UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
-------------- -------------------
Common Stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes |x| No |_|
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant, based on the closing price on July 31, 2004:
$395,147,256
Number of shares outstanding of each of the Registrant's classes of common
stock as of April 18, 2005: 25,345,513 shares of Common Stock, par value $.01
per share.
Documents incorporated by reference:
Part III - Portions of Registrant's Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of Registrant's fiscal year covered
by this Form 10-K.
(This page intentionally left blank)
C&D TECHNOLOGIES, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2005
INDEX
Part I
Item 1 Business 1
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities 15
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosure about Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Item 9A Controls and Procedures 27
Item 9B Other Information 28
Part III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 29
Matters
Item 13 Certain Relationships and Related Transactions 29
Item 14 Principal Accountant Fees and Services 29
Part IV
Item 15 Exhibits and Financial Statement Schedules 30
Signatures 36
Index to Financial Statements and Financial Statement Schedule F-1
I
C&D TECHNOLOGIES, INC.
PART I
Item 1. Business
About Our Company
C&D Technologies, Inc. (together with its operating subsidiaries, "we,"
"our" or "C&D") is a technology company that produces and markets systems for
the conversion and storage of electrical power, including reserve power systems
and embedded, high frequency switching power supplies. Our integrated reserve
power systems are comprised of the following:
o industrial lead acid batteries;
o power rectifiers;
o power control equipment;
o power distribution equipment; and
o related accessories.
Our power products are comprised of the following:
o DC to DC converters;
o AC to DC and DC to DC power supplies;
o magnetics (transformers and inductors);
o custom architectures;
o data acquisition components; and
o digital meters.
Common applications for our power products and system portfolio include:
o telecommunications equipment, including optical switches, remote
switches, Voice Over Internet Protocol (VOIP), central office
backup;
o data centers and networked (LAN and WAN) computing architecture;
o high availability industrial computing;
o industrial temperature control systems;
o industrial imaging equipment;
o displays (signs, scanning equipment);
o broadband cable television ("CATV") powering;
o advanced office electronic machines, such as digital copiers;
o motive power systems for electric industrial vehicles; and
o military.
We sell both individual components and integrated power systems.
We were organized in November 1985 to acquire all the assets of the
eighty-year old C&D Power Systems Division (the "Division") of Allied
Corporation ("Allied"). The Division's business essentially was unchanged by the
acquisition, which was completed on January 28, 1986. Shares of our Common
Stock, par value $.01 per share ("Common Stock"), were first issued to the
public in February 1987.
In March 1999, we purchased substantially all of the assets of the
Specialty Battery Division of Johnson Controls, Inc. ("JCI"), a Milwaukee,
Wisconsin-based designer, manufacturer, marketer and distributor of industrial
batteries. These assets included all of the ordinary shares of Johnson Controls
Battery (U.K.) Limited, an indirect wholly owned subsidiary of JCI. In addition,
in August 1999, we acquired JCI's 67% ownership interest in a joint venture
battery business in Shanghai, China. The joint venture manufactures and markets
industrial batteries. For reporting purposes, the Specialty Battery Division and
JCI's 67% ownership interest in the joint venture battery business in Shanghai,
China, are included in the results of operations in the Standby Power Division.
1
In June 2000, we completed a two-for-one stock split, effected in the form
of a 100% stock dividend. All share and per share amounts have been adjusted.
In December 2000 (effective as of November 26, 2000), we acquired the
Newport Components Division of Newport Technology Group Limited, a producer of
electronic power conversion products (primarily DC to DC converters) based in
the United Kingdom. For reporting purposes, this acquisition is included as part
of the Power Electronics Division and is referred to as C&D Technologies (NCL)
Limited ("NCL").
In September 2003, we acquired certain assets from Matsushita Battery
Industrial Corporation of America and Matsushita Battery Industrial de Mexico,
S.A. de C.V. Acquired assets included a 240,000 square foot facility, in
Reynosa, Mexico, and the equipment in the facility historically used for the
manufacture of large, valve regulated lead acid batteries for standby power
applications. In addition, we entered into a worldwide technology license
agreement with Matsushita Battery Industrial Co. Ltd. of Japan for selected
patents and know-how relating to the manufacturing technology for the
aforementioned products. Our Reynosa, Mexico, facility produces product for both
the Standby Power and Motive Power divisions.
On February 1, 2004, we combined our Powercom and Dynasty divisions into
the newly created Standby Power Division.
Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we
acquired Celab Limited ("Celab"), based in Hampshire, United Kingdom, a provider
of power conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004, we acquired Datel
Holding Corporation and its subsidiaries ("Datel"), a Mansfield,
Massachusetts-based manufacturer of DC to DC converters, data acquisition
components and digital meters. On September 30, 2004, we acquired the Power
Systems division of Celestica, Inc., which we now operate as "CPS", a Toronto,
Ontario-based company. CPS develops DC to DC converters and AC to DC power
supplies which are sold on a direct basis to large computing and communications
original equipment manufacturers ("OEMs"). For reporting purposes, these
acquisitions are part of the Power Electronics Division.
Fiscal Year
Our fiscal year ends on the last day of January. Any references to a
fiscal year means the 12-month period ending January 31 of the year mentioned.
Forward-Looking Statements
Statements and information contained in this Annual Report on Form 10-K
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
Annual Report on Form 10-K, and we undertake no obligation to update or revise
these statements to reflect events or circumstances occurring after the date of
this Annual Report on Form 10-K.
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 or other countries in which we conduct business, could affect
our results of operations. (See Item 1. Business - International
Operations, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of the
Economy and Shift in Customer Demand, and Item 7A. Quantitative and
Qualitative Disclosure about Market Risk - Market Risk Factors.)
2
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, uninterruptible power
supply ("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. (See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Raw
Material Pricing and Productivity; and Inflation.)
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. The loss of a key supplier or the
inability to obtain certain key products or components could cause
delays or reductions in shipments of our products or increase our
costs.
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;
maintain or improve product quality; or gain market acceptance of
the new products. Our growth could also be affected by competitive
products and technologies.
o Our ability to implement our business strategies may be hindered or
delayed. 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, including substantial management
time and financial and other resources, 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, including
the shut down or sale of portions of our business, 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.
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 potentially
responsible parties ("PRPs") at multi-party sites, the number and
financial viability of other PRPs and risks associated with
litigation. (See Item 1. Business - Environmental Regulations.)
3
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. (See
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.)
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). (See Item 3. Legal Proceedings.)
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. (See Item 1.
Business - Employees.)
o Our credit facility and covenants under our credit facility restrict
our operational and financial flexibility and impose significant
interest and financing costs. Also, our 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, 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 computer 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.
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. We will continue to strive
for elimination, and seek to have our component part suppliers
eliminate prohibited hazardous substances consistent with
legislative requirements. We will continue to actively monitor
decisions around environmental legislation and align our compliance
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 an adverse effect on our
results of operations.
o We are a party to time-limited supply agreements with certain of our
customers. There is no assurance that these contracts will be
renewed or, if renewed, that they will be renewed on as favorable
terms to us as existing agreements.
The foregoing list of important factors is not all-inclusive, or
necessarily in order of importance.
4
Reportable Segments
Our operations are classified into the following reportable business
segments:
o Standby Power Division
o Power Electronics Division
o Motive Power Division
Segments are determined using the "management approach," which means the
way management organizes the segments within the enterprise for making operating
decisions and assessing performance. Effective February 1, 2004, we combined the
Dynasty and Powercom divisions into the newly created Standby Power Division.
Effective April 2005, the Motive Power Division reports to the general manager
of the Standby Power Division.
The financial information regarding our three business segments, which
includes net sales and operating income for each of the three years in the
period ended January 31, 2005, is provided in Note 15 to the Consolidated
Financial Statements. See Part II, Item 8.
The Market for Our Products
We manufacture and market products in the following general categories by
business segment:
o Standby Power Division - industrial batteries and fully integrated
reserve power systems and components for the standby power market,
which includes UPS applications for computer systems and corporate
data networks, telecommunications reserve power systems, CATV signal
powering, utilities and solar.
o Power Electronics Division - custom, standard and modified standard
DC to DC converters, embedded high frequency AC to DC and DC to DC
switching power supplies and magnetics (transformers and inductors);
digital meters and data acquisition components.
o Motive Power Division - motive power systems for the material
handling equipment market.
We market our products through independent manufacturer's representatives,
national and global distributors, specialty resellers and our own sales
personnel to end users and OEMs.
We sell some products to the U.S. Government. These sales accounted for
less than 5% of our total Company sales during each of our last three fiscal
years.
Products and Customers by Business Segment
Standby Power Division - Reserve Power Systems and Components
Through our Standby Power Division, we manufacture and market integrated
reserve power systems and components for the standby power market, which
includes telecommunications, 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, CATV signal powering, corporate data center powering and
computer network backup for use during power outages. Our customers include
industry-leading OEMs, broadband and telecommunications providers, large
investor owned utilities as well as large end user customers.
We manufacture lead acid batteries for use in reserve power systems. We
sell these batteries in a wide range of sizes and configurations in two broad
categories:
o flooded batteries; and
o valve-regulated lead acid batteries ("VRLA") (sealed type).
Flooded batteries require periodic watering and maintenance. VRLA
batteries require less maintenance and are often smaller.
5
To meet the needs of our customers, our reserve power systems include a
wide range of power electronics products, consisting principally of power
rectifiers and distribution and monitoring equipment. Our power rectifiers
convert or "rectify" external AC power into DC power at the required voltage to
constantly charge the reserve battery and operate the user's equipment. For
installations with end applications that require varied power levels, our power
control and distribution equipment distributes the rectified power for each of
the applications.
Uninterruptible Power Supplies. The Standby Power Division produces
batteries for UPS systems, which provide instant battery backup in the event of
primary power loss or interruption, thereby permitting an orderly shutdown of
equipment or continued operation for a limited period of time until a power
source comes back on-line. C&D offers distinct product families to meet the
needs and requirements of this growing industry. Our Dynasty(R) High Rate VRLA
Series batteries have been engineered specifically for UPS applications and
deliver extended life while complying with rigorous industry standards. In
addition, the Standby Power Division offers a line of premium replacement VRLA
batteries for UPS applications called the MAXRATE(TM), which we believe provides
a longer life and improved runtime in the same space as that of original
equipment batteries currently supplied by UPS manufacturers. Our flooded XT &
XTPlus products are utilized for large system back up in major data centers and
critical 24X7 applications. As a critical component to overall power backup
solutions, our Standby Power Division continues to work closely with major
global UPS OEMs to design a cost-effective, reliable product to meet customer
expectations.
Telecommunications. As with UPS, the Standby Power Division produces
battery solutions to fill the many application needs of today's
telecommunications industry. Designed specifically for the telecommunications
need for long life and extended runtime, our flooded MCT and LCT family of
products have become the battery of choice for central office and critical back
up applications. With the addition of our facility in Reynosa, Mexico, in fiscal
year 2004, we have added the VRLA MSE and msEndur(TM) family of products
designed for wireless applications, as well as other applications for
non-flooded requirements. In addition, our Dynasty(R) Tel Series VRLA Long
Duration batteries are designed to Telcordia standards to meet the demanding
requirements of telecommunications applications. These batteries operate in a
wide variety of environmental conditions, meet prolonged run time needs so as to
maintain operations during power loss and protect sophisticated electronics
equipment. Our customers use the majority of our standby power products in
telecommunications applications, such as central telephone exchanges, microwave
relay stations, private branch exchange ("PBX") systems and wireless telephone
systems. Our major telecommunications customers include national long distance
companies, competitive local exchange carriers, wireline and wireless system
operators, paging systems and PBX telephone locations using fiber optic,
microwave transmission or traditional copper-wired systems.
CATV Signal Powering and Broadband. Dynasty(R) Broadband Series batteries
are designed for demanding standby float applications in abusive environments.
These batteries have been designed to offer the best combination of run time and
service life for CATV signal powering and broadband applications. Our gelled
electrolyte technology provides excellent heat transfer properties, which enable
these batteries to perform in high temperature environments. Unlike other
competitive gel technologies, the Dynasty(R) Broadband Series does not require
cycling subsequent to delivery to meet 100% of rated capacity. Our Dynasty(R)
Broadband Series of batteries is considered the market leader for CATV powering
in North America.
Modular Power Plants. We offer several modular power plants, which are a
type of integrated reserve power system. These products, which are referred to
as the Liberty(R) AGM Series Power Plant and the Liberty(R) ACM Series Power
Plant, integrate advanced rectifiers with virtually maintenance-free
valve-regulated batteries. Also, the Standby Power Division offers the
Sageon(TM) family of power systems products, which are designed to fit virtually
any application that demands stable, reliable and easily expandable DC power.
Equipment for Electric Utilities and Industrial Control Applications. We
produce rectifiers and batteries used in reserve power systems for switchgear
and instrumentation control systems used in electric utilities and industrial
control applications. These power systems provide auxiliary power that enables
fossil fuel, hydro and nuclear power generating stations, switching substations
and industrial control facilities to be shut down in an orderly fashion during
emergencies or power failures until a power source comes back on-line.
6
Power Electronics Division - DC to DC Converters, Power Supplies and
Magnetics
Through our Power Electronics Division, we manufacture and market custom,
standard and modified-standard electronic power supply systems, including DC to
DC converters, for large 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.
We sell the majority of our power supply products to OEMs of electronic
products on either a custom, standard or modified-standard basis. Power supplies
are embedded in almost all electronic products and are used to convert available
AC or DC voltage to the required level and quality of DC voltage to power the
associated equipment.
Our power supplies incorporate advanced technology and are designed for
reliable operation of the host equipment. These products include DC to DC
converters, AC to DC and DC to DC power supplies and magnetics (transformers and
inductors) for use in a wide variety of applications, with outputs ranging from
sub one watt to several kilowatts. DC to DC products are circuit board mounted
devices used to convert available system power to required component voltages.
DC to DC converters are widely used in distributed power and intermediate bus
architecture where system voltages require conversion to a higher or lower
voltage to power components such as microprocessors and arrays. AC to DC power
supplies convert alternating current, the form in which virtually all power is
delivered by electric utilities to end users, into precisely controlled direct
current that is required by sensitive electronic application architecture.
In the telecommunications industry, our power supplies are broadly used in
central office and transmission equipment. We also produce power supplies for
networking equipment (switches, routers, hubs, etc.), office equipment (mass
storage, digital printing, etc.), and industrial equipment (computing,
automation and test instrumentation).
Motive Power Division - Motive Power Systems
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.
We offer a broad line of motive power equipment including the C-Line(TM)
battery, which we believe is the industry standard for long life and the
V-Line(R) battery for general material handling applications. We also offer a
broad line of battery charging and associated specialty equipment and parts.
Sales, Installation and Servicing
The sales, installation and servicing of certain Standby Power and Motive
Power products are performed through several networks of independent
manufacturer's representatives located throughout North America. Most of our
independent manufacturer's representatives (or contractors in the case of
installation or service) operate under contracts providing for compensation on a
commission basis or as a distributor with product purchased for resale. Certain
Standby Power and Power Electronics products are sold via a network of
independent manufacturer's representatives as well as independent distributors
located throughout the world.
In addition to these networks of independent manufacturer's
representatives and distributors, we employ internal sales management consisting
of regional sales managers, account specific sales persons and product/market
specialists. The regional sales managers are each responsible for managing a
number of independent manufacturer's representatives and for developing
long-term relationships with large end users, OEMs and national accounts. We
also employ a separate sales organization that works with the independent
manufacturer's representative network and directly with certain large customers.
We have internal product management and marketing personnel in each of our
divisions to manage the development of new products from the initial concept
definition and management approval stages through the engineering, production
and sales processes. They are also responsible for applications engineering,
technical training of sales representatives and the marketing communications
function.
We maintain branch sales and service facilities in North America, Europe
and Asia, with the support of our headquarters and service personnel, and have
business relationships with sales representatives and distributors throughout
the world.
7
No single customer of C&D accounted for 10% or more of our net sales for
the year ended January 31, 2005. We typically sell our products with terms
requiring payment in full within 30 days. We warrant our battery products for
various periods of time depending on the type of product and its application.
The longest warranties generally are applicable to flooded standby power
batteries sold by our Standby Power Division. Power supply products from our
Power Electronics Division are generally sold with a one year warranty.
Backlog
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of orders, customer
requirements and, taking into account considerations of manufacturing capacity
and flexibility, the speed with which we fill those orders. Period-to-period
comparisons may not be meaningful. Occasionally orders may be canceled by the
customer prior to shipment.
Our order backlog at March 31, 2005, was $90,838,000 and at March 31,
2004, was $50,034,000. The increase in backlog was primarily the result of the
acquisitions in fiscal year 2005. We expect to fill virtually all of the March
31, 2005, backlog during fiscal year 2006.
Manufacturing and Raw Materials
We manufacture our products at nine domestic plants, two plants in China,
two plants in Mexico and two plants in the United Kingdom. We manufacture most
key product lines at a single focused plant in order to optimize manufacturing
efficiency, asset management and quality control.
Consolidation. No manufacturing facilities were closed during fiscal year
2005 or in fiscal year 2004; however, in fiscal year 2005, we completed the
transition of the 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 from the Company's Huguenot, New York, and Leola, Pennsylvania,
facilities, respectively. In fiscal year 2003, we closed the metal fabrication
operations at our Conshohocken, Pennsylvania, facility and now purchase products
previously manufactured at this location from third parties. We also closed our
Shannon, Ireland, facility in fiscal year 2003, shifting its manufacturing and
design capabilities to other Power Electronics Division facilities.
Raw Materials. The principal raw materials used in the manufacture of our
products include lead, steel, copper, plastics, printed circuit boards and
electronic components, all of which are generally available from multiple
suppliers. We use a number of suppliers to satisfy our raw materials needs.
8
ISO 9001 Recognition. ISO certification assures customers that our
internal processes and systems meet internationally recognized standards. We are
ISO 9001:2000 standard certified at the following locations:
Domestic
o Conyers, Georgia;
o Dunlap, Tennessee;
o Mansfield, Massachusetts;
o Milwaukee, Wisconsin;
o Milwaukie, Oregon; and
o Tucson, Arizona.
International
o Bordon, United Kingdom;
o Guangzhou, China;
o Milton Keynes, United Kingdom;
o Nogales, Mexico;
o Romsey, United Kingdom;
o Shanghai, China, Standby Division joint venture; and
o Toronto, Canada.
We are working towards certification at our battery plants in Attica,
Indiana, and Reynosa, Mexico, and our Power Electronics Research and Development
facility in Shanghai, China.
Competition
Our products compete on the basis of:
o product quality and reliability;
o reputation;
o customer service;
o delivery capability; and
o technology.
We also offer competitive pricing and highly value our relationships with
our customers. In addition, we believe that we have certain competitive
advantages in specific product lines.
We believe that we are one of the four largest producers of both reserve
and motive power systems in North America. We believe that the ability to
provide a single source for design, engineering, manufacturing and service is an
important element in our competitive position.
In reserve power systems, we believe we are the only major North American
company that manufactures complete, integrated reserve power systems consisting
of both electronics and batteries. Our other major competitors manufacture
either electronics or batteries, but not both.
When lead prices rise, certain of our battery competitors that own
smelting operations may have lower lead costs than we have. However, when lead
prices decline, the high fixed costs associated with these operations may
provide C&D with a cost advantage.
Having completed the acquisitions of Celab, Datel and CPS (formerly the
Celestica Power Systems division of Celestica, Inc.), we believe we have the
building blocks to firmly establish our Power Electronics Division as a
significant power platform in the industry. We believe our Power Electronics
Division is a leading supplier of board mounted DC to DC technologies worldwide.
In addition we have leading technology in the area of AC to DC and DC to DC
power supplies, data acquisition, digital panel meters and magnetics. Our
channels-to-market and preferred supplier position at major global OEMs set us
apart in the power electronics field. We have several major technology licenses
(with other power companies) and development alliances with industry-leading
9
silicon vendors that give us a competitive portfolio in the power electronics
space. Our Power Electronics Division's value proposition is rooted in
technology, quality and reliability coupled with strategically located
manufacturing facilities worldwide to meet the cost and logistic needs of our
customers.
Research and Development
Research and development expenses for the fiscal years ended January 31,
2005, 2004 and 2003, were $19,105,000, $9,542,000 and $9,502,000.
We maintain extensive technology departments concentrating on
electrochemical and electronics technologies. We focus on:
o design and development of new products;
o development and improvement of existing products;
o sustaining engineering;
o production engineering (including quality testing and managing the
changes in production capacity); and
o evaluation of competitive products.
