UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ___________________
Commission File No. 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its charter)
Delaware 13-3314599
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
(Address of principal executive office)
(Zip Code)
(215) 619-2700
(Registrant's telephone number, including area code)
_____________________________________
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO_____
Number of shares of the Registrant's Common Stock outstanding on December 7,
1998: 12,452,299
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
October 31, 1998 and January 31, 1998................. 3
Consolidated Statements of Income -
Three and Nine Months Ended October 31, 1998
and 1997.............................................. 5
Consolidated Statements of Cash Flows -
Nine Months Ended October 31, 1998 and 1997........... 6
Consolidated Statements of Comprehensive Income
Three and Nine Months Ended October 31, 1998
and 1997.............................................. 8
Notes to Consolidated Financial Statements............. 9
Report of Independent Accountants...................... 16
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 17
PART II. OTHER INFORMATION 23
SIGNATURES 24
2
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
October 31, January 31,
1998 1998*
---- ----
ASSETS
Current assets:
Cash and cash equivalents................. $ 490 $ 1,167
Accounts receivable, less allowance for
doubtful accounts of $1,828 and
$1,701, respectively................. 47,207 42,742
Inventories............................... 49,412 40,735
Deferred income taxes..................... 8,011 7,871
Other current assets...................... 1,420 885
------- -------
Total current assets........... 106,540 93,400
Property, plant and equipment, net.............. 60,667 57,058
Intangible and other assets, net................ 4,615 5,339
Goodwill, net................................... 10,277 10,701
------- -------
Total assets................... $182,099 $166,498
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 218 $ 321
Accounts payable.......................... 23,046 22,791
Accrued liabilities....................... 17,874 16,012
Income taxes ............................. 2,098 3,689
Other current liabilities................. 2,976 3,245
------- -------
Total current liabilities...... 46,212 46,058
Deferred income taxes........................... 2,684 2,376
Long-term debt.................................. 3,999 10,267
Other liabilities............................... 12,178 10,492
------- -------
Total liabilities.............. 65,073 69,193
------- -------
*Reclassified for comparative purposes to reflect the Company's two-for-one
stock split, effected in the form of a 100% stock dividend.
The accompanying notes are an integral part of these statements.
3
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(Dollars in thousands)
(Unaudited)
October 31, January 31,
1998 1998*
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 75,000,000 and
10,000,000 shares authorized; 13,270,704
and 13,228,898 shares issued, respectively
(as adjusted for the two-for-one stock
split, effected in the form of a 100%
stock dividend)......................... 133 132
Additional paid-in capital.................. 42,026 41,364
Treasury stock, at cost, 905,102 shares (as
adjusted for the two-for-one stock split,
effected in the form of a 100% stock
dividend)............................... (10,819) (10,819)
Notes receivable from stockholder, net of
discount of $28......................... - (1,029)
Cumulative translation adjustment........... (68) (248)
Retained earnings........................... 85,754 67,905
------- -------
Total stockholders' equity....... 117,026 97,305
------- -------
Total liabilities and
stockholders' equity........... $182,099 $166,498
======= =======
*Reclassified for comparative purposes to reflect the Company's two-for-one
stock split, effected in the form of a 100% stock dividend.
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited) (Unaudited)
Three months ended Nine months ended
October 31, October 31,
1998 1997 1998 1997
---- ---- ---- ----
Net sales............................ $ 81,598 $ 81,381 $240,580 $230,102
Cost of sales........................ 57,743 60,725 174,298 170,989
------- ------- ------- -------
Gross profit..................... 23,855 20,656 66,282 59,113
Selling, general and
administrative expenses.......... 11,286 9,678 30,921 28,543
Research and development
expenses......................... 2,071 2,156 6,132 6,358
------- ------- ------- -------
Operating income................. 10,498 8,822 29,229 24,212
Interest expense, net................ 14 301 90 1,041
Other expense, net................... 47 132 189 843
------- ------- ------- -------
Income before income taxes....... 10,437 8,389 28,950 22,328
Provision for income taxes........... 3,665 3,070 10,422 8,170
------- ------- ------- -------
Net income....................... $ 6,772 $ 5,319 $ 18,528 $ 14,158
======= ======= ======= =======
Net income per common share*......... $ 0.55 $ 0.44 $ 1.50 $ 1.16
======= ======= ======= =======
Net income per common share -
assuming dilution*............... $ 0.53 $ 0.42 $ 1.45 $ 1.12
======= ======= ======= =======
Dividends per share*................. $0.02750 $0.01375 $0.05500 $0.04125
======= ======= ======= =======
* Per share amounts have been adjusted to reflect the Company's two-for-one
stock split, effected in the form of a 100% stock dividend, where appropriate.
