conjunction with a significant amount of foreign earnings; (iv) the tax effect
of the write-off of non-deductible acquired in-process research and development
related to the Datel acquisition, and (v) the tax effect from the resolution of
state tax audits.
25
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 smaller net loss in the third quarter of fiscal 2005 versus the
comparable period of the prior year. For the nine months ended October 31, 2004,
the joint venture had a net loss as compared to net income in nine months ended
October 31, 2003.
As a result of all of the above, for the third quarter of fiscal 2005, net
(loss) income decreased $11,556 to $(7,353) or $(0.29) per share - basic and
diluted. For the nine-month period, net (loss) income decreased $12,748 to
$(2,143) or $(.08) per share - basic and diluted.
Future Outlook
During the third quarter, we substantially completed the transition of our
Motive Power V-Line(R) and former Standby Power HD products (now replaced by the
MSE and msEndur(TM)) to our Reynosa, Mexico facility. As a result of the
completion of feasibility analyses and successful product start-up testing in
the quarter, this previously announced transition resulted in a number of
one-time charges totaling $13,483 during the quarter as follows: (i) a non-cash
impairment charge of $4,585 related to HD property, plant and equipment in
Leola, Pennsylvania; (ii) environmental clean-up and impaired equipment
decontamination charges of $2,481 related to our Leola, Pennsylvania facility;
(iii) a non-cash impairment charge of $3,195 related to machinery and equipment
in Huguenot, New York; and (iv) environmental clean-up and impaired equipment
decontamination charges of $1,400 related to Huguenot, New York. The impaired
machinery and equipment was generally older, excess and/or immovable equipment
that was replaced by more modern equipment located in the Reynosa, Mexico
facility. We also incurred non-cash impairment charges of $1,822 on Leola,
Pennsylvania machinery and equipment related to our Round Cell product line as
this product is slowly being displaced by our other flooded products.
Our earnings continue to be negatively affected by higher raw material
pricing. Higher lead prices negatively affected operating results in the quarter
by approximately $7,324 compared to the prior year's third quarter, and
approximately $1,300 compared to the second quarter of fiscal 2005. 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 $0.08 to
$0.12 for the fourth quarter. Currently, we are hedged on approximately 15% of
our domestic lead requirements through June 2005, and monitor the lead market
for favorable buying opportunities. In addition, this earnings estimate does not
include potential effects associated with the finalization of the independent
appraisal of acquired tangible and intangible assets related to our acquisition
of CPS, which may include acquired in-process research and development which, if
identified, would result in a charge to earnings upon finalization.
Liquidity and Capital Resources
Net cash provided by operating activities decreased $2,980 or 9% to 29,840
for the nine-month period ended October 31, 2004 compared to $32,820 in the same
period of the prior year. This decrease in net cash provided by operating
activities was primarily due to: (i) a net loss in the nine months ended October
31, 2004 versus net income in the nine months ended October 31, 2003; (ii) an
increase in inventories in the nine-month period ending October 31, 2004 versus
a decrease in the comparable period of the prior year; (iii) a decrease in
current taxes payable in the nine-month period ended October 31, 2004 as
compared to an increase in the comparable period of the prior fiscal year
(primarily due to the receipt of income tax refunds of approximately $2,300 in
the first nine months of fiscal 2004); and (iv) a deferred tax credit in the
nine months ended October 31, 2004 versus deferred tax expense in the nine
months ended October 31, 2003. These changes, resulting in lower net cash
provided by operating activities, were partially offset by (i) an impairment of
fixed assets in the amount of $9,602 during the nine months ended October 31,
2004; (ii) an increase in accounts payable in the nine months ended October 31,
2004 as compared to a decrease in the nine months ended October 31, 2003; (iii)
a smaller increase in accounts receivable during the nine months ended October
31, 2004 versus the nine months ended October 31, 2003; and (iv) an increase in
other liabilities in the nine-month period ending October 31, 2004 versus a
decrease in the comparable period of the prior year.
26
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
Net cash used by investing activities increased $106,620 or 725% to
$121,332 in the first nine months of fiscal 2005 as compared to $14,712 in the
comparable period of the prior fiscal year, primarily due to the acquisitions of
Celab, Datel and CPS in the current fiscal year. This increase was partially
offset by the receipt of approximately $15,500 from the Chinese government as
partial payment for the Company's existing battery facility located in Shanghai.
The Company intends to use these funds for the future construction of a new
battery manufacturing facility in Shanghai.
We had net cash provided by financing activities of $103,681 in the nine
months ended October 31, 2004 as compared to net cash used by financing
activities of $24,010 in the comparable period of the prior fiscal year. Current
year financing activities included $106,190 from new borrowings primarily used
to finance the acquisitions of Celab, Datel and CPS. This was partially offset
by $2,983 used to acquire treasury stock. Prior year net cash used by financing
activities included $20,000 for the reduction of debt and $3,503 for the
purchase of treasury stock.
On June 30, 2004, we 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 our request. The credit agreement included lender
approval of the Datel and CPS acquisitions. The agreement also includes a
$50,000 sub limit for loans in certain foreign currencies. The interest rates
are determined by our 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 that we 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 us to maintain minimum ratios such
as fixed charge coverage and leverage ratios as well as minimum consolidated net
worth. These covenants permit us 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 October 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
approximately $10,000 for similar purposes.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
NEW AND PROPOSED ACCOUNTING PRONOUNCEMENTS
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 any interim or annual period beginning after June 15, 2005.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs, an
amendment of ARB No. 43, Chapter 4," which adopts wording from the IASB IAS No.