We have research and development facilities in North America, China and
Europe which utilize computer-aided design tools and testing equipment. Notable
new product achievements in fiscal year 2005 include:
o Standby Power Division. We launched two new flooded product lines -
the DJ line for UPS and utility applications and the LCT HP line for
the telecommunications industry. We also launched the msEndur(TM)
product line, which is based on technology acquired as part of the
Reynosa facility purchase from Matsushita in fiscal year 2004. It is
a complete line of two-volt sealed product for telecommunications
and UPS applications, which we believe has superior performance as
compared with equivalent competitive products. The Standby Power
Division also launched, under the Dynasty(R) brand, the new global
MAXRATE(TM) product with attributes specifically targeting the
European UPS battery market.
o Power Electronics Division. We launched many industry-leading
products during fiscal year 2005, including:
o Our design team introduced new products in low power DC to DC,
medium power DC to DC, and standard and custom AC to DC
products. Examples include the NNL series of non-isolated
point of load converters, the SLC series of 100-watt quarter
bricks, Compact-PCI 200 and 325 watt family releases, enhanced
IPMI programmable functionality on several PCI models and a
large, 5000-watt three phase, digitally-controlled power
supply for a customer in the blade rack server market.
o Celab Limited, our specialist military and CATV subsidiary
developed or enhanced products for customers in its two
primary markets. Celab also started two major new programs for
its military customers, namely the SP1920 which powers a
ship-borne SONAR system and SP1940 which powers a land-based
radar system.
o Our Datel business unit developed and announced new products
across all three of its product lines (DC to DC converters,
digital panel meters, and data-acquisition components),
including a DC to DC ULE Series of high-density, isolated
eighth-bricks. It also greatly expanded its
already-industry-leading offering of non-isolated, point of
load devices. In data-acquisition components, Datel developed
and introduced the ADSD-1410 whose single package contains
simultaneous, high-speed (10MHz), high-resolution (14-bits)
sampling analog-to-digital (A/D) converters.
o Our CPS business unit developed and announced products in
fixed ratio DC to DC, custom DC to DC, and custom AC to DC.
The CPS acquisition included a technology alliance with Vicor
for factorized power architecture.
In addition, the Power Electronics Division continued to develop alliances
with major power management companies for reference designs, and is negotiating
development agreements with major silicon companies and other power conversion
companies for alternative technologies such as the Power One Z-One Digital IBA
architecture.
10
International Operations
Along with our domestic manufacturing facilities, we have international
manufacturing facilities in China, Mexico, and the United Kingdom. Our 67% joint
venture facility in Shanghai, China, manufactures industrial batteries that are
sold primarily in China and Europe. Our Power Electronics Division facilities in
China and the United Kingdom manufacture electronics that are sold primarily in
Europe, North America, and the Far East. International sales accounted for
26.3%, 17.4% and 18.0% of net sales for the years ended January 31, 2005, 2004
and 2003, respectively.
Patents and Trademarks
Our practice is to apply for patents on new inventions, designs and
processes that have strategic value or are associated with existing or
prospective product lines, service offerings or operations. We believe that the
growth of our business will depend primarily upon the quality and reliability of
our products and our relationships with our customers, rather than the extent of
our patent protection. While we believe that patents are important to our
business operations, the loss of any single or several patents would not have a
material adverse effect on our company.
We regard our trademarks C&D(R), C&D TECHNOLOGIES(R), C&D TECHNOLOGIES
POWER SOLUTIONS(R), DATEL(R), DYNASTY(R), LIBERTY(R), and LIBERTY SERIES(R) as
being of substantial value in the marketing of our products and have registered
these trademarks in the United States Patent and Trademark Office. Our
trademarks also include C-LINE(TM), COMPUCHARGE(R), FERRO FIVE(R), FERRO
1500(R), HYPERON(R), MAXRATE(R), msEndur(TM), POSITION PERFECT(TM), RANGER(R),
REVOLUTION(TM), SAGEON(TM), SCOUT(R), SMARTBATTERY(R), and V-LINE(R).
Employees
On February 28, 2005, we employed 2,977 people. Of these employees, 1,964
were employed in manufacturing and 1,013 were employed in field sales,
technology, manufacturing support, sales support, marketing and administrative
activities. Our management considers our employee relations to be satisfactory.
Employees at five North American plants are represented by five different unions
under collective bargaining agreements.
Environmental Regulations
Our operations are 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, the following:
o requirements relating to the handling, storage, use and disposal of
lead and other hazardous materials used in manufacturing processes
and contained in solid wastes;
o record keeping and periodic reporting to governmental entities
regarding the use and disposal of hazardous materials;
o monitoring and permitting of air emissions and water discharge; and
o 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.
We operate under a comprehensive environmental, health and safety
compliance program, which is headed by an environmental vice-president and
staffed with trained environmental professionals. As part of our program, we:
o prepare environmental and health and safety practice manuals and
policies;
o conduct employee training;
o develop and implement waste minimization initiatives;
o undertake periodic internal and oversee external audits of our
operations and environmental and health and safety programs;
o practice and engage in routine sampling and monitoring of employee
chemical and physical exposure levels;
o engage in sampling and monitoring of potential points of
environmental emissions; and
o prepare and/or review internal reports to regulatory bodies and
interface with them regarding environmental, safety and other
issues.
11
In addition, we also have installed certain pollution abatement equipment
to reduce emissions and discharges of regulated pollutants into the environment.
Our program monitors and seeks to resolve potential environmental liabilities
that result from, or may arise from, current and historic hazardous materials
handling and waste disposal practices. We have in place a spent product
recapture and recycling program for our facilities and our customers.
While we believe that we are in material compliance with the applicable
environmental requirements, we have received, and in the future may receive,
citations and notices from governmental regulatory authorities that certain of
our operations are not in compliance with our permits or applicable
environmental requirements. Occasionally we are required to pay a penalty or
fine, to install control technology or to make equipment or process changes (or
a combination thereof) as a result of the non-compliance or changing regulatory
requirements. When we become aware of a non-compliance or change in regulatory
requirements, we take immediate steps to correct and resolve the issues. The
associated costs have not had a material adverse effect on our business,
financial condition or results of operations.
Notwithstanding our 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 our business (or that of our predecessors to the extent we are not
indemnified therefor), we may be held liable for certain damages, the costs of
the investigation and remediation, and potential fines and penalties, which
could have a material adverse effect on our business, financial condition or
results of operations. However, under the terms of the purchase agreement with
Allied for the acquisition of C&D (the "Acquisition Agreement"), Allied was
obligated to indemnify C&D for any liabilities of this type resulting from
conditions existing at January 28, 1986, that were not disclosed by Allied to
C&D in the schedules to the Acquisition Agreement. These obligations have since
been assumed by Allied's successor in interest, Honeywell ("Honeywell").
C&D, 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 C&D had
made scrap lead shipments for reclamation prior to the date of the acquisition.
C&D and four other 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 C&D, for which C&D's allocated share rose from 5.25% to
7.79%.
We 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, we were notified of our involvement as a PRP at the NL
Atlanta, Northside Drive Superfund site. NL Industries, Inc. ("NL") and Norfolk
Southern Railway Company have been conducting a removal action on the site,
preliminary to remediation. We, along with other PRPs, are currently in
negotiations with NL at this site regarding our share of the allocated
liability, which we expect will not have a material adverse effect on our
business, financial condition or results of our operations.
We are also aware of the existence of contamination at our 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, we filed suit
against the prior owner of the site, Avnet, Inc., 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' attempts to resolve the matter through mediation were not
successful; therefore, we are aggressively pursuing available legal remedies.
Should the parties fail to reach a negotiated settlement, and unless an
alternative resolution can be achieved, NYSDEC may conduct the remediation and
seek recovery from the parties.
C&D, together with Johnson Controls, Inc. ("JCI"), is conducting an
assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment
12
and remediation, with a maximum liability of $1,750,000 (ii) any environmental
liabilities at the facility that are not remediated as part of the ongoing
cleanup project and (iii) environmental liabilities for any new claims made
after the fifth anniversary of the closing, i.e. March 2004, that arise from
migration from a pre-closing condition at the Milwaukee facility to locations
other than the Milwaukee facility, but specifically excluding liabilities
relating to pre-closing offsite disposal. JCI retained the environmental
liability for the off-site assessment and remediation of lead. In March 2004, we
entered into an agreement with JCI to continue to share responsibility as set
forth in the original purchase agreement. We are currently in negotiation with
JCI regarding the allocation of costs for assessment and remediation of certain
off-site chlorinated volatile organic compounds ("CVOCs") in groundwater.
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
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 C&D 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. We anticipate that the matter will result in a
penalty assessment and compliance obligations. We continue to seek a negotiated
or mediated resolution, failing which we intend to vigorously defend the action.
In October 2004, we accrued estimated environmental clean-up and impaired
equipment decontamination charges of $3,881,000 associated with the impairment
charges related to the Leola, Pennsylvania, and Huguenot, New York, facilities,
the timing for which has not been ascertained.
In February 2005, we received a verbal request from EPA to conduct
exploratory testing to determine if the historical municipal landfill located on
the C&D Attica, Indiana, property is the source of elevated levels of
trichloroethylene detected in two city wells downgradient of the C&D property.
No formal claim has been made against C&D. The scope of this potential exposure
is not defined at this time. C&D has retained environmental counsel and is fully
assessing the matter. At this time, we do not believe that this matter will have
a material adverse effect on our business, financial condition or results of
operations.
We accrue reserves for liabilities in our consolidated financial
statements and periodically reevaluate 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 January 31, 2005, accrued environmental reserves totaled
$6,570,000 consisting of $2,362,000 in other current liabilities and $4,208,000
in other liabilities. Based on currently available information, we believe that
appropriate reserves have been established with respect to the foregoing
contingent liabilities and that they are not expected to have a material adverse
effect on our business, financial condition or results of operations.
Certifications
C&D has included as Exhibits 31.1 and 31.2 to its Annual Report on 10-K
for fiscal year ended January 31, 2005, filed with the Securities and Exchange
Commission ("SEC"), certifications of the Chief Executive Officer and Chief
Financial Officer of C&D regarding the quality of C&D's public disclosure. In
June 2004, C&D submitted to the New York Stock Exchange the certification of the
Chief Executive Officer required by the rules of the New York Stock Exchange
certifying that he was not aware of any violation by C&D of the New York Stock
Exchange corporate governance listing standards.
Available Information
C&D maintains an Internet web site (www.cdtechno.com) and makes available
free of charge on or through the web site its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. C&D also makes available on its web site and in
printed form upon request, C&D's Code of Business Conduct, Code of Ethics for
C&D's Chief Executive Officer and Financial Employees and C&D's Corporate
Governance Guidelines.
13
Item 2. Properties
Set forth below is certain information, as of April 1, 2005, with respect
to our principal properties.
Square
Location Footage Products Manufactured at or Use of Facility
==============================================================================================================
United States Properties:
Milwaukee, Wisconsin (1) 370,000 Small standby power batteries
Attica, Indiana (1) 295,000 Large standby power batteries
Leola, Pennsylvania (1) (4) 240,000 Round Cell and battery R&D laboratory
Mansfield, Massachusetts (1) 180,000 Power supplies, data acquisition and digital meters
Conyers, Georgia (1) 161,000 Small standby power batteries
Huguenot, New York (1) 148,000 Motive power batteries
Dunlap, Tennessee (2) 72,000 Standby power and motive power electronics products
Blue Bell, Pennsylvania (2) 63,000 Corporate headquarters, Standby Power and Motive Power
divisional headquarters and electronics R&D laboratory
Milwaukie, Oregon (2) 50,000 Design, development and manufacture of power supplies
Tucson, Arizona (2) 45,000 DC to DC converters, power supplies, headquarters of Power
Electronics Division and electronics R&D laboratory
International Properties:
Shanghai, China (3) 315,000 Small standby power batteries
Reynosa, Mexico (1) 240,000 Large standby power batteries and motive power batteries
Nogales, Mexico (2) 81,000 DC to DC converters and AC to DC power supplies
Hampshire, United Kingdom (2) 42,000 Low voltage switchmode power supply units
Guangzhou, China (2) 35,000 DC to DC converters and wound magnetics
Milton Keynes, United Kingdom (2) 33,000 DC to DC converters, wound magnetics and electronics R&D
laboratory
Toronto, Canada (2) 24,000 Design and development of power supplies
Romsey, United Kingdom (2) 21,000 Distribution center
Mississauga, Canada (2) 20,000 Canadian headquarters, sales office and distribution center
(1) Property is owned by C&D.
(2) Property is leased by C&D.
(3) Building is owned by a joint venture, of which the Company owns 67%;
however, the land is leased under a 50-year agreement, of which 40 years
remain. The Chinese government previously notified our joint venture that
it will be required to relocate the Shanghai facility and has paid our
joint venture approximately $15,547,000 as a partial payment, which the
Company is applying towards construction of a new facility in the Pudong
Development Zone. Our joint venture is prepared to break ground in the
third quarter of fiscal year 2006 and anticipates production will begin in
the fourth quarter of fiscal year 2007. Upon return of the existing
property to the Chinese government, it will pay the joint venture an
additional $1,727,000.
(4) One of the buildings in the Leola, Pennsylvania, location is held for
sale.
Item 3. Legal Proceedings
We are involved in ordinary, routine litigation incidental to the conduct
of our business. None of this litigation, individually or in the aggregate, is
material or is expected to be material to our business, financial condition or
results of operations in any year. See Business - Environmental Regulations for
a description of certain administrative proceedings in which we are involved.
On March 24, 2003, C&D 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. The parties are in
the process of negotiating a resolution of the matter, failing which we intend
to aggressively defend the matter.
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Our Common Stock is traded on The New York Stock Exchange under the symbol
CHP. The approximate number of beneficial and registered record holders of our
Common Stock on April 18, 2005, was 3,400.
The following table sets forth, for the periods indicated, the high and
low sales prices for our Common Stock as reported by the New York Stock
Exchange. These prices represent actual transactions, but do not reflect
adjustment for retail markups, markdowns or commissions.
Years Ended January 31,
2005 2004
--------------------- --------------------
Fiscal Quarter High Low High Low
=============================================================================
First Quarter $20.86 $14.59 $17.82 $11.30
Second Quarter 18.20 13.55 15.55 11.20
Third Quarter 20.26 13.64 21.80 14.43
Fourth Quarter 19.55 14.36 23.43 17.70
Dividends. We began paying cash dividends on our Common Stock in April
1987. For the years ended January 31, 2005 and 2004, we declared dividends per
share as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
================================================================================
2005 $ 0.01375 $ 0.02750 $ -- $ 0.01375
2004 $ 0.01375 $ 0.01375 $ 0.01375 $ 0.01375
Our Amended and Restated Credit Facility permits dividends to be paid on
our Common Stock so long as there is no uncured default under that agreement.
Subject to that restriction and the provisions of Delaware law, future dividends
will depend on our earnings, financial condition and other factors. (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.)
On February 22, 2000, the Board of Directors of C&D declared a dividend of
one common stock purchase right (a "Right") for each share of Common Stock
outstanding on March 3, 2000 to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
C&D and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder
Services, L.L.C.), as rights agent. On November 15, 2004, an amendment was
signed among C&D, Mellon Investor Services LLC and the Bank of New York whereby
Mellon Investor Services LLC resigned as rights agent effective as of 12:00
A.M., New York time, November 30, 2004. We appointed the Bank of New York as
successor rights agent effective as of 12:01 A.M., New York time, December 1,
2004. Upon the occurrence of certain events, each Right will entitle the
registered holder to purchase from C&D one one-hundredth of a share of Common
Stock at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of C&D, unless our Board of Directors acts
otherwise, each holder of a Right, other than Rights beneficially owned by the
acquiring company, will thereafter have the right to receive upon exercise: (i)
that number of shares of our common stock having a market value equal to two
times the purchase price of the Right or (ii) that number of shares of common
stock of the acquiring company that at the time of the transaction has a market
value of two times the exercise price of the Right.
15
The following table provides information regarding repurchases by C&D of
our common stock during the fourth quarter of fiscal year 2005.
Total Number Maximum Number
of Shares (or Approximate
Publicly Dollar Value) of
Total Number Announced Shares that May Yet
of Shares Average Price Plans Be Purchased Under
Period Purchased Paid per Share or Programs the Plans or Programs
====================================================================================================================
November 1 - November 30, 2004 151 $ 19.08 -- 1,000,000
December 1 - December 31, 2004 505 $ 17.10 -- 1,000,000
January 1 - January 31, 2005 1,199 $ 16.74 -- 1,000,000
- ------------------------------------------------ -----
Total 1,855 --
================================================ =====
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.
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. None of the
shares purchased during the fourth quarter of fiscal year 2005 were purchased
pursuant to the September 30, 2004, repurchase program; 1,855 shares were
purchased through deferred compensation plans.
16
Item 6. Selected Financial Data
The following selected historical financial data for the periods indicated
have been derived from C&D's consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, independent registered public accounting
firm. The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
C&D's consolidated financial statements, which appear in Items 7 and 15 of this
Form 10-K.
STATEMENT OF OPERATIONS DATA
(In thousands, except share and per share data)
Fiscal 2005 (1)(2) 2004 (3) 2003 2002 2001 (4)
===================================================================================================================
NET SALES $ 414,738 $324,824 $335,745 $471,641 $ 615,678
- -------------------------------------------------------------------------------------------------------------------
COST OF SALES 348,080 248,145 257,046 343,370 439,135
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 66,658 76,679 78,699 128,271 176,543
OPERATING EXPENSES:
Selling, general and administrative expenses 47,480 40,459 34,647 50,406 66,243
Research and development expenses 19,105 9,542 9,509 10,291 10,281
Goodwill impairment 74,233 -- 489 -- --
- -------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (74,160) 26,678 34,054 67,574 100,019
- -------------------------------------------------------------------------------------------------------------------
Interest expense, net 5,015 1,268 3,800 6,700 6,315
Other expense (income), net 1,612 1,641 1,457 1,239 (725)
- -------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (80,787) 23,769 28,797 59,635 94,429
AND MINORITY INTEREST
(Benefit) provision for income taxes (21,289) 8,795 9,414 22,244 35,883
- -------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (59,498) 14,974 19,383 37,391 58,546
Minority interest (5) 83 91 1,317 2,651
- -------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (59,493) $ 14,891 $ 19,292 $ 36,074 $ 55,895
===================================================================================================================
Net (loss) income per common share - basic (5) $ (2.35) $ 0.58 $ 0.75 $ 1.38 $ 2.13
===================================================================================================================
Net (loss) income per common share - diluted (6) $ (2.35) $ 0.58 $ 0.74 $ 1.35 $ 2.05
===================================================================================================================
Dividends per common share $ 0.055 $ 0.055 $ 0.055 $ 0.055 $ 0.055
===================================================================================================================
BALANCE SHEET DATA
Working capital $ 115,897 $ 64,005 $ 53,776 $ 55,014 $ 75,895
Total assets 481,408 385,950 382,156 395,558 455,519
Short-term debt 1,874 -- 14,062 27,255 18,172
Long-term debt 135,004 19,620 25,857 46,892 98,849
Stockholders' equity 209,328 269,533 258,274 241,858 218,054
(1) On May 27, 2004, we acquired Celab Limited, based in Hampshire, United
Kingdom, a provider of power conversion products, predominately sold into
military, CATV and telecommunications applications in Europe. On June 30, 2004,
we acquired Datel Holding Corporation and its subsidiaries, a Mansfield,
Massachusetts-based manufacturer of primarily DC to DC converters, with
additional product offerings in data acquisition components and digital panel
meters. On September 30, 2004, we acquired the Power Systems division of
Celestica, Inc., which we now operate as "CPS," a Toronto, Ontario-based
company. 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 included in the Power Electronics
Division.
(2) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2005: Cost of sales includes non-cash fixed
asset impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602; environmental clean-up charges at these two
facilities in the amount of $3,881; and rigging, transportation and severance
costs related to the transfer of production to our Reynosa, Mexico, facility of
$1,426. Operating expenses include non-cash goodwill and intangible asset
impairment charges of $74,233 and $464, respectively, relating to the Power
Electronics Division.
17
(3) On September 25, 2003, C&D and its wholly owned Mexican subsidiary,
C&D Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery
Industrial Corporation of America, and its Mexican subsidiary, Matsushita
Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in
Reynosa, Mexico, and the equipment in that facility historically used for the
manufacture of large, valve regulated lead acid batteries ("VRLA batteries") for
standby power applications. In addition, C&D entered into a worldwide technology
license agreement with Matsushita Battery Industrial Co. Ltd. of Japan for
selected patents and know-how relating to the manufacturing technology for the
aforementioned products. For reporting purposes, the acquisition of the Reynosa
facility and associated operating results are included in both the Motive Power
and Standby Power divisions. We continue to use the assets acquired for the
manufacture of large, VRLA batteries for standby power applications.