The accompanying notes are an integral part of these statements.
5
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Nine months ended
October 31,
1998 1997
---- ----
Cash flows provided (used) by operating activities:
Net income ..................................... $ 18,528 $ 14,158
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 8,862 8,770
Deferred income taxes..................... 168 434
Loss on disposal of assets................ 163 72
Changes in:
Accounts receivable................. (4,511) (2,443)
Inventories......................... (8,525) (1,354)
Other current assets................ (493) (717)
Accounts payable.................... 192 (921)
Accrued liabilities................. 2,123 3,580
Income taxes payable................ (1,404) (123)
Other current liabilities........... (272) (1,459)
Other liabilities................... 1,677 2,178
Other, net................................ 336 269
------- -------
Net cash provided by operating activities........... 16,844 22,444
------- -------
Cash flows provided (used) by investing activities:
Acquisition of property, plant and equipment.... (11,813) (9,266)
Proceeds from disposal of property, plant
and equipment................................ 69 13
Change in restricted cash....................... - 1
------- -------
Net cash used by investing activities............... (11,744) (9,252)
------- -------
Cash flows provided (used) by financing activities:
Repayment of long-term debt..................... (6,374) (11,621)
Repayment of note receivable from stockholder... 1,057 664
Proceeds from issuance of common stock, net..... 382 435
Payment of common stock dividends............... (848) (671)
------- -------
The accompanying notes are an integral part of these statements.
6
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Dollars in thousands)
(Unaudited)
Nine months ended
October 31,
1998 1997
---- ----
Net cash used by financing activities............... (5,783) (11,193)
------ ------
Effect of exchange rate changes on cash............. 6 (36)
------ ------
(Decrease) increase in
cash and cash equivalents........................ (677) 1,963
Cash and cash equivalents at beginning
of period........................................ 1,167 952
------ ------
Cash and cash equivalents at end of period.......... $ 490 $ 2,915
====== ======
SCHEDULE OF NONCASH INVESTING AND
FINANCIAL ACTIVITIES
Fair market value of treasury stock issued to
pension plans ...................................... $ - $ 847
The accompanying notes are an integral part of these statements.
7
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited) (Unaudited)
Three months ended Nine months ended
October 31, October 31,
1998 1997 1998 1997
---- ---- ---- ----
Net income ....................... $6,772 $5,319 $18,528 $14,158
Other comprehensive income, net of tax:
Foreign currency
translation adjustments ... 147 468 180 64
----- ----- ------ ------
Total comprehensive income........ $6,919 $5,787 $18,708 $14,222
===== ===== ====== ======
The accompanying notes are an integral part of these statements.
8
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
(UNAUDITED)
1. INTERIM STATEMENTS
The accompanying interim consolidated financial statements of C&D
TECHNOLOGIES, INC. (together with its operating subsidiaries, the "Company")
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Company's Annual Report to Shareholders for the
fiscal year ended January 31, 1998. The January 31, 1998 amounts were derived
from the Company's Audited Financial Statements. The consolidated financial
statements presented herein are unaudited but, in the opinion of management,
include all necessary adjustments (which comprise only normal recurring items)
required for a fair presentation of the consolidated financial position as of
October 31, 1998 and the consolidated statements of income for the three and
nine months ended October 31, 1998 and 1997 and the consolidated statements of
cash flows for the nine months ended October 31, 1998 and 1997 and the
consolidated statements of comprehensive income for the three and nine months
ended October 31, 1998 and 1997. However, interim results of operations
necessarily involve more estimates than annual results and may not be indicative
of results for the full fiscal year.
2. STOCK SPLIT
On July 24, 1998 the Company completed a two-for-one stock split, effected
in the form of a 100% stock dividend to stockholders of record on July 10, 1998.