2 "Inventories" in an effort to improve the comparability of cross-border
financial reporting. The FASB and IASB both believe the standards have the same
intent; however, an amendment to the wording was adopted to avoid inconsistent
application. The new standard indicates that abnormal freight, handling costs,
and wasted materials (spoilage) are required to be treated as current period
charges rather than as a portion of inventory cost. Additionally, the standard
clarifies that fixed production overhead should be allocated based on the normal
capacity of a production facility. The statement is effective for the Company
beginning in fiscal year 2007. Adoption is not expected to have a material
impact on our consolidated earnings, financial position or cash flows.
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 or reorganizations 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.
28
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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 results of operations.
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.
o Our operating results could be adversely affected by increases in the cost
of raw materials, particularly lead, the primary component cost of our
battery products, or other product parts or components. 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 results of 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 or
otherwise capitalize upon 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 and/or trigger
environmental remediation obligations. Further, there can be no assurance
that any of these initiatives will be completed or beneficial to us.
29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
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 multi-party
sites, the number and financial viability of other PRPs and risks
associated with litigation.
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, intellectual property, 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 our 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 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 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.
30
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
(Dollars in thousands, except per share data)
o Section 404 of the Sarbanes-Oxley Act of 2002 requires management to
perform an evaluation of its internal control over financial reporting and
have our independent accountants attest to such evaluation. Along with many
other companies whose fiscal year ends on January 31, we must implement
these requirements for the first time in connection with the preparation of
the annual report for the year ending January 31, 2005. We have been
actively preparing for the implementation of this requirement by, among
other things, establishing an ongoing program to document, evaluate and
test the systems and processes necessary for compliance. While we
anticipate that we will be able to comply on a timely basis with these
requirements, unforeseen delays may occur which could prevent us from
achieving timely compliance. If we fail to complete our evaluation on a
timely basis and in a satisfactory manner, or if our independent
accountants are unable to attest on a timely basis to the adequacy of the
Company's internal control, we may be subject to additional scrutiny
surrounding our internal control over financial reporting.
o In response to the European Union's "Restriction on Use of Hazardous
Substances in Electrical and Electronic Equipment," or "RoHS", we
established a schedule for compliance. C&D will continue to strive for
elimination, and seek to have its component part suppliers eliminate
prohibited hazardous substances consistent with legislative requirements.
C&D will continue to actively monitor decisions around environmental
legislation and align its conversion with those decisions and the needs of
our customers. There is no assurance that these efforts will be successful
or timely completed, the failure of either of which could have a adverse
effect on our results of operations.
o C&D is a party to time-limited supply agreements with certain of its
customers. There is no assurance that these contracts will be renewed or,
if renewed, that they will be renewed on as favorable terms to the company
as existing agreements.
The foregoing list of important factors is not all-inclusive, or
necessarily in order of importance.
31
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 current year
acquisitions. We do not believe that any such changes have materially affected
or are reasonably likely to materially affect the Company's internal control
over financial reporting.
32
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
- -------- ------------ -------------- -------------------------- ----------------------
August 1 - August 31, 2004 20,381 $15.43 20,000 139,100
September 1 - September 30, 2004 328 $17.35 - 1,000,000
October 1 - October 31, 2004 459 $18.60 - 1,000,000
------ ------
Total 21,168 20,000
====== ======
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, 20,000 were
purchased pursuant to the July 24, 2002 repurchase program and 1,168 were
purchased through deferred compensation plans.
On September 30, 2004, our Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1,000,000 shares of C&D Technologies common stock having a total purchase
price of no greater than $25,000,000. This program entirely replaces and
supersedes all previously authorized stock repurchase programs.
33
Item 6. Exhibits.
10.1 Employment Agreement dated April 1, 2003 between Kevin D. Burgess
and C&D (filed herewith).
10.2 Agreement for Manufacture between Dynamo Power System (USA) LLC
and Celestica Hong Kong Limited and C&D Technologies, Inc., dated
September 30, 2004. Portions of this exhibit have been deleted
pursuant to the Company's Application Requesting Grant of
Confidential Treatment under the Exchange Act and pursuant to the
Rule 12b-24 promulgated thereunder (filed herewith).
10.3 Amendment to Rights Agreement (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).
34
SIGNATURES
- -------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
December 10, 2004 BY: /s/ Wade H. Roberts, Jr.
----------------------------------
Wade H. Roberts, Jr.
President, Chief Executive
Officer and Director
(Principal Executive Officer)
December 10, 2004 BY: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance
and Chief Financial Officer
(Principal Financial and
Accounting Officer)
35
EXHIBIT INDEX
10.1 Employment Agreement dated April 1, 2003 between Kevin D. Burgess
and C&D.
10.2 Agreement for Manufacture between Dynamo Power System (USA) LLC
and Celestica Hong Kong Limited and C&D Technologies, Inc., dated
September 30, 2004. Portions of this exhibit have been deleted
pursuant to the Company's Application Requesting Grant of
Confidential Treatment under the Exchange Act and pursuant to the
Rule 12b-24 promulgated thereunder.
10.3 Amendment to Rights Agreement.
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.
36