(4) In December 2000 (effective as of November 26, 2000), we acquired NCL,
a producer of electronic power conversion products (primarily DC to DC
converters) based in Milton Keynes, United Kingdom. For reporting purposes, the
acquisition of NCL is included in the Power Electronics Division. We continue to
use the assets acquired in such business.
(5) Based on 25,349,488, 25,536,628, 25,818,024, 26,153,715 and 26,223,684
weighted average shares outstanding - basic.
(6) Based on 25,349,488, 25,731,961, 26,025,179, 26,688,011 and 27,264,528
weighted average shares outstanding - diluted.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts in this Item 7 are in thousands, except per share
amounts and per pound lead amounts.
Overview
During fiscal year 2005, major items that impacted our financial results
include: (i) a $74,233 non-cash pre-tax goodwill impairment charge related to
our Power Electronics Division; (ii) the aforementioned acquisitions and
associated financial results of Celab, Datel and CPS, which are included in the
results of operations of our Power Electronics Division; and (iii) the increased
cost of lead, which had a significant negative impact on the results of our
Standby Power and Motive Power divisions. (See Item 15. Exhibits and Financial
Statement Schedules related to the goodwill impairment charge.)
Impact of Economy and Shift in Customer Demand
During fiscal year 2005, our Standby Power Division experienced higher
demand for products sold to the UPS markets, while demand for our Standby Power
products sold into the telecommunication markets continued to soften. Demand for
our Motive Power products and Power Electronics Division products (excluding the
fiscal year 2005 acquisitions) increased over fiscal 2004.
Raw Material Pricing and Productivity
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of our industrial batteries and electronics
products and, accordingly, represent a significant portion of our materials
costs. During fiscal years 2005, 2004 and 2003, the average London Metals
Exchange ("LME") price per pound of lead was as follows:
Fiscal 2005 2004 2003
=======================================================================================
Average annual LME price per pound of lead $ 0.41 $ 0.25 $ 0.20
Lowest average monthly LME price per pound of lead $ 0.34 $ 0.20 $ 0.19
Highest average monthly LME price per pound of lead $ 0.44 $ 0.34 $ 0.22
We have a long-term cost containment program to minimize manufacturing
costs. Under the program, we continue to allocate a significant amount of our
normal annual capital expenditures to cost containment and productivity
improvement projects.
18
Inflation
The cost to C&D of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. Lead prices continued to
rise in fiscal year 2005, and we have not been able to fully offset the higher
lead prices through selective price increases. We believe that, over recent
years, we have been able to offset inflationary cost increases on items other
than lead by:
o effective raw materials purchasing programs;
o increases in labor productivity;
o improvements in overall manufacturing efficiencies; and
o selective price increases of our products.
Results of Operations
The following table sets forth selected items in C&D's consolidated
statements of operations as a percentage of sales for the periods indicated.
Fiscal 2005 2004 2003*
====================================================================================
NET SALES 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------
COST OF SALES 83.9 76.4 76.6
- ------------------------------------------------------------------------------------
GROSS PROFIT 16.1 23.6 23.4
OPERATING EXPENSES:
Selling, general and administrative expenses 11.5 12.5 10.3
Research and development expenses 4.6 2.9 2.8
Goodwill impairment 17.9 -- 0.2
- ------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (17.9) 8.2 10.1
- ------------------------------------------------------------------------------------
Interest expense, net 1.2 0.4 1.1
Other expense, net 0.4 0.5 0.4
- ------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (19.5) 7.3 8.6
(Benefit) provision for income taxes (5.2) 2.7 2.8
- ------------------------------------------------------------------------------------
NET (LOSS) INCOME BEFORE MINORITY INTEREST (14.3) 4.6 5.8
Minority interest (0.0) 0.0 0.1
- ------------------------------------------------------------------------------------
NET (LOSS) INCOME (14.3)% 4.6% 5.7%
====================================================================================
* Reclassified for comparative purposes.
Critical Accounting Policies
We have identified the critical accounting policies that are most
important to the portrayal of our financial condition and results of operations.
The policies set forth below require management's most subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Litigation and Environmental Reserves
C&D is involved in litigation in the ordinary course of business,
including personal injury, property damage and environmental litigation. We also
expend funds for environmental remediation of both company-owned and third-party
locations. In accordance with SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," we record a
loss and establish a reserve for litigation or remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonably estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other PRPs, their ability to contribute and
prior experience. These judgments are reviewed quarterly as more information is
received and the amounts reserved are updated as necessary. However, the
reserves may materially differ from ultimate actual liabilities if the loss
contingency is
19
difficult to estimate or if management's judgments turn out to be inaccurate. If
management believes no best estimate exists, the minimum loss is accrued.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors we consider in deciding when to perform
an impairment review include significant under-performance of a business or
product line in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the
assets. Recoverability of assets that will continue to be used in our operations
is measured by comparing the carrying amount of the asset grouping to the
related total future net cash flows. If an asset grouping's carrying value is
not recoverable through those cash flows, the asset grouping is considered to be
impaired. The impairment is measured by the difference between the assets'
carrying amount and their fair value, based on the best information available,
including market prices or discounted cash flow analyses.
Pension and Other Employee Benefits
Certain assumptions are used in the calculation of the actuarial valuation
of our defined benefit pension plans and postretirement benefits. These
assumptions include the weighted average discount rate, rates of increase in
compensation levels, expected long-term rates of return on assets and increases
or trends in health care costs. If actual results are less favorable than those
projected by management, additional expense may be required.
Inventory Reserves
C&D adjusts the value of its obsolete and unmarketable inventory to the
estimated market value based upon assumptions of future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts
C&D maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Warranty Reserves
C&D provides for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
suppliers' products and processes, C&D's warranty obligation is affected by
product failure rates, warranty replacement costs and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
warranty replacement costs or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be made.
Deferred Tax Valuation Allowance
C&D records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event C&D was to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that C&D would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
Revenue Recognition
C&D recognizes revenue when the earnings process is complete. This occurs
when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past.
20
Impairment of Goodwill
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill and other "indefinite-lived"
assets are not amortized and are subject to the impairment rules of SFAS No.
142, "Goodwill and Other Intangible Assets," which C&D adopted on February 1,
2002. Goodwill is tested for impairment on an annual basis or upon the
occurrence of certain circumstances or events. C&D determines the fair value of
its reporting units using a combination of financial projections and discounted
cash flow techniques adjusted for risk characteristics, also giving
consideration to C&D's overall market capitalization. The fair market value of
the reporting units is compared to the carrying value of the reporting units to
determine if an impairment loss should be calculated. If the book value of a
reporting unit exceeds the fair value of the reporting unit, an impairment loss
is indicated. The loss is calculated by comparing the fair value of the goodwill
to the book value of the goodwill. If the book value of the goodwill exceeds the
fair value of the goodwill, an impairment loss is recorded. Fair value of
goodwill is determined by subtracting the fair value of the identifiable assets
of a reporting unit from the fair value of the reporting unit.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development costs.
Fiscal 2005 Compared to Fiscal 2004
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Three acquisitions occurred during fiscal year 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 company. 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 fiscal year 2005 increased $89,914 or 28% to $414,738 from
$324,824 in fiscal year 2004. This increase resulted primarily from the
aforementioned acquisitions coupled with improved customer demand for products
of all three divisions. Sales of the Power Electronics Division increased
$72,466 or 185%, primarily due to net sales of $66,806 recorded by the entities
acquired during the year, coupled with higher sales by the legacy portion of the
Power Electronics Division, which increased by $5,660 or 14%, primarily due to
higher DC to DC converter sales. Sales by the Standby Power Division increased
$13,107 or 6%, primarily due to increased sales to the UPS market, partially
offset by continued weakness in the telecommunications market. Motive Power
divisional sales increased $4,341 or 8%, primarily due to higher battery and
charger sales.
Gross profit for fiscal year 2005 declined $10,021 or 13% to $66,658 from
$76,679 with margins decreasing from 23.6% to 16.1%. 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 $25,309. Additionally, there were rigging,
transportation and severance costs related to the transfer of production to our
Reynosa, Mexico, facility of approximately $1,426. 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 fiscal year 2005
increased $7,021 or 17%. This increase was primarily due to selling, general and
administrative expenses of $9,253 incurred by the current year acquisitions.
Excluding the acquired companies, selling, general and administrative expenses
decreased $2,232 primarily as a result of lower warranty costs of $3,738 and
lower commissions of $988, partially offset by Sarbanes-Oxley compliance costs
of $2,664.
21
Research and development expenses for fiscal year 2005 increased $9,563 or
100%. As a percentage of sales, research and development expenses increased from
2.9% during fiscal year 2004 to 4.6% during fiscal year 2005. The increase was
primarily the result of $8,473 of research and development expenses incurred by
our recent acquisitions, including acquired in-process research and development
expenses of $780 related to the acquired companies and intangible asset
impairment charges of $464. The impairment was related to certain intellectual
property of the Power Electronics Division resulting from a decline in financial
projections of certain products.
Goodwill impairment charges of $74,233 were recorded in the Power
Electronics Division for the fiscal year ended January 31, 2005. No goodwill
impairment charges were recorded in the Standby Power Division. All of the
goodwill of the Motive Power Division was written off in fiscal year 2003. C&D
determined the fair value of its reporting units, using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to C&D's overall market
capitalization. (See Item 15. Exhibits and Financial Statement Schedules related
to the goodwill impairment charge.)
Operating (loss) income for fiscal year 2005 decreased $100,838 or 378% to
an operating loss of $74,160 from operating income of $26,678 in fiscal year
2004. This decrease was primarily the result of goodwill and intangible
impairment charges in the Power Electronics Division, lower operating income in
the Standby Power Division, coupled with a higher operating loss in the Motive
Power Division.
Below is a summary of key items affecting operating (loss) income for
fiscal year 2005:
Analysis of Change in Operating (Loss) Income
Fiscal Year 2005 vs. 2004
=============================================================================
Operating income - fiscal 2004 $ 26,678
Motive Power Division:
Operations 3,034
Lead - increased cost (4,569)
Reynosa rigging, transportation, severance (827)
Impairments and related environmental clean-up (4,595)
Standby Power Division:
Operations 9,158
Lead - increased cost (20,740)
Reynosa rigging, transportation, severance (599)
Impairments and related environmental clean-up (8,888)
Power Electronics Division:
Operations - Legacy 1,063
Operations - Acquisitions 822
Goodwill and intangible assets' impairment (74,697)
- -----------------------------------------------------------------------------
Operating (loss) income - fiscal 2005 $(74,160)
=============================================================================
Interest expense, net, increased $3,747 in fiscal year 2005, primarily due
to higher average debt balances outstanding during the period due to funds
borrowed to finance the Celab, Datel and CPS acquisitions.
There was an income tax benefit of $21,289 recorded in fiscal year 2005 as
a result of a net loss before income taxes, compared to income tax expense of
$8,795 in fiscal year 2004. The effective tax rate consists of statutory rates
adjusted for the tax impacts of foreign operations and other permanent items.
The effective tax rate for fiscal year 2005 reflects a benefit of 26.4% compared
to a provision of 37% in the prior year. The benefit recorded in fiscal year
2005 was adjusted from the statutory rate to reflect the tax effect of the
goodwill impairment, an increase to the valuation allowance relating to foreign
tax credits for the unremitted earnings of a controlled foreign subsidiary, and
the impact of non-deductible acquired in-process research and development assets
related to the Datel acquisition.
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 incurred a net loss in fiscal year 2005 compared to net income in the
prior year.
As a result of all of the above, a net loss was recorded of $(59,493)
compared to net income of $14,891 in the prior year. On a per share basis, net
loss was $(2.35) compared to net income of $0.58 - basic and fully diluted for
fiscal years 2005 and 2004, respectively.
22
Fiscal 2004 Compared to Fiscal 2003
Effective February 1, 2004, we combined the former Dynasty and Powercom
divisions into the newly created Standby Power Division. The foregoing results
of operations reported using the former Dynasty and Powercom divisions have been
combined and reclassified under the Standby Power Division.
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal year 2004 decreased $10,921 or 3% to $324,824 from
$335,745 in fiscal year 2003. This decrease resulted from lower customer demand
for products of all divisions. Sales of the Power Electronics Division fell
$7,760, or 17%, mainly due to lower DC to DC converter sales. Power Electronics
had a solid fourth quarter, with revenue increasing across the division. This
division introduced over 30 new products in fiscal year 2004, accounting for
approximately 7% of the division's revenue. Motive Power divisional sales
dropped $1,487, or 3% due to lower sales of batteries and chargers. Standby
Power Division sales decreased $1,674, or less than 1%.
Gross profit for fiscal year 2004 decreased $2,020 or 3% to $76,679 from
$78,699 in the prior year. Gross margin increased slightly from 23.4% in fiscal
year 2003 to 23.6% in fiscal year 2004. Gross profit declined in the Standby
Power Division, primarily as a result of startup costs of approximately $1,300
at our new Reynosa, Mexico, facility and higher lead costs, partially offset by
a favorable year-end LIFO inventory adjustment of $1,557. Gross profit in the
Motive Power Division increased on lower sales, primarily due to the improvement
in plant operational effectiveness in fiscal year 2004, partially offset by
higher lead costs. Gross profit in the Power Electronics Division increased on
lower sales primarily due to the re-organization charges of $1,263 recorded in
the fourth quarter of fiscal year 2003 related to the closure of our Shannon,
Ireland, facility and the benefits of relocating certain Mexican manufacturing
activities to our Guangzhou, China, facility, which has lower manufacturing
costs.
Selling, general and administrative expenses for fiscal year 2004
increased $5,812 or 17%. This increase was primarily due to $2,897 of higher
warranty costs, higher payroll related costs of $1,932 and the prior year gain
of $1,610 recognized on the sale of our Conshohocken, Pennsylvania, facility,
partially offset by lower variable selling costs of $803 associated with the
decreased sales volumes.
Research and development expenses for fiscal year 2004 increased $33 or
less than 1%. As a percentage of sales, research and development expenses
increased from 2.8% of sales in fiscal year 2003 to 2.9% of sales in fiscal year
2004.
Goodwill impairment charges of $489 were recorded in the Motive Power
Division for the fiscal year ended January 31, 2003, resulting in the complete
write-off of the Motive Power Division's goodwill.
Operating income decreased $7,376 or 22% to $26,678 from $34,054 in the
prior year. This decrease was the result of lower operating income generated by
the Standby Power Division, partially offset by a lower operating loss in the
Motive Power Division and operating income in the Power Electronics Division in
fiscal year 2004 compared to an operating loss in fiscal year 2003.
Interest expense, net, decreased $2,532 in fiscal year 2004 compared to
the prior year, primarily due to lower average debt balances outstanding during
the year, coupled with a lower effective interest rate.
Income tax expense for fiscal year 2004 decreased $619 from fiscal year
2003, primarily as the result of lower income before income taxes, partially
offset by an increase in our effective tax rate. The effective tax rate consists
of statutory rates adjusted for the tax impacts of foreign operations. The
effective tax rate for fiscal year 2004 increased to 37.0% from 32.7% in the
prior year, primarily as a result of the favorable resolution of state tax
audits in the fourth quarter of fiscal year 2003.
Minority interest of $83 in fiscal year 2004 reflects the 33% ownership
interest in the joint venture battery business located in Shanghai, China, that
is not owned by C&D. The decrease in minority interest was due to lower
profitability of the Shanghai joint venture.
As a result of the above, for fiscal year 2004, net income decreased
$4,401 or 23% to $14,891 or $0.58 per share - basic and $0.58 per share -
diluted.
23
Future Outlook
During fiscal year 2005, we completed the transition of our Motive Power
V-Line(R) and former Standby Power HD products (now replaced by the MSE and
msEndur(TM) product lines) to our Reynosa, Mexico, facility.
Our results of operations continue to be negatively affected by higher raw
material pricing, and we anticipate that high lead pricing will continue to
adversely affect our profitability in the near term. Higher lead prices
negatively affected operating results in fiscal year 2005 by approximately
$25,309 compared to the prior year. In fiscal year 2005, to mitigate rising lead
costs, we increased prices where competitive situations allowed and reviewed
incoming business on an order-by-order basis and selectively declined business
where the price/cost relationship was not in proper balance. Currently, we are
hedged on approximately 10% of our first half fiscal year 2006 lead
requirements, and we continue to monitor the lead market for favorable buying
opportunities.
The Chinese government previously notified our joint venture that it will
be required to relocate the Shanghai facility and has paid our joint venture
approximately $15,547 as partial payment, which we intend to apply towards
construction of a new facility in the Pudong Development Zone. Our joint venture
is prepared to break ground in the third quarter of fiscal year 2006 and
anticipates production will begin in the fourth quarter of fiscal year 2007.
Upon return of the existing property to the Chinese government, it will pay the
joint venture an additional $1,727.
Liquidity and Capital Resources
Net cash provided by operating activities decreased $10,767 or 26% to
$30,191 for the fiscal year ended January 31, 2005, compared to $40,958 in the
prior fiscal year. The decrease in net cash provided by operating activity was
primarily due to: (i) a net loss in fiscal year 2005 compared to net income in
fiscal year 2004; (ii) a decrease from a net deferred tax liability to a net
deferred tax asset in fiscal year 2005 compared to an increase in net deferred
tax liabilities in fiscal year 2004; and (iii) a net reduction to current taxes
payable due to the tax benefit recorded for federal and state tax purposes
compared to an increase to taxes payable in the prior period. These changes,
resulting in lower net cash provided by operating activities, were partially
offset by: (i) non-cash charges for impairments to goodwill, intangible assets
and fixed assets, and increases to depreciation and amortization in fiscal year
2005; (ii) decreases in accounts and other notes receivable; and (iii) increases
to accounts payable and other liabilities in fiscal year 2005 compared to
decreases in fiscal year 2004.
Net cash used by investing activities increased $108,961 or 696% to
$124,609 in the fiscal year 2005 as compared to $15,648 in 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
$15,547 from the Chinese government as partial payment for the Shanghai joint
venture's existing battery facility. We intend to use these funds for the future
construction of a new battery manufacturing facility in Shanghai, China.
We had net cash provided by financing activities of $108,889 in fiscal
year 2005 as compared to net cash used by financing activities of $26,247 in the
prior fiscal year. Current year financing activities included $110,176 from new
borrowings, primarily used to finance the acquisitions of Celab, Datel and CPS.
This was partially offset by $3,023 used to acquire treasury stock. Prior year
net cash used by financing activities included $20,000 for the reduction of debt
and $5,770 for the purchase of treasury stock.
On June 30, 2004, we entered into an amended and restated revolving credit
agreement ("Credit Agreement" or "Facility"), with a maturity date of June 30,
2009. The financing was arranged by Banc of America Securities LLC. Under the
Credit 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 Credit Agreement 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 were 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. The Credit 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 Credit Agreement 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.
24
C&D was not in compliance with its leverage ratio covenant at January 31,
2005. We obtained a waiver of this violation on February 28, 2005. We entered
into the second amendment to the Credit Agreement to modify this ratio through
the remaining term of the agreement. The second amendment requires C&D to pledge
certain assets as collateral on a going forward basis. The interest rates
determined by our leverage ratio were also changed as a result of this second
amendment. The rates available to C&D are now LIBOR plus 1% to LIBOR plus 2.75%
or Prime to Prime plus 1.25%. The second amendment also modifies other
provisions of the Credit Agreement such that it permits C&D to exclude the write
down of up to $85,000 of goodwill from the minimum net worth covenant
calculation, to exclude up to $2,500 in severance costs in fiscal year 2006 as
well as to exclude all future non-cash stock option or restricted stock expense
from certain covenant calculations. Further, the second amendment requires C&D
to maintain minimum levels of trailing earnings before interest, taxes,
depreciation and amortization as calculated quarterly through fiscal year 2006.
On April 29, 2005, we entered into the third amendment to the Credit Agreement
to correct and revise the definitional term "Consolidated EBITDA."
The availability under the Credit Agreement is expected to be sufficient
to meet our ongoing cash needs for working capital requirements, debt service
and capital expenditures. Capital expenditures during fiscal year 2005 were
incurred to fund cost reduction programs, normal maintenance and regulatory
compliance. Fiscal year 2006 capital expenditures are expected to be
approximately $30,000 primarily for the construction of our new Shanghai
joint-venture facility (of which approximately $15,547 has already been received
from the Chinese government to fund construction), upgrades to our Reynosa,
Mexico, facility and other items expended for similar purposes as fiscal year
2005.