This transaction resulted in a transfer on the Company's balance sheet of $66 to
common stock from additional paid-in-capital. The accompanying financial
statements and management's discussion and analysis of results of operations and
financial condition, including all share and per share amounts, have been
adjusted to reflect this transaction.
3. INVENTORIES
Inventories consisted of the following:
October 31, January 31,
1998 1998
---- ----
Raw materials ........................... $20,158 $17,099
Work-in-progress ........................ 12,367 9,990
Finished goods .......................... 16,887 13,646
------ ------
$49,412 $40,735
====== ======
4. INCOME TAXES
A reconciliation of the provision for income taxes from the statutory rate
to the effective rate is as follows:
Nine months ended
October 31,
1998 1997
---- ----
U.S. statutory income tax ...................... 35.0% 35.0%
State tax, net of federal income tax benefit.... 3.1 3.4
Foreign sales corporation ...................... (0.9) (1.1)
Tax effect of foreign operations ............... (0.5) (0.9)
Research and development credit ................ (0.7) -
Other........................................... - 0.2
---- ----
36.0% 36.6%
==== ====
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. NET INCOME PER COMMON SHARE
Net income per common share for the three and nine months ended October 31,
1998 and 1997 is based on the weighted average number of shares of Common Stock
outstanding. Net income per common share - assuming dilution reflects the
potential dilution that could occur if stock options were exercised.
(Unaudited) (Unaudited)
Three months ended Nine months ended
October 31, October 31,
1998 1997* 1998 1997*
---- ---- ---- ----
Net income (A)............... $6,772 $5,319 $18,528 $14,158
Weighted average shares
of common stock
outstanding (B)........... 12,354,732 12,222,034 12,343,820 12,195,246
Assumed conversion of stock
options, net of shares
assumed reacquired........ 426,163 453,280 473,767 400,710
------- ------- ------- -------
Weighted average common
shares - assuming
dilution (C).............. 12,780,895 12,675,314 12,817,587 12,595,956
Net income per common
share (A/B)............... $0.55 $0.44 $1.50 $1.16
Net income per common
share - assuming
dilution (A/C)............ $0.53 $0.42 $1.45 $1.12
* Restated to reflect the Company's two-for-one stock split, effected in the
form of a 100% stock dividend, where appropriate.
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
6. CONTINGENT LIABILITIES
With regard to the following contingent liabilities there have been no
material changes since January 31, 1998.
Because the Company uses lead and other hazardous substances in its
manufacturing processes, it is subject to numerous federal, Canadian, Mexican,
Irish, state and local laws and regulations that are designed to protect the
environment and employee health and safety.
These laws and regulations include requirements relating to the handling,
storage, use and disposal of hazardous materials and solid wastes, recordkeeping
and periodic reporting to governmental entities regarding the use of hazardous
substances and disposal of hazardous wastes, monitoring and permitting of air
and water emissions and monitoring and protecting workers from exposure to
hazardous substances, including lead used in the Company's manufacturing
processes. In the opinion of the Company, the Company complies in all material
respects with these laws and regulations.
Notwithstanding such compliance, if damage to persons or the environment
has been or is caused by 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
the damage and be required to pay the cost of investigating and remedying the
same, and the amount of any such liability could be material to the results of
operations or financial condition. However, under the terms of the purchase
agreement with Allied Corporation ("Allied") for the Acquisition of the Company
(the "Acquisition Agreement"), Allied is 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.
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 several 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. As of January 16, 1989, the Company entered into an
agreement with other potentially responsible parties ("PRPs") relating to
remediation of a portion of one of the Third Party Facilities, the former NL
Industries ("NL"), facility in Pedricktown, New Jersey (the "NL Site"), which
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
6. CONTINGENT LIABILITIES (continued)
agreement provides for their joint funding on a proportionate basis of certain
remedial investigation and feasibility study activities with respect to that
site.
In fiscal 1993 in accordance with an EPA order, a group comprised of the
Company and 30 other parties commenced work on the cleanup of a portion of the
NL Site based on a specified remedial approach which is now completed. The
Company did not incur costs in excess of the amount previously reserved.