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of January 31, 2005:
Payments Due by Period
---------------------------------------------------
Less Than 1 - 3 4 - 5 After
Contractual Obligations Total 1 year years years 5 years
=============================================================================================
Operating leases $23,365 $4,827 $7,108 $5,470 $5,960
Inventory 1,695 1,695 -- -- --
- ---------------------------------------------------------------------------------------------
Total contractual cash obligations $25,060 $6,522 $7,108 $5,470 $5,960
=============================================================================================
Amount of Commitment Expiration Per Period
-----------------------------------------------------
Total
Amounts Less than 1 - 3 4 - 5 After
Other Commercial Commitments Committed 1 year years years 5 years
===============================================================================================
Mortgage $ 5,487 $ 257 $5,230 $ -- $ --
Capital lease 2,156 1,132 1,024 -- --
Revolving credit facility 128,750 -- -- 128,750 --
Other 485 485 -- -- --
Standby letters of credit 3,320 1,112 2,208 -- --
- -----------------------------------------------------------------------------------------------
Total commercial commitments $140,198 $2,986 $8,462 $128,750 $ --
===============================================================================================
New Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board ("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 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 C&D beginning in fiscal year
2007. Adoption is not expected to have a material impact on our consolidated
operations, financial position or cash flows.
25
In December 2004, FASB issued SFAS No.123 (revised 2004), "Share-Based
Payment" (SFAS No. 123R), which replaces SFAS No. 123 and supersedes APB Opinion
No. 25, "Accounting for Stock Issued to Employees." This SFAS No. 123R requires
all share-based payments to employees, including grants of employee stock
options, to be recognized in the financial statements based on their fair values
beginning with the first annual period beginning after December 15, 2005. The
pro forma disclosures previously permitted under SFAS No. 123 no longer will be
an alternative to financial statement recognition. We are required to adopt SFAS
No. 123R in the first quarter of fiscal year 2007. SFAS No. 123R permits public
companies to adopt these requirements using one of two methods:
o A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted employees prior to the effective date
of SFAS No. 123R that remain unvested on the effective date.
o A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
C&D is evaluating the impact of adoption of the provisions of SFAS No.
123R. We currently expect to apply the provisions of SFAS No. 123R utilizing the
modified prospective method. In anticipation of the implementation of SFAS No.
123R, C&D accelerated the vesting of all stock options granted under the 1996
and 1998 Stock Option Plans as of March 1, 2005; therefore, these options will
not be expensed in future periods.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, and amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." SFAS No. 153 eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of
APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it
with an exception for exchanges that do not have commercial substance. SFAS No.
153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005.
Adoption is not expected to have a material impact on our consolidated
operations, financial position or cash flows.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk
All dollar amounts in this Item 7A are in thousands.
Market Risk Factors
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 that are subject to interest rate risk consist
of debt instruments and interest rate swap contracts. The net market value of
our debt instruments (excluding capital leases) was $134,722 and $19,620 at
January 31, 2005 and 2004, respectively. 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.
We employ separate swap transactions rather than fixed rate obligations to take
advantage of the lower borrowing costs associated with floating rate debt while
also avoiding the costs associated with refinancing in the fixed rate market.
The net market value of our interest rate swaps was $(644) and $(1,486) at
January 31, 2005 and 2004, respectively. A 100-basis point increase in rates at
January 31, 2005 and 2004 would result in a $486 and a $405 increase in the
market value, respectively. A 100-basis point decrease in rates at January 31,
2005 and 2004 would result in a $497 and a $404 decrease in the market value,
respectively.
26
The above sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their year-end levels, with all other variables held
constant. We calculate the market value of the interest rate swaps by utilizing
a standard net present value model based on the market conditions as of the
valuation date.
We use currency forwards and swaps to hedge anticipated cash flows in
foreign currencies. The exposures currently hedged are the British Pound, the
Euro, the Japanese Yen and Canadian Dollar. These financial instruments
represent a net market value of $78 and $(923) at January 31, 2005 and 2004,
respectively.
To monitor our currency exchange rate risk, we use sensitivity analysis to
measure the impact on earnings in the case of a 10% change in exchange rates.
The sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables being held
constant. At January 31, 2005 and 2004, a 10% strengthening of the US Dollar
versus these currencies would result in an increase of the net market value of
the forwards of $171 and $2,522, respectively. At January 31, 2005 and 2004, a
10% weakening of the US Dollar versus these currencies would result in a
decrease in the net market value of the forwards of $207 and $3,092,
respectively.
The market value of the instruments was determined by taking into
consideration the contracted interest rates and foreign exchange rates versus
those available for similar maturities in the market at January 31, 2005 and
2004, respectively.
Foreign exchange forwards are used to hedge our firm and anticipated
foreign currency cash flows. There is either a balance sheet or cash flow
exposure related to all of the financial instruments in the above sensitivity
analysis for which the impact of a movement in exchange rates would be in the
opposite direction and substantially equal to the impact on the instruments in
the analysis.
Effective for fiscal year 2006, we adopted a lead hedging policy.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in Item 15(a)(1)
hereof are incorporated herein by reference and are filed as part of this report
immediately following the signature page of this Form 10-K.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Controls and Procedures:
The Chief Executive Officer and the Chief Financial Officer of C&D have
concluded, based on their evaluation as of January 31, 2005, that C&D's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) are effective to ensure
that information required to be disclosed by C&D in the reports filed or
submitted by it under the Securities Exchange Act of 1934, as amended, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and include controls and procedures designed to
ensure that information required to be disclosed by C&D in such reports is
accumulated and communicated to the Company's management, including the Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
Changes in Internal Control:
There were no changes in C&D's internal control over financial reporting
that occurred during the fourth quarter of fiscal year 2005 that have materially
affected, or are reasonably likely to materially affect, C&D's internal control
over financial reporting.
27
Management's Report on Internal Control over Financial Reporting:
Management's report on internal control over financial reporting and the
attestation report of C&D's independent registered public accounting firm are
included in C&D's Financial Statements under the captions entitled "Management's
Report on Internal Control over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm" located in Item 15.
Item 9B. Other Information
We completed our annual impairment review with respect to the fourth
quarter of fiscal year 2005 and found in connection with our preparation and
review of our financial statements included in this Form 10-K report that a
pre-tax impairment of $74,233,000 was required in the Power Electronics Division
as of January 31, 2005. (See Item 15. Exhibits and Financial Statement Schedules
related to the goodwill impairment charge.)
On April 29, 2005, C&D, the Lenders and the other parties to the Credit
Agreement entered into a third amendment to the Credit Agreement. The third
amendment to the Credit Agreement was executed to correct and revise the
definitional term "Consolidated EBITDA."
28
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated by reference to
the information under the captions "Election of Directors," "Current Executive
Officers" and "Compliance with Section 16(a)" of the Securities Exchange Act of
1934" included in C&D's Proxy Statement for our 2005 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in C&D's
Proxy Statement for our 2005 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to
the information under the captions "Principal Stockholders," "Beneficial
Ownership of Management" and "Equity Compensation Plan Information" included in
C&D's Proxy Statement for our 2005 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Accountant Fees and Services
The information required by this Item 14 is incorporated by reference to
the information under the captions "Report of the Audit Committee - Fees of
Independent Registered Public Accounting Firm" included in C&D's Proxy Statement
for our 2005 Annual Meeting of Stockholders to be filed with the Securities and
Exchange Commission.
29
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) The following financial statements are included in this report on
Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of January 31, 2005 and 2004
Consolidated Statements of Operations for the years ended January
31, 2005, 2004 and 2003
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2005, 2004 and 2003
Consolidated Statements of Cash Flows for the years ended January
31, 2005, 2004 and 2003
Consolidated Statements of Comprehensive (Loss) Income for the years
ended January 31, 2005, 2004 and 2003
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in this
report on Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES for the years ended January
31, 2005, 2004 and 2003
II. Valuation and Qualifying Accounts
(3) Exhibits:
3.1 Restated Certificate of Incorporation of C&D, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to C&D's
Current Report on Form 8-K dated June 30, 1998).
3.2 Amended and Restated By-laws of C&D (incorporated by reference
to Exhibit 3.1 to C&D's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 2002).
4.1 Rights Agreement dated as of February 22, 2000, between C&D
and Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, L.L.C.), as rights agent, which includes
as Exhibit B thereto the form of rights certificate
(incorporated by reference to Exhibit 1 to C&D's Form 8-A
Registration Statement filed on February 28, 2000), Amendment
to Rights Agreement (incorporated by reference to Exhibit 10.3
to C&D's Quarterly Report on Form 10-Q for the period ended
October 31, 2004).
10.1 Purchase Agreement dated November 27, 1985, between Allied,
Allied Canada Inc. and C&D; Amendments thereto dated January
28 and October 8, 1986 (incorporated by reference to Exhibit
10.1 to C&D's Registration Statement on Form S-1, No.
33-10889).
10.2 Agreement dated December 15, 1986, between C&D and Allied
(incorporated by reference to Exhibit 10.2 to C&D's
Registration Statement on Form S-1, No. 33-10889).
10.3 Lease Agreement dated February 15, 1994, by and between
Sequatchie Associates, Incorporated and C&D Charter Power
Systems, Inc. (which has since been merged into C&D)
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1999);
Extension
30
and Modification Agreement effective December 19, 2003
(incorporated by reference to Exhibit 10.3 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2004).
10.4 Purchase and Sale Agreement, dated as of November 23, 1998,
among Johnson Controls, Inc. and its subsidiaries as Seller
and C&D and C&D Acquisition Corp. as Purchaser (incorporated
by reference to Exhibit 2.1 to C&D's Current Report on Form
8-K dated March 1, 1999).
10.5 Amended and Restated Credit Agreement dated as of June 30,
2004, among C&D Technologies, Inc. and Certain of its
Subsidiaries as the Borrowers, the Subsidiaries identified
herein as the Guarantors, Citizens Bank as Syndication Agent,
LaSalle National Bank National Association as Co-Agent, Bank
of America, N.A., as Administrative Agent, Swing Line Lender
and L/C Issuer and the Other Lenders Party Hereto Arranged By
Banc of America Securities LLC as Sole Lead Arranger and Sole
Book Manager (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the period ended July
31, 2004), First Amendment thereto dated as of December 9,
2004 (filed herewith), Second Amendment thereto dated as of
April 21, 2005 (filed herewith), Third Amendment thereto dated
as of April 29, 2005 (filed herewith).
10.6 Security Agreement dated April 21, 2005, among C&D
Technologies, Inc., C&D International Investment Holdings
Inc., C&D Charter Holdings, Inc., C&D Technologies (Datel),
Inc., Datel Systems, Inc., C&D Dynamo Corp., Dynamo
Acquisition Corp., C&D Technologies (CPS) LLC and Datel
Holding Corporation as Grantors, and the Bank of America,
N.A., in its capacity as administrative agent for the holders
of the Secured Obligations (filed herewith).
10.7 Uncommitted loan facility dated June 5, 2001, between C&D
Holdings Limited and ABN Amro Bank N.V. (incorporated by
reference to Exhibit 10.2 to C&D's Quarterly Report on Form
10-Q for the period ended April 30, 2001).
10.8 Asset Purchase Agreement among Matsushita Battery Industrial
Corporation of America, Matsushita Battery Industrial de
Mexico, S.A. de C.V., C&D Technologies, Inc. and C&D
Technologies Reynosa, S. de R.L. de C.V., dated as of August
27, 2003 (incorporated by reference to C&D's Current Report on
Form 8-K dated September 25, 2003).
10.9 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
(incorporated by reference to Exhibit 10.2 to C&D's Quarterly
Report on Form 10-Q for the period ended October 31, 2004).
10.10 Assignment and Assumption dated as of August 3, 2004, by and
between Bank of America, N.A. and Sovereign Bank (incorporated
by reference to Exhibit 10.2 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
10.11 Lender Joinder Agreement dated as of August 3, 2004, among C&D
Technologies, Inc. and Certain of its subsidiaries as the
Borrowers and Calyon New York Branch as the New Lender and
Bank of America, N.A., as Administrative Agent (incorporated
by reference to Exhibit 10.3 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
10.12 Lender Joinder Agreement dated as of August 3, 2004, among C&D
Technologies, Inc. and Certain of its subsidiaries as the
Borrowers and Sovereign Bank as the New Lender and Bank of
America, N.A., as Administrative Agent (incorporated by
reference to Exhibit 10.4 to C&D's Quarterly Report on Form
10-Q for the period ended July 31, 2004).
10.13 LLC Interest Purchase Agreement between Celestica Corporation,
Celestica Inc. and C&D Technologies, Inc., dated September 23,
2004 (incorporated by reference to Exhibit 2.1 to C&D's
Current Report on Form 8-K dated September 30, 2004).
31
10.14 Share Purchase Agreement between Celestica International Inc.,
Celestica Inc., C&D Power Systems (Canada) ULC and C&D
Technologies, Inc., dated September 23, 2004 (incorporated by
reference to Exhibit 2.2 to C&D's Current Report on Form 8-K
dated September 30, 2004).
10.15 Asset Purchase Agreement between Celestica International Inc.,
Celestica Corporation, Celestica (Thailand) Limited, Dynamo
Acquisition Corp., Celestica Inc. and C&D Technologies, Inc.,
dated September 23, 2004 (incorporated by reference to Exhibit
2.3 to C&D's Current Report on Form 8-K dated September 30,
2004).
10.16 Asset Purchase Agreement between Celestica Electronics
(Shanghai) Co. Ltd., Datel Electronic Technology (Shanghai)
Co., Ltd., Celestica Inc. and C&D Technologies, Inc., dated
September 23, 2004 (incorporated by reference to Exhibit 2.4
to C&D's Current Report on Form 8-K dated September 30, 2004).
10.17 Inventory Purchase Agreement between Celestica Suzhou
Technology Ltd., Dynamo Acquisition Corp., Celestica Inc. and
C&D Technologies, Inc., dated September 23, 2004 (incorporated
by reference to Exhibit 2.5 to C&D's Current Report on Form
8-K dated September 30, 2004).
10.18 Purchase Price Adjustment Agreement between Celestica
International Inc., Celestica Corporation, Celestica
(Thailand) Limited, Celestica Electronics (Shanghai) Co. Ltd.,
Celestica Suzhou Technology Ltd., Celestica Inc., C&D Power
Systems (Canada) ULC, C&D Technologies, Inc., Dynamo
Acquisition Corp., and Datel Electronic Technology (Shanghai)
Co., Ltd., dated September 23, 2004 (incorporated by reference
to Exhibit 2.6 to C&D's Current Report on Form 8-K dated
September 30, 2004).
10.19 Merger Agreement dated as of June 10, 2004, among C&D
Technologies, Inc., CLETADD Acquisition Corporation and Datel
Holding Company (incorporated by reference to Exhibit 10.1 to
C&D's Current Report on Form 8-K dated June 30, 2004).
Management Contracts or Plans
10.20 Charter Power Systems, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1996),
First Amendment to C&D Technologies, Inc. 1996 Stock Option
Plan (formerly known as the Charter Power Systems, Inc. 1996
Stock Option Plan) dated April 27, 1999 (incorporated by
reference to Exhibit 10.3 to C&D's Quarterly Report on Form
10-Q for the quarter ended July 31, 1999).
10.21 C&D Technologies, Inc. Amended and Restated 1998 Stock Option
Plan (incorporated by reference to Exhibit 10.7 to C&D's
Annual Report on Form 10-K for fiscal year ended January 31,
2001).
10.22 C&D Technologies, Inc. Savings Plan as restated and amended
(incorporated by reference to Exhibit 10.9 to C&D's Annual
Report on Form 10-K for fiscal year ended January 31, 2002),
First Amendment thereto dated June 12, 2002 (incorporated by
reference to Exhibit 10.10 to C&D's Quarterly Report on Form
10-Q for the quarter ended October 31, 2002), Second Amendment
thereto dated November 20, 2002 (incorporated by reference to
Exhibit 10.11 to C&D's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2002); Third Amendment thereto dated
June 18, 2003 (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the quarter ended July
31, 2003).
10.23 C&D Technologies, Inc. Pension Plan for Salaried Employees as
restated and amended (incorporated by reference to Exhibit
10.10 to C&D's Annual Report on Form 10-K for fiscal year
ended January 31, 2002); First Amendment thereto dated June
12, 2002 (incorporated by reference to Exhibit 10.3 to C&D's
Quarterly Report on Form 10-Q for the quarter ended April 30,
2003); Second Amendment thereto dated September 25, 2002
(incorporated by reference to Exhibit 10.4 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 2003);
Third Amendment thereto dated March 19, 2004 (incorporated by
reference to Exhibit 10.11 to C&D's Annual Report on Form 10-K
for the fiscal year ended January 31, 2004).
32
10.24 Supplemental Executive Retirement Plan compiled as of February
27, 2004, to reflect all amendments (incorporated by reference
to Exhibit 10.12 to C&D's Annual Report on Form 10-K for the
fiscal year ended January 31, 2004).
10.25 C&D Technologies, Inc. Management Incentive Bonus Plan Policy
(incorporated by reference to Exhibit 10.3 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 2004).
10.26 Employment Agreement dated November 28, 2000, between Wade H.
Roberts, Jr. and C&D (incorporated by reference to Exhibit
10.1 to C&D's Quarterly Report on Form 10-Q for the quarter
ended October 31, 2000).
10.27 Release Agreement dated March 24, 2005, between C&D
Technologies, Inc. and Wade H. Roberts, Jr. (filed herewith).
10.28 Employment Agreement dated March 31, 2000, between Stephen E.
Markert, Jr. and C&D (incorporated by reference to Exhibit
10.14 to C&D's Annual Report on Form 10-K for the fiscal year
ended January 31, 2000).
10.29 Employment Agreement dated March 31, 2000, between Linda R.
Hansen and C&D (incorporated by reference to Exhibit 10.15 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2000).
10.30 Employment Agreement dated March 31, 2000, between Charles R.
Giesige, Sr. and C&D (incorporated by reference to Exhibit
10.18 to C&D's Annual Report on Form 10-K for the fiscal year
ended January 31, 2000); letter dated January 27, 2004 to
Charles R. Giesige, Sr. amending Employment Agreement dated
March 31, 2000 (incorporated by reference to Exhibit 10.17 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2004).
10.31 Employment Agreement dated February 27, 2001, between John A.
Velker and C&D (incorporated by reference to Exhibit 10.18 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2003).
10.32 Employment Agreement dated March 1, 2001, between David A. Fix
and C&D (incorporated by reference to Exhibit 10.21 to C&D's
Annual Report on Form 10-K for the fiscal year ended January
31, 2001); Letter dated January 29, 2004, to David A. Fix
amending Employment Agreement dated March 1, 2001
(incorporated by reference to Exhibit 10.19 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2004).
10.33 Release Agreement dated April 19, 2005, between C&D
Technologies, Inc. and David A. Fix (filed herewith).
10.34 Employment Agreement dated August 6, 2001, between James D.
Johnson and C&D (incorporated by reference to Exhibit 10.2 to
C&D's Quarterly Report on Form 10-Q for the quarter ended
October 31, 2001).
10.35 Employment Agreement dated July 28, 2003, between Stan Wreford
and C&D (incorporated by reference to Exhibit 10.1 to C&D's
Quarterly Report on Form 10-Q for the quarter ended July 31,
2003).
10.36 Employment Agreement dated April 1, 2003, between Kevin D.
Burgess and C&D (incorporated by reference to Exhibit 10.1 to
C&D's Quarterly Report on Form 10-Q for the quarter ended
October 31, 2004).
10.37 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and William Harral, III
(incorporated by reference to Exhibit 10.2 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
33
10.38 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Wade H. Roberts, Jr.
(incorporated by reference to Exhibit 10.3 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.39 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Peter R. Dachowski
(incorporated by reference to Exhibit 10.4 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.40 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Kevin P. Dowd
(incorporated by reference to Exhibit 10.5 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.41 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Robert I. Harries
(incorporated by reference to Exhibit 10.6 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.42 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and Pamela S. Lewis
(incorporated by reference to Exhibit 10.7 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.43 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and George MacKenzie
(incorporated by reference to Exhibit 10.8 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.44 Indemnification Agreement dated as of November 19, 2002, by
and between C&D Technologies, Inc. and John A. H. Shober
(incorporated by reference to Exhibit 10.9 to C&D's Quarterly
Report on Form 10-Q for the quarter ended October 31, 2002).
10.45 Indemnification Agreement dated as of February 24, 2003, by
and between C&D Technologies, Inc. and Stanley W. Silverman
(incorporated by reference to Exhibit 10.33 to C&D's Annual
Report on Form 10-K for the fiscal year ended January 31,
2003).
10.46 C&D Technologies, Inc. Nonqualified Deferred Compensation Plan
(incorporated by reference to Exhibit 4 to C&D's Registration
Statement on Form S-8, No. 333-42054).
10.47 C&D Technologies, Inc. Approved Share Option Plan
(incorporated by reference to Exhibit 4 to C&D's Registration
Statement on Form S-8, No. 333-69266).
10.48 C&D Technologies, Inc. Management Compensation Plan Policy for
Fiscal Year 2006 (incorporated by reference to Exhibit 10.1 to
C&D's Form 8-K dated March 1, 2005).
10.49 C&D Technologies, Inc. Board of Directors Nominating/Corporate
Governance Committee Charter As Amended Effective as of March
1, 2005 (incorporated by reference to Exhibit 10.2 to C&D's
Form 8-K dated March 1, 2005).
14 Code of Ethics (incorporated by reference to Exhibit 14 to
C&D's Annual Report on Form 10-K for the fiscal year ended
January 31, 2004).
21 Subsidiaries of C&D (filed herewith).
23 Consent 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).
34
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).
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
May 3, 2005 By: /s/ George MacKenzie
------------------------------------
George MacKenzie
President, Chief Executive
Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ George MacKenzie President, Chief Executive May 3, 2005
- ---------------------------------------- Officer and Director
George MacKenzie (Principal Executive Officer)
/s/ Stephen E. Markert, Jr. Vice President and May 3, 2005
- ---------------------------------------- Chief Financial Officer
Stephen E. Markert, Jr. (Principal Financial and Accounting
Officer)
/s/ William Harral, III Director, Chairman May 3, 2005
- ----------------------------------------
William Harral, III
/s/ Kevin P. Dowd Director May 3, 2005
- ----------------------------------------
Kevin P. Dowd
/s/ Robert I. Harries Director May 3, 2005
- ----------------------------------------
Robert I. Harries
/s/ Pamela S. Lewis Director May 3, 2005
- ----------------------------------------
Pamela S. Lewis
/s/ John A. H. Shober Director May 3, 2005
- ----------------------------------------
John A. H. Shober
/s/ Stanley W. Silverman Director May 3, 2005
- ----------------------------------------
Stanley W. Silverman
/s/ Ellen C. Wolf Director May 3, 2005
- ----------------------------------------
Ellen C. Wolf
36
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INDEX TO FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENTS
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Management's Report on Internal Control over Financial Reporting F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheets as of January 31, 2005 and 2004 F-5
Consolidated Statements of Operations for the years ended January 31, 2005, 2004 and 2003 F-6
Consolidated Statements of Stockholders' Equity for the years ended January 31, 2005, 2004 and 2003 F-7
Consolidated Statements of Cash Flows for the years ended January 31, 2005, 2004 and 2003 F-8
Consolidated Statements of Comprehensive (Loss) Income for the years ended January 31, 2005,
2004 and 2003 F-10
Notes to Consolidated Financial Statements F-11
FINANCIAL STATEMENT SCHEDULE
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
For the years ended January 31, 2005, 2004 and 2003
Schedule II. Valuation and Qualifying Accounts S-1
F-1
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with Generally Accepted Accounting
Principles ("GAAP"). It includes policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
the assets of C&D Technologies, Inc. ("C&D");
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with GAAP, and that our receipts and expenditures are
being made only in accordance with authorizations of management and
directors; and
o Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the
degree of compliance with the policies or procedures may deteriorate.
Management evaluated the effectiveness of our internal control over
financial reporting as of January 31, 2005, based on the criteria established in
a report entitled Internal Control - Integrated Framework, issued by the
Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based
on such evaluation and the criteria in the COSO framework, we have concluded
that our internal control over financial reporting was effective as of January
31, 2005.
In evaluating the effectiveness of our internal control over financial
reporting as of January 31, 2005, we excluded the acquisitions of Celab, Datel
and CPS, because they were acquired in purchase business combinations during
fiscal year 2005. Celab, Datel and CPS's combined total assets and total
revenues represent $129.3 million and $66.8 million, respectively of the related
consolidated financial amounts as of and for the fiscal year ended January 31,
2005. Refer to Note 2 to the consolidated financial statements for further
discussion about these acquisitions.
Our management's assessment of the effectiveness of C&D's internal control
over financial reporting as of January 31, 2005, has been audited by
PricewaterhouseCoopers LLP, an independent registered public accounting firm, as
stated in their report which appears on the following page.
/s/ George MacKenzie /s/ Stephen E. Markert, Jr.
- ------------------------------ ------------------------------
George MacKenzie Stephen E. Markert, Jr.
President, Chief Executive Vice President and
Officer and Director Chief Financial Officer
May 3, 2005
F-2
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of C&D Technologies, Inc.:
We have completed an integrated audit of C&D Technologies, Inc. 2005
consolidated financial statements and of its internal control over financial
reporting as of January 31, 2005 and audits of its 2004 and 2003 consolidated
financial statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the index
appearing under Item 15(a)(1) present fairly, in all material respects, the
financial position of C&D Technologies, Inc. and its subsidiaries at January 31,
2005 and 2004, and the results of their operations and their cash flows for each
of the three years in the period ended January 31, 2005 in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit of financial statements
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Internal control over financial reporting
Also, in our opinion, management's assessment, included in Management's Report
on Internal Control Over Financial Reporting appearing herein that the Company
maintained effective internal control over financial reporting as of January 31,
2005 based on criteria established in Internal Control- Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of January 31, 2005,
based on criteria established in Internal Control- Integrated Framework issued
by the COSO. The Company's management is responsible for maintaining effective
internal control over financial reporting and for its assessment of the
effectiveness of internal control over financial reporting. Our responsibility
is to express opinions on management's assessment and on the effectiveness of
the Company's internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. An audit of internal control
over financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the circumstances.
We believe that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
F-3
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control Over Financial
Reporting, management has excluded Celab, Datel and CPS from its assessment of
internal control over financial reporting as of January 31, 2005 because they
were acquired by the Company in purchase business combinations during 2005. We
have also excluded Celab, Datel and CPS from our audit of internal control over
financial reporting. Celab, Datel and CPS are wholly-owned subsidiaries whose
total assets and total revenues represent $129.3 million and $66.8 million,
respectively, of the related consolidated financial statement amounts as of and
for the year ended January 31, 2005.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
May 3, 2005
F-4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
January 31,
(Dollars in thousands, except par value)
2005 2004
=====================================================================================
ASSETS
Current assets:
Cash and cash equivalents $ 26,855 $ 12,306
Accounts receivable, less allowance for doubtful accounts
of $2,018 in 2005 and $1,476 in 2004 73,621 49,838
Inventories, net 77,272 47,175
Deferred income taxes 14,481 10,356
Other current assets 3,652 1,262
- -------------------------------------------------------------------------------------
Total current assets 195,881 120,937
Property, plant and equipment, net 104,130 104,799
Deferred income taxes 287 --
Intangible and other assets, net 83,863 39,799
Goodwill 97,247 120,415
- -------------------------------------------------------------------------------------
TOTAL ASSETS $ 481,408 $ 385,950
=====================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 1,874 $ --
Accounts payable 43,482 22,246
Accrued liabilities 24,254 19,495
Income taxes -- 3,791
Other current liabilities 10,374 11,400
- -------------------------------------------------------------------------------------
Total current liabilities 79,984 56,932
Deferred income taxes 12,216 17,369
Long-term debt 135,004 19,620
Other liabilities 36,705 14,310
- -------------------------------------------------------------------------------------
Total liabilities 263,909 108,231
- -------------------------------------------------------------------------------------
Commitments and contingencies (see Note 9)
Minority interest 8,171 8,186
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 28,714,973 and 28,605,747
shares issued in 2005 and 2004, respectively 287 286
Additional paid-in capital 71,956 70,619
Treasury stock, at cost, 3,368,676 and (47,151) (44,481)
3,196,508 shares in 2005 and 2004, respectively
Accumulated other comprehensive income 5,275 3,259
Retained earnings 178,961 239,850
- -------------------------------------------------------------------------------------
Total stockholders' equity 209,328 269,533
- -------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 481,408 $ 385,950
=====================================================================================
See notes to consolidated financial statements.
F-5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended January 31,
(Dollars in thousands, except per share data)
2005 2004 2003*
===========================================================================================
NET SALES $ 414,738 $324,824 $335,745
- -------------------------------------------------------------------------------------------
COST OF SALES 348,080 248,145 257,046
- -------------------------------------------------------------------------------------------
GROSS PROFIT 66,658 76,679 78,699
OPERATING EXPENSES:
Selling, general and administrative expenses 47,480 40,459 34,647
Research and development expenses 19,105 9,542 9,509
Goodwill impairment 74,233 -- 489
- -------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (74,160) 26,678 34,054
- -------------------------------------------------------------------------------------------
Interest expense, net 5,015 1,268 3,800
Other expense, net 1,612 1,641 1,457
- -------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (80,787) 23,769 28,797
- -------------------------------------------------------------------------------------------
(Benefit) provision for income taxes (21,289) 8,795 9,414
- -------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (59,498) 14,974 19,383
- -------------------------------------------------------------------------------------------
Minority interest (5) 83 91
- -------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (59,493) $ 14,891 $ 19,292
===========================================================================================
Net (loss) income per common share - basic $ (2.35) $ 0.58 $ 0.75
===========================================================================================
Net (loss) income per common share - diluted $ (2.35) $ 0.58 $ 0.74
===========================================================================================
* Reclassified for comparative purposes.
See notes to consolidated financial statements.
F-6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
for the years ended January 31, 2005, 2004 and 2003
(Dollars in thousands, except per share data)
Accumulated
Additional Other
Common Stock Paid-In Treasury Stock Comprehensive Retained
Shares Amount Capital Shares Amount Income (Loss) Earnings
====================================================================================================================================
BALANCE AT
JANUARY 31, 2002 28,431,728 $ 284 $ 65,893 (2,414,161) $ (29,743) $ (3,057) $ 208,481
Net income 19,292
Dividends to stockholders,
$.055 per share (1,408)
Tax effect relating to stock
options exercised 179
Foreign currency translation
adjustment 3,926
Unrealized gain on derivative
instruments 12
Purchase of common stock (585,800) (9,792)
Deferred compensation plan (50) (3,319) (16)
Issuance of common stock 7,741 2,247 193,000 1,142
Stock options exercised 70,334 1 883
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2003 28,509,803 285 69,152 (2,810,280) (38,409) 881 226,365
Net income 14,891
Dividends to stockholders,
$.055 per share (1,406)
Tax effect relating to stock
options exercised 162
Foreign currency translation
adjustment 2,132
Unrealized gain on derivative
instruments 246
Purchase of common stock (374,000) (5,887)
Deferred compensation plan (1) (12,228) (185)
Issuance of common stock 12,842 183
Stock options exercised 83,102 1 1,123
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2004 28,605,747 286 70,619 (3,196,508) (44,481) 3,259 239,850
Net loss (59,493)
Dividends to stockholders,
$.055 per share (1,396)
Tax effect relating to stock
options exercised 264
Foreign currency translation
adjustment 1,511
Unrealized gain on derivative
instruments 505
Purchase of common stock (163,700) (2,543)
Deferred compensation plan (14) (8,468) (127)
Issuance of common stock 9,627 156
Stock options exercised 99,599 1 931
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2005 28,714,973 $ 287 $ 71,956 (3,368,676) $ (47,151) $ 5,275 $ 178,961
====================================================================================================================================
See notes to consolidated financial statements.
F-7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended January 31,
(Dollars in thousands)
2005 2004* 2003*
====================================================================================================================
Cash flows from operating activities:
Net (loss) income $ (59,493) $ 14,891 $ 19,292
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Minority interest (5) 83 91
Depreciation, amortization and impairment of intangibles 25,339 22,534 23,740
Impairment of fixed assets 9,602 -- --
Impairment of goodwill 74,233 -- 489
Purchased in-process research and development 780 -- --
Deferred income taxes (19,416) 4,668 9,900
Loss (gain) on disposal of assets 215 208 (955)
Annual retainer to Board of Directors paid by the issuance of common stock 156 183 171
Changes in assets and liabilities, net of effects from businesses acquired:
Accounts receivable 3,994 (1,096) 780
Inventories (1,288) 1,249 14,713
Other current assets (2) (251) 185
Accounts payable 2,797 (95) 3,218
Accrued liabilities (623) (2,504) (3,086)
Income taxes payable (5,449) 5,237 4,414
Other current liabilities (4,475) 3,750 (560)
Other liabilities 6,450 (2,302) (1,673)
Other long-term assets (2,667) (1,128) (11,649)
Other, net 43 (4,469) (4,462)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 30,191 40,958 54,608
- --------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired (128,429) (12,116) --
Acquisition of property, plant and equipment (11,865) (3,697) (7,163)
Proceeds from disposal of property, plant and equipment 15,685 165 3,652
- --------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (124,609) (15,648) (3,511)
- --------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Repayment of debt (775) (20,000) (35,655)
Proceeds from new borrowings 110,176 -- --
Increase in book overdrafts 3,753 420 542
Financing cost of long term debt (768) (407) (118)
Proceeds from issuance of common stock, net 932 1,123 884
Purchase of treasury stock (3,023) (5,770) (10,899)
Payment of common stock dividends (1,396) (1,406) (1,766)
Payment of minority interest dividends (10) (207) (94)
- --------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 108,889 (26,247) (47,106)
- --------------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash and cash equivalents 78 277 194
- --------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 14,549 (660) 4,185
Cash and cash equivalents, beginning of fiscal year 12,306 12,966 8,781
- --------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of fiscal year $ 26,855 $ 12,306 $ 12,966
====================================================================================================================
* Reclassified for comparative purposes.
See notes to consolidated financial statements.
F-8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
for the years ended January 31,
(Dollars in thousands)
2005 2004 2003
========================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES
Cash paid (received) during the year for:
Interest paid, net $ 4,362 $ 1,405 $ 4,478
Income taxes paid (refunded), net $ 4,417 $ 623 $(3,737)
SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquired business:
Estimated fair value of assets acquired $ 75,697 $ 10,980 $ --
Goodwill 48,885 -- --
Identifiable intangible assets 44,989 3,936 --
Purchased in-process research and development 780 -- --
Cash paid, net of cash acquired (128,429) (12,116) --
- ------------------------------------------------------------------------------------------------------------------------
Liabilities $ 41,922 $ 2,800 $ --
========================================================================================================================
Annual retainer to Board of Directors paid by the issuance of common stock $ 156 $ 183 $ 171
Increase (decrease) in property, plant and equipment acquisitions in accounts
payable $ 408 $ (368) $ (789)
Note received as part of fixed asset sale $ -- $ -- $ 2,000
Fair market value of treasury stock issued to pension plans $ -- $ -- $ 3,218
Tax effect of stock options exercised $ 264 $ 162 $ 179
See notes to consolidated financial statements.
F-9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
for the years ended January 31,
(Dollars in thousands)
2005 2004 2003
=============================================================================================================
NET (LOSS) INCOME $(59,493) $14,891 $19,292
Other comprehensive income, net of tax:
Net unrealized gain on derivative instruments, less tax expense of $337,
$165, and $237 for 2005, 2004 and 2003, respectively 505 246 12
Foreign currency translation adjustments, less tax expense of $316, $1,440
and $1,246 for 2005, 2004 and 2003, respectively 1,511 2,132 3,926
- -------------------------------------------------------------------------------------------------------------
Total comprehensive (loss) income $(57,477) $17,269 $23,230
=============================================================================================================
See notes to consolidated financial statements.
F-10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of C&D
Technologies, Inc., its wholly owned subsidiaries and a 67% owned joint venture
(collectively the "Company"). All significant intercompany accounts and
transactions have been eliminated.
The Company produces and markets systems for the conversion and storage of
electrical power, including industrial batteries and electronics. On January 28,
1986, the Company purchased substantially all of the assets of the C&D Power
Systems division of Allied Corporation ("Allied"). The Company's reportable
business segments consist of the Standby Power Division, the Power Electronics
Division and the Motive Power Division. Effective February 1, 2004, the Company
combined the Dynasty and Powercom divisions into the Standby Power Division (see
"Note 15: Operations by Industry Segment and Geographic Area").
Accounting Estimates:
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. In addition, financial projections and estimates
are required in the Company's annual impairment assessment of goodwill. Actual
results could differ from those estimates.
Foreign Currency Translation:
Assets and liabilities in foreign currencies are translated into U.S.
dollars at the rate of exchange prevailing at the balance sheet date. Revenue
and expenses are translated at the average rate of exchange for the period.
Gains and losses on foreign currency transactions are included in other
expenses, net. Gains and losses on foreign currency translation are included in
Other Comprehensive (Loss) Income.
Derivative Financial Instruments:
The Company follows Statement of Financial Accounting Standards ("SFAS")
No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. SFAS No. 133, as amended, establishes accounting and reporting
standards for derivative instruments. Specifically, SFAS No. 133 requires an
entity to recognize all derivatives as either assets or liabilities in the
statement of financial position and to measure those instruments at fair value.
Additionally, the fair value adjustments will affect either stockholders' equity
as accumulated other comprehensive income or net (loss) income depending on
whether the derivative instrument qualifies as a hedge for accounting purposes
and, if so, the nature of the hedging activity.
In the normal course of business, the Company uses a variety of derivative
financial instruments primarily to manage currency exchange rate and interest
rate risk. All derivatives are recognized on the balance sheet at fair value and
are generally reported in accrued liabilities. To qualify for hedge accounting,
the instruments must be effective in reducing the risk exposure that they are
designed to hedge. For instruments that are associated with the hedge of an
anticipated transaction, hedge effectiveness criteria also require that it be
probable that the underlying transaction will occur. Instruments that meet
established accounting criteria are formally designated as hedges at the
inception of the contract. These criteria demonstrate that the derivative is
expected to be highly effective at offsetting changes in fair value of the
underlying exposure both at inception of the hedging relationship and on an
ongoing basis. The assessment for effectiveness is formally documented at hedge
inception and reviewed at least quarterly throughout the designated hedge
period.
The Company uses interest rate swap agreements to reduce the impact of
interest rate changes on its debt. The interest rate swap agreements involve the
exchange of variable for fixed rate interest payments without the exchange of
the underlying notional amount.
F-11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents:
The Company considers all highly liquid debt instruments purchased with an
initial maturity of three months or less to be 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
$8,674 and $4,921 at January 31, 2005 and 2004, respectively.
Revenue Recognition:
The Company recognizes revenue when the earnings process is complete. This
occurs when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on the Company's experience. Amounts
charged to customers for shipping and handling are classified as revenue. The
Company accounts for sales rebates as a reduction in revenue at the time revenue
is recorded.
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 January 31, 2005 and 2004.
Years Ended January 31, 2005 2004
========================================================================================================================
Trade receivables $ 72,680 $ 45,396
Notes receivables 500 2,323
Other 2,459 3,595
Allowance for doubtful accounts (2,018) (1,476)
- ------------------------------------------------------------------------------------------------------------------------
Total receivables $ 73,621 $ 49,838
========================================================================================================================
Following are the changes in the allowance for doubtful accounts during the periods ended:
Years Ended January 31, 2005 2004
========================================================================================================================
Balance at beginning of period $ 1,476 $ 1,906
Additions 56 --
Write-offs net of recoveries (241) (430)
Opening balance sheet of acquired companies 727 --
- ------------------------------------------------------------------------------------------------------------------------
Balance at end of period $ 2,018 $ 1,476
========================================================================================================================
Inventories:
Inventories are stated at the lower of cost or net realizable value. Cost
is determined by the last-in, first-out ("LIFO") method for financial statement
and federal income tax purposes. The Company adjusts its inventory reserves
based upon assumptions of future demand and market conditions.
F-12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property, Plant and Equipment:
Property, plant and equipment acquired as part of a business combination
are recorded at the then fair market value. Property, plant and equipment
acquired subsequent to a business combination are recorded at cost or fair
market value. Property, plant and equipment, including capital leases, are
depreciated on the straight-line method for financial reporting purposes over
estimated useful lives which generally range from 3 to 10 years for machinery
and equipment, and 10 to 40 years for buildings and improvements. The Company
capitalizes interest on borrowings during the active construction period of
major capital projects. Capitalized interest is added to the cost of the
underlying assets and is depreciated over the useful lives of the assets.
The cost of maintenance and repairs is charged to expense as incurred.
Renewals and betterments are capitalized. Upon retirement or other disposition
of items of property, plant and equipment, the cost of the item and related
accumulated depreciation are removed from the accounts and any gain or loss is
included in operations.
The Company capitalizes purchased software, including certain costs
associated with its installation. The cost of software capitalized is amortized
over its estimated useful life, generally 3 to 5 years, using the straight-line
method.
Identifiable Intangible Assets, Net:
Acquisition-related intangible assets are amortized on a straight-line
basis over periods ranging from 5 to 25 years. Intellectual property assets are
amortized over the periods of benefit, ranging from 2 to 11 years, on a
straight-line basis. All identifiable intangible assets are classified within
intangible and other assets, net on the balance sheet.
Long-Lived Assets:
The Company follows SFAS No. 144, "Accounting for Impairment or Disposal
of Long-Lived Assets", which requires periodic evaluation of the recoverability
of the carrying amount of long-lived assets (including property, plant and
equipment, and intangible assets with determinable lives) whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be fully recoverable. Events or changes in circumstances are evaluated based on
a number of factors including operating results, business plans and forecasts,
general and industry trends and, economic projections and anticipated cash
flows. An impairment is assessed when the undiscounted expected future cash
flows derived from an asset are less than its carrying amount. Impairment losses
are measured as the amount by which the carrying value of an asset exceeds its
fair value and are recognized in earnings. The Company also continually
evaluates the estimated useful lives of all long-lived assets and periodically
revises such estimates based on current events (see "Note 5: Property, Plant and
Equipment").
F-13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill:
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill and other "indefinite-lived"
assets are not amortized and are subject to the impairment rules of SFAS No.
142, "Goodwill and Other Intangible Assets," which the Company adopted on
February 1, 2002. Goodwill is tested for impairment on an annual basis or upon
the occurrence of certain circumstances or events. The Company determines the
fair value of its reporting units using a combination of financial projections
and discounted cash flow techniques adjusted for risk characteristics, also
giving consideration to the Company's overall market capitalization. The fair
value of the reporting units is compared to the carrying value of the reporting
units to determine if an impairment loss should be calculated. If the book value
of a reporting unit exceeds the fair value of the reporting unit, an impairment
loss is indicated. The loss is calculated by comparing the implied fair value of
the goodwill to the book value of the goodwill. If the book value of the
goodwill exceeds the fair value of the goodwill, an impairment loss is recorded.
The implied fair value of goodwill is determined by subtracting the fair value
of the identifiable assets of a reporting unit from the fair value of the
reporting unit. The Company completed its annual impairment review during the
fourth quarter of fiscal year 2005 and found that an impairment existed in the
Power Electronics Division as of January 31, 2005 (see "Note 3: Goodwill and
Identifiable Intangible Assets"). The Company completed its annual impairment
review during the fourth quarter of fiscal year 2004 and found that no
impairment existed as of January 31, 2004. The Company completed its annual
impairment review during the fourth quarter of fiscal year 2003 and recorded an
impairment of $489 in the Motive Power Division. No impairment to goodwill
existed in any other divisions as of January 31, 2003.
Other Current Liabilities:
Accrued worker's compensation of $3,008 and $3,266 is included in other
current liabilities as of January 31, 2005 and 2004, respectively.
Other Liabilities:
The Company's joint venture received $15,547 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.
Environmental Matters:
Environmental expenditures that relate to current operations are expensed
or capitalized as appropriate. Expenditures that relate to an existing condition
caused by past operations, and that do not contribute to current or future
revenue generation, are also expensed. The Company records liabilities on an
undiscounted basis for environmental costs when environmental assessments and/or
remedial efforts are probable and the costs can be reasonably estimated. The
liability for future environmental remediation costs is evaluated on a quarterly
basis by management.
Research and Development:
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development costs.
F-14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income Taxes:
The Company follows SFAS No. 109, "Accounting for Income Taxes," which
requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the financial
statements or tax returns using tax rates in effect for the year in which the
differences are expected to reverse.
Net (Loss) Income per Share:
Net (loss) income per common share for the fiscal years ended January 31,
2005, 2004 and 2003, is based on the weighted-average number of shares of Common
Stock outstanding. Net (loss) income per common 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:
Years Ended January 31, 2005 2004 2003
============================================================================================================
Weighted-average shares of common stock 25,349,488 25,536,628 25,818,024
Assumed conversion of stock options, net of shares assumed reacquired -- 195,333 207,155
- ------------------------------------------------------------------------------------------------------------
Weighted-average common shares - diluted 25,349,488 25,731,961 26,025,179
============================================================================================================
During the years ended January 31, 2004 and 2003, the Company had
1,001,762 and 1,176,034, respectively, outstanding stock options that were
excluded from the calculation of diluted earnings per share because their
inclusion would have been anti-dilutive. These stock options could be dilutive
in the future. Due to a net loss in fiscal year 2005, 134,295 of dilutive
securities issuable in connection with stock plans have been excluded from the
diluted loss per share calculation because their effect would reduce the loss
per share.
F-15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock-Based Compensation Plans:
Under APB No. 25, if the exercise price of the Company's employee stock
options equals or exceeds 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 net (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.
Years Ended January 31, 2005 2004 2003
=========================================================================================================
Net (loss) income - as reported $(59,493) $14,891 $19,292
Deduct: Total stock-based employee compensation expense determined under
fair value based method for all awards, net of related tax effect 3,790 3,382 4,259
- ---------------------------------------------------------------------------------------------------------
Net (loss) income - pro forma $(63,283) $11,509 $15,033
=========================================================================================================
Net (loss) income per common share - basic - as reported $ (2.35) $ 0.58 $ 0.75
Net (loss) income per common share - basic - pro forma $ (2.50) $ 0.45 $ 0.58
Net (loss) income per common share - diluted - as reported $ (2.35) $ 0.58 $ 0.74
Net (loss) income per common share - diluted - pro forma $ (2.50) $ 0.45 $ 0.58
Weighted-average fair value of options granted during the year $ 9.05 $ 7.79 $ 9.30
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of SFAS No.
123. The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 2005, 2004 and 2003:
Years Ended January 31, 2005 2004 2003
================================================================================
Risk-free interest rate 3.07% 2.80% 4.42%
Expected dividend yield 0.30% 0.34% 0.27%
Expected volatility factor 0.547 0.537 0.477
Weighted-average expected life 5.00 years 5.00 years 5.00 years
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, the existing
models may not provide a reliable single measure of the fair value of employee
stock options.
On March 1, 2005, the Company's Compensation Committee authorized the
vesting of all outstanding non-vested options then held by employees of the
Company and any of its subsidiaries, which were granted by the Corporation under
the 1996 and 1998 Stock Option Plans. In accordance with SFAS No. 123R, which is
effective for the first annual period after December 15, 2005, the Company will
be required to apply the expense recognition provisions under SFAS No. 123R
beginning February 1, 2006. The reason that the Company accelerated the vesting
of the identified stock options was to reduce the Company's compensation charge
in periods subsequent to adoption of SFAS No. 123R.
F-16
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New Accounting Pronouncements:
In November 2004, the Financial Accounting Standards Board ("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 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 operations, financial position or cash flows.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share-Based Payment" (SFAS No. 123R), which replaces SFAS No. 123 and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This
SFAS No. 123R requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the financial statements based on
their fair values beginning with the first annual period beginning after
December 15, 2005. The pro forma disclosures previously permitted under SFAS No.
123 no longer will be an alternative to financial statement recognition. The
Company is required to adopt SFAS No. 123R in the first quarter of fiscal year
2007. SFAS No. 123R permits public companies to adopt these requirements using
one of two methods:
o A "modified prospective" method in which compensation cost is
recognized beginning with the effective date (a) based on the
requirements of SFAS No. 123R for all share-based payments granted
after the effective date and (b) based on the requirements of SFAS
No. 123 for all awards granted to employees prior to the effective
date of SFAS No. 123R that remain unvested on the effective date.
o A "modified retrospective" method which includes the requirements of
the modified prospective method described above, but also permits
entities to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures either (a) all
prior periods presented or (b) prior interim periods of the year of
adoption.
The Company is evaluating the impact of adoption of the provisions of SFAS
No. 123R. The Company currently expects to apply the provisions of this SFAS No.
123R utilizing the modified prospective method. In anticipation of the
implementation of SFAS No. 123R, the Company has accelerated the vesting of all
stock options granted under the 1996 and 1998 Stock Option Plans as of March 1,
2005.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions." SFAS No. 153 eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in paragraph 21 (b) of
APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it
with an exception for exchanges that do not have commercial substance. SFAS No.
153 specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for periods beginning after June 15, 2005.
Adoption is not expected to have a material impact on the Company's consolidated
operations, financial position or cash flows.
F-17
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
2. 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. 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 an approximately $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 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, trade 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 research and development expense of this amount in the
year ended January 31, 2005. The acquisition was funded with the Company's
expanded revolving credit facility.
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 $1,050, 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 appraisal of the acquired CPS
tangible and intangible assets included technology of $3,760 with a weighted
average 5-year expected useful life, customer relationships of $18,500 with a
20-year expected useful life, and acquired in-process research and development
of $340, which lastly, resulted in a charge to research and development expense
of this amount in the year ended January 31, 2005. This acquisition was funded
with the Company's expanded revolving credit facility.
For the in-process research and development acquired in the Datel and CPS
acquisitions, the technological feasibility of the in-process technology has not
yet been established and the technology has no alternate future use.
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.
F-18
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
2. ACQUISITIONS (continued)
The three acquisitions referred to above are included in the Power
Electronics Division for reporting purposes. The purchase price for these
acquisitions was allocated as follows:
Amount
===============================================================================
Assets:
Accounts receivable $ 26,144
Inventories 28,433
Prepaid assets and other current assets 738
Deferred income taxes 1,731
Property, plant and equipment 18,190
Identifiable intangible assets 44,989
Goodwill 48,885
Other non-current assets 461
- -------------------------------------------------------------------------------
Total assets 169,571
- -------------------------------------------------------------------------------
Liabilities:
Short-term debt (1,355)
Accounts payable (12,134)
Accrued liabilities and other current liabilities (5,607)
Income taxes, net (431)
Other current liabilities (3,351)
Deferred income taxes (11,587)
Other long-term liabilities (394)
Long-term debt (7,063)
- -------------------------------------------------------------------------------
Total liabilities (41,922)
- -------------------------------------------------------------------------------
In-process research and development 780
- -------------------------------------------------------------------------------
Total purchase price $ 128,429
===============================================================================
On September 25, 2003, the Company and its wholly owned Mexican
subsidiary, C&D Technologies Reynosa, S. de R.L. de C.V., acquired from
Matsushita Battery Industrial Corporation of America and its Mexican subsidiary,
Matsushita Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot
facility in Reynosa, Mexico, and the equipment in that facility historically
used for the manufacture of large, valve regulated lead acid batteries ("VRLA
batteries") for standby power applications. In addition, the Company entered
into a worldwide technology license agreement with Matsushita Battery Industrial
Co. Ltd. of Japan for selected patents and know-how relating to the
manufacturing technology for the aforementioned products. The cost of this
acquisition, including the technology agreement, was approximately $13,900 plus
$1,000 of acquisition related costs. The Company is using and intends to use the
facility for the manufacture of batteries.
The results of operations of these businesses are included in the
Company's consolidated financial statements from their respective dates of
acquisition.
The Company funded the foregoing transaction with the Company's working
capital funds, and its existing credit agreement. Additionally, $2,800 of the
cost of the technology agreement was paid in November 2004 and was recorded in
other current liabilities in the consolidated balance sheet as of January 31,
2004.
The allocation of the purchase price resulted in identifiable intangible
assets of $3,936, which are being amortized on a straight-line basis over ten
years. The Company's Reynosa, Mexico, facility produces product for both the
Standby Power and Motive Power divisions.
F-19
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
2. ACQUISITIONS (continued)
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) (Unaudited)
Years Ended January 31, 2005 2004
===============================================================================
Net sales $ 515,011 $ 478,597
Net (loss) income $ (72,244) $ 14,677
Net (loss) income per common share - basic $ (2.85) $ 0.57
Net (loss) income per common share - diluted $ (2.85) $ 0.57
The pro forma net income includes the following significant pre-tax
charges incurred by CPS prior to the acquisition in the year ended January 31,
2005:
Year Ended January 31, 2005
================================================================================
Accrual for inventory obsolescence $ 8,460
Severance and related benefits 2,846
Other costs 1,480
- --------------------------------------------------------------------------------
Total $ 12,786
================================================================================
The pro forma net income includes a gain of $9,200 related to the
forgiveness of a Datel loan in the year ended January 31, 2004.
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.
Pro forma amounts are not presented for the year ended January 31, 2004,
related to the September 25, 2003, Reynosa, Mexico, acquisition, as the
acquisition did not have a material effect on the Company's results of
operations or financial condition due to the insignificant level of operations
during the approximately eight month period ended September 25, 2003, at the
Reynosa facility.
F-20
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS
Goodwill:
During the year ended January 31, 2005, the Company recorded $10,024,
$28,627 and $10,234 in goodwill in connection with the Celab, Datel and CPS
acquisitions, respectively. During the year ended January 31, 2004, no goodwill
was acquired. Goodwill by reportable segment was adjusted as follows:
Standby Power Motive
Power* Electronics Power Total
============================================================================================
Goodwill, January 31, 2003 $ 59,514 $ 55,461 $ -- $ 114,975
Effect of exchange rate changes on goodwill 148 5,292 -- 5,440
- --------------------------------------------------------------------------------------------
Goodwill, January 31, 2004 $ 59,662 $ 60,753 $ -- $ 120,415
Goodwill acquired -- 48,885 -- 48,885
Effect of exchange rate changes on goodwill 49 2,131 -- 2,180
Impairment of goodwill -- (74,233) -- (74,233)
- --------------------------------------------------------------------------------------------
Goodwill, January 31, 2005 $ 59,711 $ 37,536 $ -- $ 97,247
============================================================================================
* Reclassified for comparative purposes.
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill is tested for impairment on
an annual basis or upon the occurrence of certain circumstances or events. An
impairment review may require a two-step process. The first step of the review
compares the fair value of the reporting units with goodwill against their
carrying values, including goodwill. The Company determines the fair value of
its reporting units using a combination of financial projections and discounted
cash flow techniques adjusted for risk characteristics, also giving
consideration to the Company's overall market capitalization. Based on the
comparison, the carrying value of the Power Electronics reporting unit exceeded
its fair value primarily as a result of lower financial projections, coupled
with publicly available market information related to integration risks
associated with the fiscal year 2005 acquisitions within the Power Electronics
Division. Accordingly, the Company performed the second step of the test,
comparing the implied fair value of the Power Electronics reporting unit's
goodwill with the carrying amount of that goodwill. The Company completed its
annual impairment review with respect to the fourth quarter of fiscal year 2005
and found in connection with its preparation and review of its financial
statements that a pre-tax impairment of $74,233 was required in the Power
Electronics Division as of January 31, 2005. No impairment to goodwill existed
in any other division as of January 31, 2005.
Identifiable Intangible Assets:
The Company completed an impairment review with respect to the fourth
quarter of fiscal year 2005 and found in connection with its preparation and
review of the Company's financial statements that an impairment existed with
respect to certain intellectual property of the Power Electronics Division as of
January 31, 2005, due to a decline in financial projections of certain products.
As a result, the Company recorded a pre-tax non-cash impairment charge of $464
included in research and development expense in fiscal year 2005. During the
year ended January 31, 2004, no acquisition-related intangibles were impaired.
Identifiable intangible assets acquired during the years ended January 31,
2005 and 2004, are summarized as follows:
Weighted- Weighted-
Average Average
Years Ended January 31, 2005 Life 2004 Life
==========================================================================
Trade names $ 2,400 25 $ -- --
Intellectual property 15,012 9 3,936 10
Customer relationships 27,400 20 -- --
Other 177 2 -- --
- -------------------------------------- ---------
Total intangible assets $ 44,989 $ 3,936
====================================== =========
F-21
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
3. GOODWILL AND IDENTIFIABLE INTANGIBLE ASSETS (continued)
Identifiable intangible assets as of January 31, 2005, consisted of the
following:
Gross Accumulated
January 31, 2005 Assets Amortization Net
================================================================================
Trade names $ 20,240 $ (5,333) $ 14,907
Intellectual property 25,501 (7,075) 18,426
Customer relationships 27,400 (569) 26,831
Other 2,013 (695) 1,318
- --------------------------------------------------------------------------------
Total intangible assets $ 75,154 $(13,672) $ 61,482
================================================================================
Identifiable intangible assets as of January 31, 2004, consisted of the
following:
Gross Accumulated
January 31, 2004 Assets Amortization Net
================================================================================
Trade names $ 17,840 $ (4,386) $ 13,454
Intellectual property 10,269 (4,737) 5,532
Other 2,045 (797) 1,248
- --------------------------------------------------------------------------------
Total intangible assets $ 30,154 $ (9,920) $ 20,234
================================================================================
Based on intangibles recorded at January 31, 2005, the annual amortization
expense is expected to be as follows (assuming current exchange rates):
Years Ended January 31, 2006 2007 2008 2009 2010
===============================================================================
Trade names $ 988 $ 988 $ 988 $ 988 $ 988
Intellectual property 2,643 2,439 2,288 2,155 1,907
Customer relationships 1,370 1,370 1,370 1,370 1,370
Other 162 92 27 27 27
- -------------------------------------------------------------------------------
Total intangible assets $5,163 $4,889 $4,673 $4,540 $4,292
===============================================================================
Amortization of identifiable intangibles was $3,423, $2,031 and $1,922 for
the years ended January 31, 2005, 2004 and 2003.
4. INVENTORIES
Inventories, net consisted of the following:
Years Ended January 31, 2005 2004
================================================================================
Raw materials $31,558 $17,961
Work-in-process 13,084 10,667
Finished goods 32,630 18,547
- --------------------------------------------------------------------------------
Total $77,272 $47,175
================================================================================
If the first-in, first-out method of inventory accounting had been used
(which approximates current cost), inventories would have been $82,151 and
$51,214 as of January 31, 2005 and 2004, respectively. During the year ended
January 31, 2004, inventory quantities were reduced resulting in the liquidation
of certain layers carried at cost, which were lower than the cost of current
purchases. The effect of these reductions in 2004 was to decrease the cost of
sales by approximately $32 and to increase net income by $20 or less than $0.01
per share. There was no inventory decrement in the year ended January 31, 2005.
F-22
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
4. INVENTORIES (continued)
The Company reserves for excess and obsolete inventory and adjusts the
reserve based upon assumptions of future demand and market conditions. The
excess and obsolete inventory reserve as of January 31, 2005 and 2004, was
$23,967 and $8,977, respectively. The increase in the excess and obsolete
inventory reserve was primarily the result of opening balance sheet reserves
associated with acquired inventory of the fiscal year 2005 acquisitions. As a
requirement of the seller, whose business model as a third party manufacturer
does not permit the ownership of inventory, the Company was required to purchase
inventory related to the CPS business. At the time of acquisition of CPS, the
Company was aware that a significant portion of the acquired inventory required
excess and obsolete reserves to properly value the inventory at fair market
value.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
Years Ended January 31, 2005 2004
================================================================================
Land $ 5,552 $ 3,637
Buildings and improvements 63,695 49,657
Furniture, fixtures and equipment 235,671 193,313
Construction in progress 6,256 5,892
- --------------------------------------------------------------------------------
311,174 252,499
Less accumulated depreciation 207,044 147,700
- --------------------------------------------------------------------------------
Total $104,130 $104,799
================================================================================
For the years ended January 31, 2005, 2004 and 2003, depreciation charged
to operations, including property under capital leases, amounted to $21,238,
$20,395 and $21,050; maintenance and repair costs expensed totaled $12,536,
$10,367 and $10,075; and capitalized interest amounted to $152, $82 and $135,
respectively.
During the third quarter of fiscal year 2005, the Company substantially
completed the transition of its Motive Power V-Line(R) products and former
Standby Power HD products (now replaced by the MSE and msEndur(TM) products) 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 in the
Consolidated Statement of Operations. The impairment charges were calculated by
identification of excess HD product-related equipment located in Leola,
Pennsylvania, and excess V-Line(R) product related equipment located in
Huguenot, New York, resulting from the move of manufacturing to the Company's
Reynosa, Mexico, facility. The impairment charges also include charges resulting
from the Company's identification of inadequate discounted cash flows to support
the book value of Round Cell equipment in Leola, Pennsylvania, and certain
Motive equipment in Huguenot, New York. In general, older, excess and/or
immovable manufacturing equipment was replaced by more modern production
equipment located in the Company's Reynosa, Mexico, 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, its expected fair value, resulting in a loss of $114.
F-23
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
6. DEBT
Debt consisted of the following:
Years Ended January 31, 2005 2004
===========================================================================================================================
Revolving multi-currency credit facility; maximum commitment of $200,000 and $100,000 at January
31, 2005 and 2004, bearing interest of Prime plus .25% or LIBOR plus 1.75% and Prime or LIBOR
plus 1%, respectively (effective rate on a weighted-average basis, 4.71% as of January 31,
2005, and 2.14% as of January 31, 2004), net of unamortized debt costs of $941 and $380 as of
January 31, 2005, and January 31, 2004, respectively $128,750 $19,620
8.4% mortgage payable to an insurance company in monthly installments of $59 payable through
July 2007 with a final installment of $4,861 due in August 2007 collateralized by the Company's
Mansfield, Massachusetts, manufacturing facility 5,487 --
Obligations under capital leases with interest rates ranging from 8.1% to 9.2% collateralized by
equipment 2,156 --
Other 485 --
- ---------------------------------------------------------------------------------------------------------------------------
Total debt 136,878 19,620
Less current portion 1,874 --
- ---------------------------------------------------------------------------------------------------------------------------
Total long-term portion $135,004 $19,620
===========================================================================================================================
On March 1, 1999, the Company obtained a fully syndicated senior unsecured
agreement comprised of a $100,000 term loan and a $120,000 revolving credit
facility. The term loan was paid in full on April 29, 2003. The revolving credit
agreement, which had a termination date of March 1, 2004, was replaced and fully
substituted by an amended and restated credit agreement on November 20, 2003. At
the Company's request, the amended credit agreement extended the maturity date
to November 20, 2006, and the total availability under the revolver was reduced
from $120,000 to $100,000. The available interest rates were changed to Prime to
Prime plus .50%, or LIBOR plus 1.00% to LIBOR plus 2.00%, depending on a certain
leverage ratio. The previous agreement provided available interest rates between
Prime to Prime plus .25%, or LIBOR plus .75% to LIBOR plus 1.50%, depending on a
certain leverage ratio. The amended agreement required the Company to pay a fee
of .25% to .50% per annum on any unused portion of the revolver, depending on
the Company's leverage ratio. Prior to the amendment, this fee was between .20%
and .30%. During the year ended January 31, 2004, the average fee paid was .21%.
The amended agreement included a letter of credit facility, not to exceed
$15,000 of which $11,842 was available at January 31, 2004.
On June 30, 2004, the Company entered into an amended and restated
revolving credit agreement ("Credit Agreement" or "Facility"), with a maturity
date of June 30, 2009. The financing was arranged by Banc of America Securities
LLC. Under the Credit 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 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% to LIBOR plus 2.25% or Prime, to Prime
plus .75%. The initial loans were 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. The Credit Agreement requires the Company to pay a
fee of .25% to .50% per annum of any unused portion of the Facility, based on
the leverage ratio. During the year ended January 31, 2005, the average fee paid
was .39%.
F-24
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
6. DEBT (continued)
The Credit Agreement includes a letter of credit facility, not to exceed
$25,000 of which $22,238 was available at January 31, 2005. The Credit Agreement
contains certain 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 not in compliance with its leverage ratio covenant at January 31,
2005. The Company obtained a waiver of this violation on February 28, 2005. The
Company entered into the second amendment to the Credit Agreement to modify this
ratio through the remaining term of the agreement. The second amendment requires
that the Company pledge certain assets as collateral on a going forward basis.
The interest rates determined by the Company's leverage ratio were changed as a
result of this second amendment. The rates available to the Company are now
LIBOR plus 1% to LIBOR plus 2.75% or Prime to Prime plus 1.25%. The second
amendment also modifies other provisions of the Credit Agreement such that it
permits the Company to exclude: (i) the write down of up to $85,000 of goodwill
from the minimum net worth covenant calculation, (ii) up to $2,500 in severance
costs in fiscal year 2006 as well as, (iii) all future non cash stock option or
restricted stock expense from certain covenant calculations. Additionally, the
second amendment requires the Company to maintain minimum levels of trailing
earnings before interest, taxes, depreciation and amortization as calculated
quarterly through fiscal year 2006. On April 29, 2005, the Company entered into
the third amendment to the Credit Agreement to correct and revise the
definitional term "Consolidated EBITDA."
The maximum aggregate amounts of loans outstanding under the term loan and
revolving credit facility were $149,778, $43,500 and $72,650 during the years
ended January 31, 2005, 2004 and 2003, respectively. For those years the
outstanding loans under these credit agreements computed on a monthly basis
averaged $80,314, $28,737 and $53,425 at a weighted-average interest rate of
4.64%, 2.00% and 2.60%, respectively.
The revolving credit agreement and the subsequent amended and restated
agreements all include a swingline loan facility not to exceed $10,000.
The Company has $558 of letters of credit facilities with other financial
institutions that do not reduce the Company's availability under its revolving
credit agreement.
The Company also has an uncommitted multi-currency overdraft facility.
This is a senior unsecured demand loan facility, which was originally in the
amount of 22 million British Pounds. This senior facility was reduced to 750
thousand British Pounds at the request of the Company in September 2002. There
was no balance on this facility during fiscal years 2005 and 2004 and the
maximum amount outstanding under this facility was 6.1 million British Pounds
during the year ended 2003. The outstanding loans under this agreement computed
on a monthly average basis averaged 3.4 million British Pounds at a
weighted-average interest rate of 5.05% for the year ended 2003.
As of January 31, 2005, the required minimum annual principal reduction of
long-term debt for each of the next five fiscal years is as follows:
Year Ended January 31, Amount
================================================================================
2006 $ 1,874
2007 1,038
2008 5,216
2009 --
2010 128,750
Thereafter --
- --------------------------------------------------------------------------------
Total $136,878
================================================================================
F-25
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
6. DEBT (continued)
As of January 31, 2005, the future minimum lease payments, including
interest, for capital leases are as follows:
Year Ended January 31, Amount
================================================================================
2006 $1,270
2007 815
2008 272
2009 --
2010 --
Thereafter --
- --------------------------------------------------------------------------------
Total minimum lease payments $2,357
Less amount representing interest 201
- --------------------------------------------------------------------------------
Present value of net minimum lease payments $2,156
================================================================================
7. STOCKHOLDERS' EQUITY
Stock Option Plans:
The Company has three stock option plans: the 1996 Stock Option Plan
reserved 2,000,000 shares of Common Stock; the 1998 Stock Option Plan reserved
3,900,000 shares of Common Stock; and the U.K. Stock Option Plan reserved
500,000 shares of Common Stock; for option grants. In addition, stock can be
granted to the Company's non-employee directors in lieu of their annual retainer
or a portion thereof. Incentive stock options are to be granted at no less than
100% of the fair market value on the date of grant, with a term of no more than
ten years after the date of grant. Nonqualified stock options are to be granted
at such price as the Compensation Committee of the Board of Directors deems
appropriate, with a term of no more than ten years after the date of grant. The
options are exercisable upon vesting as determined by the Compensation Committee
at the time the options are granted. The majority of the stock options
outstanding vest in equal annual installments over a three-year period
commencing one year from the date of the grant. On March 1, 2005, the
Compensation Committee of the Board of Directors of the Company authorized and
approved, effective March 1, 2005, and notwithstanding the terms of any stock
option agreements between the Company and any employee, the vesting of all
outstanding non-vested options then held by employees of the Company, which had
been granted by the Company under the 1996 and 1998 Stock Option Plans.
A summary of stock option activity related to the Company's plans is as
follows:
Beginning Granted Exercised Canceled Ending
Balance During During During Balance
Outstanding Year Year Year Outstanding Exercisable
======================================================================================================================
BALANCE AT
JANUARY 31, 2005
Number of shares 2,741,506 681,702 99,599 191,241 3,132,368 2,018,039
Weighted-average
option price per share $ 21.47 $ 18.60 $ 9.36 $ 23.64 $ 21.10 $ 22.70
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2004
Number of shares 2,501,374 616,297 83,102 293,063 2,741,506 1,703,513
Weighted-average
option price per share $ 23.02 $ 16.32 $ 13.52 $ 26.10 $ 21.47 $ 22.29
- ----------------------------------------------------------------------------------------------------------------------
BALANCE AT
JANUARY 31, 2003
Number of shares 2,155,288 597,725 70,334 181,305 2,501,374 1,461,838
Weighted-average
option price per share $ 23.84 $ 20.20 $ 12.56 $ 27.49 $ 23.02 $ 21.24
F-26
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
7. STOCKHOLDERS' EQUITY (continued)
There were 1,504,554 and 2,004,642 shares available for future grants of
options under the Company's stock option plans as of January 31, 2005 and 2004,
respectively. The following table summarizes information about the stock options
outstanding at January 31, 2005:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------ --------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
============================================================================== ================================
$ 6.00 40,000 1.7 years $ 6.00 40,000 $ 6.00
$ 11.47 - 17.27 901,895 7.0 years $ 15.30 490,323 $ 14.30
$ 18.34 - 26.76 1,754,573 6.9 years $ 20.26 1,051,816 $ 20.96
$ 35.00 - 37.28 373,150 6.1 years $ 35.06 373,150 $ 35.06
$ 48.44 - 55.94 62,750 5.5 years $ 54.54 62,750 $ 54.54
- --------------------------------------------- ------------
Total 3,132,368 6.7 years $ 21.10 2,018,039 $ 22.70
============================================= ============
Rights Plan:
In February 2000, the Company's Board of Directors declared a dividend of
one common stock purchase right (a "Right") for each share of Common Stock
outstanding on March 3, 2000, to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
the Company and Mellon Investor Services LLC, as rights agent. On November 15,
2004, an amendment was signed among the Company, Mellon Investor Services LLC
and the Bank of New York whereby Mellon Investor Services LLC resigned as rights
agent effective as of 12:00 A.M., New York time, November 30, 2004. The Company
appointed the Bank of New York as successor rights agent effective as of 12:01
A.M., New York time, December 1, 2004. Upon the occurrence of certain events,
each Right will entitle the registered holder to purchase from the Company one
one-hundredth of a share of Common Stock at a purchase price of $150 per one
one-hundredth of a share, subject to adjustment, as stated in the Rights
Agreement. Upon the occurrence of certain events involving a hostile takeover of
the Company, unless the Company's Board of Directors acts otherwise, each holder
of a Right, other than Rights beneficially owned by the acquiring company, will
thereafter have the right to receive upon exercise: (i) that number of shares of
the Company's common stock having a market value equal to two times the purchase
price of the Right or (ii) that number of shares of common stock of the
acquiring company that at the time of the transaction has a market value of two
times the exercise price of the Right.
8. INCOME TAXES
The components of (loss) income before income taxes and minority interest
were as follows:
Years Ended January 31, 2005 2004 2003
================================================================================================
Domestic $(41,704) $20,794 $23,638
Foreign (39,083) 2,975 5,159
- ------------------------------------------------------------------------------------------------
(Loss) income before income taxes and minority interest $(80,787) $23,769 $28,797
================================================================================================
F-27
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
8. INCOME TAXES (continued)
The (benefit) provisions for income taxes as shown in the accompanying
consolidated statements of operations consisted of the following:
Years Ended January 31, 2005 2004 2003
===============================================================================
Current:
Federal $ (337) $ 6,261 $ 330
State (46) 308 (982)
Foreign 1,213 574 1,901
- -------------------------------------------------------------------------------
830 7,143 1,249
- -------------------------------------------------------------------------------
Deferred:
Federal (21,352) 1,701 7,983
State (1,134) 79 182
Foreign 367 (128) --
- -------------------------------------------------------------------------------
(22,119) 1,652 8,165
- -------------------------------------------------------------------------------
Total $(21,289) $ 8,795 $ 9,414
===============================================================================
The components of the deferred tax asset and liability as of January 31,
2005 and 2004, were as follows:
Years Ended January 31, 2005 2004
===============================================================================
ASSETS
Vacation and compensation accruals $ 4,712 $ 4,044
Bad debt, inventory and return allowances 5,734 3,752
Warranty reserves 3,109 3,668
Postretirement benefits 1,697 1,282
State net operating losses 671 754
Derivatives 258 594
Foreign tax credits 1,004 802
Environmental reserves 2,056 994
Other accruals 1,255 873
Unrepatriated earnings 10,461 --
- -------------------------------------------------------------------------------
Total deferred tax assets 30,957 16,763
- -------------------------------------------------------------------------------
LIABILITIES
Depreciation and amortization (16,849) (13,246)
Pension obligation (6,988) (5,893)
Cumulative translation adjustment (3,030) (2,715)
Unrepatriated earnings -- (825)
- -------------------------------------------------------------------------------
Total deferred tax liability (26,867) (22,679)
- -------------------------------------------------------------------------------
Valuation allowance* (1,538) (1,097)
- -------------------------------------------------------------------------------
Net deferred tax asset (liability) $ 2,552 $ (7,013)
===============================================================================
* As of January 31, 2005, the balance in the deferred tax asset for
unrepatriated earnings includes $2,219 related to U.S. foreign tax credits
for unremitted earnings of a controlled foreign subsidiary. The Company
believes that some of these assets will not be realized and, therefore, a
valuation allowance of $1,538 has been recorded related to those items.
The increase in the valuation allowance from $1,097 to $1,538 is due to an
increase in foreign tax credits for unremitted earnings of a controlled
foreign subsidiary of $855, net of the reduction of the valuation
allowance of $414 related to a deferred tax asset for unremitted earnings,
which was written off in the current year. Realization of the Company's
other deferred tax assets is dependent on future taxable income. The
Company believes that it is more likely than not such assets will be
realized.
As of January 31, 2005, the Company had state net operating loss
carryforwards of approximately $14,721, foreign tax credit carryforwards of
$1,004 and foreign net operating loss carryforwards of $592. These losses and
credits begin to expire in varying amounts from January 31, 2008 to January 31,
2025.
F-28
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
8. INCOME TAXES (continued)
Reconciliations of the (benefit) provisions for income taxes at the U.S.
statutory rate to the (benefit) provisions for income taxes at the effective tax
rates for the years ended January 31, 2005, 2004 and 2003, respectively, are as
follows:
Years Ended January 31, 2005 2004 2003*
============================================================================================================
U.S. statutory income tax $(28,276) $8,319 $ 10,079
Effect of:
State tax, net of federal income tax benefit (1,018) 317 258
Resolution of state tax audits -- -- (1,100)
Tax effect of foreign operations 791 69 256
In-process research and development 154 -- --
Goodwill impairment 7,146 -- 171
Other (86) 90 (250)
- ------------------------------------------------------------------------------------------------------------
Total (benefit) provision for income taxes at the effective rate $(21,289) $8,795 $ 9,414
============================================================================================================
* Reclassified for comparative purposes.
9. COMMITMENTS AND CONTINGENCIES
(A) Operating Leases:
The Company leases certain manufacturing and office facilities and certain
equipment under operating lease agreements. Certain leases contain renewal
options and some have purchase options and generally provide that the Company
shall pay for insurance, taxes and maintenance. As of January 31, 2005, the
Company had future minimum annual lease obligations, net of sublease income,
under leases with noncancellable lease terms in excess of one year as follows:
Years Ended January 31, Amount
================================================================================
2006 $ 4,827
2007 3,820
2008 3,288
2009 2,857
2010 2,613
Thereafter 5,960
- --------------------------------------------------------------------------------
Total $23,365
================================================================================
Total rent expense, net of sublease income, for all operating leases for
the years ended January 31, 2005, 2004 and 2003, was $4,957, $3,700 and $3,903,
respectively.
(B) 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. The parties are in
the process of negotiating a resolution of the matter, failing which we intend
to aggressively defend the matter.
F-29
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
9. COMMITMENTS AND CONTINGENCIES (continued)
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
prorata increase in the liabilities of the other PRPs, including the Company,
for which the Company's allocated share rose from 5.25% to 7.79%.
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. NL Industries, Inc. ("NL") and
Norfolk Southern Railway Company have been conducting a removal action on the
site, preliminary to remediation. The Company, along with other PRPs, is
currently in negotiations with NL with respect to this site regarding its share
of the allocated liability, which the Company expects will not have a material
adverse effect on business, financial condition or results of operations.
F-30
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
9. COMMITMENTS AND CONTINGENCIES (continued)
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' attempts to resolve the matter through mediation were not
successful; therefore, the Company is aggressively pursing available legal
remedies. Should the parties fail to reach a negotiated 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 and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, 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
ongoing cleanup project and (iii) environmental liabilities for any new claims
made after the fifth anniversary of the closing, i.e. March 2004, that arise
from migration from a pre-closing condition at the Milwaukee facility to
locations other than the Milwaukee facility, but specifically excluding
liabilities relating to pre-closing offsite disposal. JCI retained the
environmental liability for the off-site assessment and remediation of lead. In
March 2004, the Company entered into an agreement with JCI to continue to share
responsibility as set forth in the original purchase agreement. The Company is
currently in negotiation with JCI regarding the allocation of costs for
assessment and remediation of certain off-site chlorinated volatile organic
compounds ("CVOCs") in groundwater.
In January 1999, the Company received notification from the 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. These charges were
included in cost of sales.
In February 2005, the Company received a verbal request from EPA to
conduct exploratory testing to determine if the historical municipal landfill
located on the Company's Attica, Indiana, property is the source of elevated
levels of trichloroethylene detected in two city wells downgradient of the
Company's property. No formal claim has been made against the Company. The scope
of this potential exposure is not defined at this time. The Company has retained
environmental counsel and is fully assessing the matter. At this time, the
Company does not believe that this matter will have a material adverse effect on
the Company's business, financial condition or results of operations.
F-31
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
9. COMMITMENTS AND CONTINGENCIES (continued)
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 January 31, 2005, accrued environmental reserves totaled
$6,570, consisting of $2,362 in other current liabilities and $4,208 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.
(C) Purchase Commitments:
Periodically the Company enters into purchase commitments pertaining to
the purchase of certain raw materials with various suppliers. Under a
manufacturing supply agreement, the Company is committed to purchase
approximately $1,695 of inventory as of January 31, 2005. No other significant
purchase commitments existed at January 31, 2005, and none are expected to
exceed usage requirements.
10. MAJOR CUSTOMER
No single customer of the Company amounted to 10% or more of the Company's
consolidated net sales for the years ended January 31, 2005, 2004 and 2003.
11. CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to potential concentration
of credit risk consist principally of trade receivables and temporary cash
investments. The Company places its temporary cash investments with various
financial institutions and, generally, limits the amount of credit exposure to
any one financial institution. Concentrations of credit risk with respect to
trade receivables are limited by a large customer base and its geographic
dispersion. The Company performs ongoing credit evaluations of its customers'
financial condition and requires collateral, such as letters of credit, in
certain circumstances.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and cash equivalents - the carrying amount approximates fair value
because of the short maturity of these instruments.
Debt (excluding capital lease obligations) - the carrying value of the
Company's long-term debt, including the current portion, approximates fair value
based on the incremental borrowing rates currently available to the Company for
loans with similar terms and maturity.
Hedging instruments - the estimated fair value of the interest rate swaps
and foreign exchange contracts are based on market prices or current rates
offered for interest rate swaps and foreign exchange contracts with similar
terms and maturities. The ultimate amounts paid or received under these interest
rate swaps and foreign currency contracts, however, depend on future interest
rates and exchange rates.
F-32
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The estimated fair values of the Company's financial instruments at
January 31, 2005 and 2004, were as follows:
2005 2004
---------------------------- ----------------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
==================================================================================================================
Cash and cash equivalents $ 26,855 $ 26,855 $ 12,306 $ 12,306
Debt (excluding capital lease obligations) $ 134,722 $ 134,722 $ 19,620 $ 19,620
The fair value of accounts receivable, accounts payable and accrued
liabilities consistently approximate the carrying value due to the relatively
short maturity of these instruments and are excluded from the above table.
The Company applies hedge accounting in accordance with SFAS No. 133 as
amended, 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,
which 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 $78
and $(923) as of January 31, 2005 and 2004. Changes in the fair value of these
currency forward contracts are recorded in other expense, net.
Changes in the value of a derivative that is designated as a fair value
hedge, along with offsetting changes in fair value of the underlying hedged
exposure, are recorded in operations each period. Changes in the fair value of a
derivative that is designated as a cash flow hedge are recorded in accumulated
other comprehensive income. When operations are affected by the variability of
the underlying cash flow, the applicable amount of the gain or loss from the
derivative that is deferred in stockholders' equity is released to operations.
When the terms of an underlying transaction are modified, or when the underlying
hedged item ceases to exist, all changes in the fair value of the instrument are
included in operations each period until the instrument matures. Derivatives
that are not designated as hedges, as well as the portion of a derivative
excluded from the effectiveness assessment and changes in the value of the
derivatives which do not offset the underlying hedged item throughout the
designated hedge period, are recorded in other expense, net each period.
In the normal course of business, the Company is exposed to the impact of
interest rate changes and foreign currency fluctuations. The Company limits
these risks by following established risk management policies and procedures
including the use of derivatives and, where cost-effective, financing debt in
the currencies in which the assets are denominated. For interest rate exposures,
derivatives are used to manage the Company's exposure to fluctuations in
interest rates on the Company's underlying variable rate debt instruments. The
Company utilizes separate swap transactions rather than fixed rate obligations
to take advantage of lower borrowing costs associated with floating rate debt
while also eliminating possible risk related to refinancing in the fixed rate
market. For currency exposures, derivatives are used to limit the effects of
foreign exchange rate fluctuations on financial results.
The Company does not use derivatives for speculative purposes, nor is it a
party to leveraged derivatives. Further, the Company has a policy of only
entering into contracts with major financial institutions. When viewed in
conjunction with the underlying and offsetting exposure that the derivatives are
designed to hedge, the Company has not sustained a material loss from these
instruments nor does it anticipate any material adverse effect on its net income
or financial position in the future from the use of derivatives.
F-33
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS (continued)
The following table includes all interest rate swaps as of January 31,
2005 and 2004. These interest rate swaps are designated as cash flow hedges and,
therefore, changes in the fair value, net of tax, are recorded in accumulated
other comprehensive income.
Notional Origination Maturity Fixed Interest Variable Interest Fair Value at Fair Value at
Amount Date Date Rate Paid Rate Received January 31, 2005 January 31, 2004
=======================================================================================================================
20,000 04/11/01 04/11/06 5.56% LIBOR $ (641) $ (1,486)
10,000 08/02/04 08/02/07 3.70% LIBOR (3) --
---------------------------
$ (644) $ (1,486)
===========================
Based on the fair value of the interest rate swap as of January 31, 2005
and the maturity dates of this swap, the Company expects to reclassify a net of
tax loss of approximately $325 of the amount from accumulated other
comprehensive income to interest expense in the next 12 months.
The Company had foreign exchange contracts on hand for delivery of
Canadian Dollars in the amount of $3,281 and $2,248 as of January 31, 2005 and
January 31, 2004, respectively.
The Company had foreign exchange contracts on hand for delivery of Euros
in the amount of $901 and $735 as of January 31, 2005 and January 31, 2004,
respectively.
The Company had foreign exchange contracts on hand that were purchased in
Japanese Yen for the delivery of U.S. Dollars in the amount of $1,350 as of
January 31, 2005.
The Company had a foreign exchange contract on hand that was purchased in
British Pounds for the delivery of U.S. Dollars in the amount of $706 as of
January 31, 2005. The Company had foreign exchange contracts on hand for the
delivery of British Pounds in the amount of $22,751 as of January, 31, 2004.
The Company had a foreign exchange contract on hand for the delivery of
Mexican Pesos in the amount of $806 as of January 31, 2004.
13. EMPLOYEE BENEFIT PLANS
(A) The Company has various noncontributory defined benefit pension plans,
which cover certain employees in the United States. Certain employees of the
Japanese subsidiary of Datel, Inc., acquired on June 30, 2004, are also covered
by a defined benefit pension plan.
The Company's funding policy for the domestic plans is to contribute
annually an amount that can be deducted for federal income tax purposes using a
different actuarial cost method and different assumptions than those used for
financial reporting purposes. Pension benefits for the Company's defined benefit
plans are generally based on employees' years of service and qualifying
compensation during the years of employment. Plan assets are invested in
commingled trust funds consisting primarily of equity and U.S. Government
securities. The Company's funding policy for the Japanese plan is to make
contributions in accordance with Japanese laws and regulations. The Japanese
plan is qualified under Japanese income tax regulations, and the related
contributions and premiums are tax deductible.
The Company also provides certain health care and life insurance benefits
for retired employees who meet certain service requirements ("postretirement
benefits") through two plans. One of these plans was amended to increase the
life insurance benefits for retirees.
F-34
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
13. EMPLOYEE BENEFIT PLANS (continued)
Benefit payments for the Company's domestic and foreign pension and post
retirement plans are expected to be paid as follows:
Pension Postretirement
Years Ended January 31, Plans Plans
===============================================================================
2006 $ 2,963 $ 246
2007 3,207 257
2008 3,340 262
2009 3,589 290
2010 3,802 333
2011 - 2015 23,983 2,100
F-35
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
13. EMPLOYEE BENEFIT PLANS (continued)
The tables that follow provide a reconciliation of the changes in the
plans' benefit obligations and fair value of assets for the years ended January
31, 2005 and 2004, and a statement of the funded status as of January 31, 2005
and 2004. The measurement dates are December 31, 2004 and 2003.
Postretirement
Pension Benefits Benefits
---------------------- --------------------
2005 2004 2005 2004
==========================================================================================================================
Change in benefit obligation:
Benefit obligation at beginning of year $ 66,374 $ 57,460 $ 4,322 $ 4,067
Service cost 1,759 1,513 158 172
Interest cost 3,912 3,823 207 252
Plan amendments -- -- 805 --
Special termination benefits 3 -- -- --
Actuarial loss (gain) 2,077 6,297 (682) 36
Acquisition 1,390 -- -- --
Exchange rate adjustment 43 -- -- --
Benefits paid (2,906) (2,719) (256) (205)
- --------------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year $ 72,652 $ 66,374 $ 4,554 $ 4,322
==========================================================================================================================
Change in plan assets:
Fair value of plan assets at beginning of year $ 58,676 $ 49,694 $ -- $ --
Actual return on plan assets 3,322 8,725 -- --
Acquisition 1,009 -- -- --
Employer contributions 4,422 2,976 256 205
Exchange rate adjustment 28 -- -- --
Benefits paid (2,906) (2,719) (256) (205)
- --------------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year $ 64,551 $ 58,676 $ -- $ --
==========================================================================================================================
Reconciliation of funded status:
Funded status $ (8,101) $ (7,698) $(4,554) $(4,322)
Unrecognized actuarial loss (gain) 24,679 22,523 (269) 410
Unrecognized prior service cost 125 143 539 655
Contributions made after measurement date
but before the end of the fiscal year 4 -- -- --
- --------------------------------------------------------------------------------------------------------------------------
Net amount recognized
at measurement date at end of year $ 16,707 $ 14,968 $(4,284) $(3,257)
==========================================================================================================================
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 20,875 $ 18,583 $ -- $ --
Contributions made after measurement date
but before the end of the fiscal year 4 -- -- --
Accrued benefit liability (4,172) (3,615) (4,284) (3,257)
- --------------------------------------------------------------------------------------------------------------------------
Net amount recognized at end of fiscal year* $ 16,707 $ 14,968 $(4,284) $(3,257)
==========================================================================================================================
* Prepaid pension cost is included in intangible and other assets, net and
the accrued benefit liability is included in other liabilities.
F-36
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
13. EMPLOYEE BENEFIT PLANS (continued)
Pension Benefits Postretirement Benefits
------------------------------------ ------------------------------------
2005 2004 2003 2005 2004 2003
===========================================================================================================================
Components of net periodic benefit cost:
Service cost $ 1,759 $ 1,513 $ 1,573 $ 158 $ 172 $ 152
Interest cost 3,912 3,823 3,750 207 252 269
Expected return on plan assets (4,886) (4,122) (3,618) -- -- --
Amortization of prior service costs 18 19 20 920 115 115
Recognized actuarial loss/(gain) 1,488 1,409 443 (2) (3) --
Special termination benefit 3 -- -- -- -- --
Settlement loss -- -- 241 -- -- --
- ---------------------------------------------------------------------------------------------------------------------------
Net periodic benefit cost $ 2,294 $ 2,642 $ 2,409 $ 1,283 $ 536 $ 536
===========================================================================================================================
Weighted-average assumptions
used to determine benefit
obligation as of January 31*:
Discount rate 5.67% 6.00% 7.00% 5.75% 6.00% 7.00%
Rate of compensation increase*** 4.36% 4.00-4.95% 4.00-4.95% N/A N/A N/A
Weighted-average assumptions
used to determine net cost for
the periods ended January 31**:
Discount rate 5.92% 7.00% 7.50% 6.00% 7.00% 7.50%
Expected long-term
rate of return on plan assets 8.36% 8.50% 9.00% N/A N/A N/A
Rate of compensation increase*** 4.39% 4.00-4.95% 4.00-5.03% 4.45% N/A N/A
* Determined as of the end of the year.
** Determined as of the beginning of the year.
*** Rate relates to certain employees. Some covered employees have benefits
unrelated to rate of pay.
The Company considered various corporate bond indices rated "Aa" or higher
with a duration that is consistent with the plans' liabilities to determine the
discount rates at each measurement date. The change in the discount rate is
consistent with the changes in the benchmarks considered for the same periods.
To develop the expected long-term rate of return on plan assets
assumption, the Company considered the historical returns and the future
expectations for returns for each asset class, as well as the target asset
allocation of the pension portfolio and the payment of plan expenses from the
pension trust. This resulted in the selection of the 8.5% expected long-term
rate of return on plan assets assumption for domestic plans and .5% for the
Japanese plan.
The Company sponsors two postretirement benefit plans for certain
employees in the United States; the Company contributions to one of them are
fixed so there is no material trend rate assumption. The other plan has a cap on
benefits in place. The impact of a change in the assumed health care cost trend
rate is zero as the per capita claims costs have exceeded the cap as of the
measurement date of December 31, 2004. The reported postretirement benefit
obligation does not reflect the effect of the Medicare Prescription Drug
Improvement and Modernization Act of 2003. C&D provides prescription drug
benefits to some Medicare-eligible retirees, but is not expected to qualify for
the tax-free federal subsidy.
The accumulated benefit obligation of the domestic and Japanese pension
plans was $66,043 and $60,056 for fiscal years 2005 and 2004, respectively.
F-37
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
13. EMPLOYEE BENEFIT PLANS (continued)
The projected benefit obligation, accumulated benefit obligation, and fair
value of plan assets for the one domestic pension plan and the Japanese pension
plan with accumulated benefit obligations in excess of plan assets were $9,383,
$7,036 and $4,645, respectively for fiscal year 2005 and $6,442, $4,815 and
$2,863, respectively for fiscal year 2004.
The pension plans, domestic and Japanese, have the following asset
allocations, as of their measurement dates:
Actual Percentage of Plan
Assets at December 31,
-------------------------
2004 2003
==============================================================================
ASSET CATEGORY
Equity Securities - Domestic 58.00% 61.50%
Equity Securities - International 8.80% 11.20%
- ------------------------------------------------------------------------------
Total 66.80% 72.70%
==============================================================================
Debt Securities 25.40% 22.20%
Other 7.80% 5.10%
- ------------------------------------------------------------------------------
Total 100.00% 100.00%
==============================================================================
The Pension Plans' investment policy includes the following asset
guidelines:
Domestic Japanese
Plans Plan
Policy Policy
Asset Allocation Policy Guidelines Target Target *
==============================================================================
ASSET CLASS
Fixed Income 30.00% 0.00%
Domestic Equity 60.00% 0.00%
International Equity 10.00% 0.00%
Other * 0.00% 100.00%
* The plan assets of the Japanese pension plan are invested in the general
assets of a Japanese insurance company. The investment profile of the
Japanese insurance company is 65% to 80% debt securities, 5% to 20% equity
securities, a maximum of 10% real estate and a maximum of 20% cash.
The asset allocation policy was developed in consideration of the
long-term investment objective of ensuring that there is an adequate level of
assets to support benefit obligations to plan participants. A secondary
objective is minimizing the impact of market fluctuations on the value of the
plans' assets. Equity securities - Domestic include Company common stock in the
amounts of $4,524 (7.1% of total domestic plan assets) and $5,089 (8.7% of total
domestic plan assets) at December 31, 2004 and 2003, respectively.
Assuming that the actual return on plan assets is consistent with the
expected rate of 8.25% for the domestic plans for fiscal year 2006, and that
interest rates remain constant, the Company would not be required to make any
contributions to its domestic pension plans for fiscal year 2006. The Company
expects to make discretionary contributions totaling approximately $1,100 to two
of its domestic pension plans and to make contributions of approximately $42 to
the Japanese plan. The Company also expects to make contributions totaling
approximately $246 to the two domestic Company sponsored postretirement benefit
plans.
In addition to the broad asset allocation described above, the following
policies apply to individual asset classes for the domestic plans:
Fixed income investments for the domestic plans are oriented toward
investment grade securities rated "Baa" or higher. They are
diversified among individual securities and sectors. The average
maturity is similar to that of the
F-38
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
broad U.S. bond market. For the Japanese plan, fixed income
investments held by the Japanese insurance company are principally
in Yen denominated bonds of high quality ratings.
Equity investments for the domestic plans are diversified among
individual securities, industries and economic sectors.
International equity investments are also diversified by country.
Most securities held are issued by companies with large market
capitalizations. Investment in the Company's stock is permissible up
to a maximum of 10% at the time of investment. For the Japanese
plan, a majority of the equity securities held by the Japanese
insurance company are invested in mature industries and companies
with long operating histories and with market capitalization of at
least $1,000,000. Only securities traded on national public markets
in industrial nations are eligible for the Japanese plan.
(B) Certain employees are eligible to participate in various defined
contribution retirement plans. The Company's contributions under the plans are
based on either specified percentages of employee contributions or specified
percentages of the employees' earnings. The Company's expense was $1,577, $2,174
and $1,610 for the years ended January 31, 2005, 2004 and 2003, respectively.
(C) The Company has Supplemental Executive Retirement Plans ("SERPs") that
cover certain executives. The SERPs are non-qualified, unfunded deferred benefit
compensation plans. Expenses related to these SERPs, which were actuarially
determined, were $767, $581 and $605 for the years ended January 31, 2005, 2004
and 2003, respectively. The liability for these plans was $3,635 and $2,981 as
of January 31, 2005 and 2004, respectively, and was included in other
liabilities.
(D) The Company has a Deferred Compensation Plan that covers certain
senior management employees and non-employee members of the Company's Board of
Directors. With the exception of administration costs, which are paid by the
Company, this non-qualified plan is funded entirely by participants through
voluntary deferrals of compensation. Income deferrals made by participants under
this plan are deposited in individual trust (known under current tax law as a
rabbi trust) accounts. The Company follows the provisions of EITF 97-14,
"Accounting for Deferred Compensation Arrangement Where Amounts Earned Are Held
in a Rabbi Trust and Invested." The EITF requires (i) the accounts of the rabbi
trust be consolidated with the accounts of the Company; (ii) the Company stock
be classified and accounted for in equity, in a manner similar to the way in
which treasury stock is accounted for; (iii) the diversified assets be accounted
for in accordance with GAAP for the particular asset; and (iv) the deferred
compensation obligation be classified as a liability and adjusted with a
corresponding charge (or credit) to compensation cost, to reflect changes in the
fair value of the amount owed to the participant. At January 31, 2005 and 2004,
the liability for the Company's Deferred Compensation Plan was $953 and $935,
respectively, and was included in other liabilities.
14. QUARTERLY FINANCIAL DATA (unaudited)
Quarterly financial data for the years ended January 31, 2005 and 2004,
follow:
First Second Third Fourth
Year Ended January 31, 2005 Quarter Quarter Quarter Quarter
=================================================================================================
Net sales $85,805 $93,627 $ 112,732 $ 122,574
Gross profit 16,541 19,521 8,908 21,688
Operating income (loss) 3,838 6,667 (9,399) (75,266)
Net income (loss) 2,004 3,206 (7,353) (57,350)
Net income (loss) per common share - basic 0.08 0.13 (0.29) (2.26)
Net income (loss) per common share - diluted 0.08 0.13 (0.29) (2.26)
The results for the third quarter of fiscal year 2005 reflect impairment
charges of $9,602 relating to the Company's Leola, Pennsylvania, and Huguenot,
New York, facilities and related estimated environmental clean-up and impaired
equipment decontamination charges at these two facilities in the amount of
$3,881.
F-39
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
14. QUARTERLY FINANCIAL DATA (unaudited) (continued)
The results for the fourth quarter of fiscal year 2005 included a non-cash
pre-tax goodwill impairment charge of $74,233 related to the Company's completed
annual impairment review required by SFAS No. 142, "Goodwill and Other
Intangible Assets."
First Second Third Fourth
Year Ended January 31, 2004 Quarter Quarter Quarter Quarter
=====================================================================================
Net sales $77,368 $81,364 $84,870 $81,222
Gross profit 16,992 19,078 19,656 20,953
Operating income 5,411 6,219 7,201 7,847
Net income 2,822 3,580 4,203 4,286
Net income per common share - basic 0.11 0.14 0.16 0.17
Net income per common share - diluted 0.11 0.14 0.16 0.17
15. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
Effective February 1, 2004, the Company combined the Dynasty and Powercom
divisions into the 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 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.
F-40
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
15. OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA (continued)
Summarized financial information related to the Company's business
segments for the years ended January 31, 2005, 2004 and 2003, is shown below:
Standby Power Motive
Year Ended January 31, 2005 Power Electronics Power Consolidated
==============================================================================================
Net sales $ 245,794 $ 111,546 $ 57,398 $ 414,738
Operating income (loss) $ 9,211 $ (71,703) $ (11,668) $ (74,160)
Year Ended January 31, 2004
==============================================================================================
Net sales $ 232,687 $ 39,080 $ 53,057 $ 324,824
Operating income (loss) $ 30,280 $ 1,109 $ (4,711) $ 26,678
Year Ended January 31, 2003
==============================================================================================
Net sales $ 234,361 $ 46,840 $ 54,544 $ 335,745
Operating income (loss) $ 38,994 $ (52) $ (4,888) $ 34,054
For the year ended January 31, 2005, the Power Electronics Division
recorded a non-cash pre-tax goodwill impairment charge of $74,233 related to the
Company's completed annual impairment review required by SFAS No. 142, "Goodwill
and Other Intangible Assets."
Many of the Company's facilities manufacture products for more than one
segment. Therefore, it is not practicable to disclose asset information (assets,
expenditures for long-lived assets) on a segment basis.
Long-lived assets are comprised of property, plant and equipment,
over-funded pensions, investments, deposits and notes receivable.
Summarized financial information related to the geographic areas in which
the Company operated at January 31, 2005, 2004 and 2003, and for each of the
years then ended is shown below:
Years Ended January 31, 2005 2004 2003
================================================================================
Net sales*:
United States $305,742 $268,149 $275,268
Other countries 108,996 56,675 60,477
- --------------------------------------------------------------------------------
Consolidated totals $414,738 $324,824 $335,745
================================================================================
Long-lived assets:
United States $ 93,796 $100,386 $116,447
Mexico 15,121 11,037 1,629
China 14,862 11,548 12,961
Other countries 2,732 1,393 1,794
- --------------------------------------------------------------------------------
Consolidated totals $126,511 $124,364 $132,831
================================================================================
* Net sales by geographic area is determined by the location of the
customer.
F-41
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
--------
16. 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:
Years Ended January 31, 2005 2004
===============================================================================
Balance at beginning of year $ 9,759 $ 10,599
Opening balance sheet liability of acquired companies 393 --
Current year provisions 3,872 7,570
Expenditures (5,725) (8,410)
Effect of foreign currency translation 4 --
- -------------------------------------------------------------------------------
Balance at end of year $ 8,303 $ 9,759
===============================================================================
As of January 31, 2005, accrued warranty obligations of $8,303 include
$4,958 in current liabilities and $3,345 in other liabilities. As of January 31,
2004, accrued warranty obligations of $9,759 include $6,603 in current
liabilities and $3,156 in other liabilities.
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
Years Ended January 31, 2005 2004
===============================================================================
Cumulative translation adjustment $5,661 $4,150
Accumulated net unrealized holding loss on derivatives (386) (891)
- -------------------------------------------------------------------------------
Total accumulated other comprehensive income $5,275 $3,259
===============================================================================
F-42
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
SCHEDULE II.
VALUATION AND QUALIFYING ACCOUNTS
for the years ended January 31, 2005, 2004 and 2003
(Dollars in thousands)
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Costs & Other Deductions End of
of Period Expenses Accounts (a) Period
=======================================================================================================================
Deducted from Assets
Allowance for doubtful accounts:
Year ended January 31, 2005 $ 1,476 $ 32 $ 751(b) $ 241 $ 2,018
Year ended January 31, 2004 1,906 -- -- 430 1,476
Year ended January 31, 2003 2,278 -- -- 372 1,906
Valuation allowance for deferred tax assets:
Year ended January 31, 2005 $ 1,097 $ 855 $ -- $ 414 $ 1,538
Year ended January 31, 2004 -- -- 1,097 -- 1,097
Year ended January 31, 2003 -- -- -- -- --
- ----------
(a) Amounts written-off, net of recoveries and reserve reversals.
(b) Additions totaling $727 relate to business acquisitions.
S-1