With regard to the remainder of the NL Site, the EPA is pursuing
negotiations with NL and the other PRPs, including the Company, regarding the
conduct and funding of the remedial work plan. The allocation percentages
between parties and the basis for allocation of cost have been agreed to by the
PRPs and NL. Based upon currently available information, the Company estimates
its share of cost for this phase of the clean-up to range from $210 to $242, the
majority of which is expected to be paid out over the next two years.
Accordingly, the Company has established a reserve for this potential exposure.
The remedial investigation and feasibility study at a second Third Party
Facility, the former Tonolli Incorporated facility at Nesquehoning, Pennsylvania
(the "Tonolli Site"), was completed in fiscal 1993. The EPA and the PRPs have
initiated the remedial action at the site. Based on the estimated cost of the
remedial approach selected by the EPA, the Company believes that the potential
cost of remedial action at the Tonolli Site is likely to range between $16,000
and $17,000. The Company's allocable share of this cost has not been finally
determined, and will depend on such variables as the financial capability of
various other PRPs to fund their respective allocable shares of the remedial
cost. Based on currently available information, however, the Company believes
that its most likely exposure with respect to the Tonolli Site will be the
approximately $579 previously reserved, the majority of which is expected to be
paid over the next two years. The Company expects to recover a portion of its
monetary obligations for the remediation of the Tonolli site through litigation
against third parties and recalcitrant PRPs.
The Company has responded to requests for information from the EPA with
regard to three other Third Party Facilities, one in September 1991, one (the
"Chicago Site") in October 1991, and the third (the "ILCO Site") in October
1993. Of the three sites, the Company has been identified as a PRP at the ILCO
and Chicago Sites only.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
6. CONTINGENT LIABILITIES (continued)
On October 31, 1995 the Company received confirmation from the EPA that it
is a de minimis PRP at the ILCO Site. In May 1998, the ILCO site was resolved
with the payment of an immaterial amount, which was less than the amount
previously reserved.
Based on currently available information, the Company believes that the
potential cost of the remediation at the Chicago Site is likely to range between
$8,000 and $10,500 (based on the preliminary estimated costs of the remediation
approach negotiated with the EPA). Sufficient information is not available to
determine the Company's allocable share of this cost. Based on currently
available information, however, the Company believes that its most likely
exposure with respect to the Chicago Site will be the approximately $283
previously reserved, the majority of which is expected to be paid over the next
two to five years.
Allied has accepted responsibility under the Acquisition Agreement for
potential liabilities relating to all Third Party Facilities other than the
aforementioned Sites. Based on currently available information, management of
the Company believes that the foregoing will not have a material adverse effect
on the Company's business, financial condition or results of operations.
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 131, "Disclosures about
Segments of an Enterprise and Related Information," which is effective for
fiscal years beginning after December 15, 1997. This statement establishes
standards for the disclosure of segment results. It requires that segments be
determined using the "management approach," which means the way management
organizes the segments within the enterprise for making operating decisions and
assessing performance. The Company has not yet determined the impact of the
implementation of SFAS No. 131.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement significantly
changes current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Some of the more
significant effects of SFAS No. 132 are that it: (i) standardizes the disclosure
requirements for pensions and other postretirement benefits and presents them in
one footnote; (ii) requires that additional information be disclosed regarding
changes in the benefit obligation and fair values of plan assets; (iii)
eliminates certain disclosures that are no longer considered useful, including
general descriptions of the plans; (iv) permits the aggregation of information
about certain plans; (v) provides reduced disclosure requirements for nonpublic
entities; (vi) revises disclosures about defined contribution plans; and (vii)
changes disclosures relating to multi-employer plans. SFAS No. 132 does not
change the existing measurement or recognition provisions of SFAS Nos. 87, 88 or
106. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. The Company believes that the adoption of SFAS No. 132 will not have a
material effect on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position ("SOP") 98-5, "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires costs of start-up activities and organization
costs to be charged to expense as incurred. SOP 98-5 is effective for financial
statements for years beginning after December 15, 1998. The Company believes
that the adoption of SOP 98-5 will not have a material effect on its financial
position or results of operations.
14
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new procedures
for accounting for derivatives and hedging activities and supersedes and amends
a number of existing standards. This statement is effective for fiscal years
beginning after June 15, 1999. The Company currently uses derivatives such as
interest rate swap agreements, currency swaps and currency forwards to
effectively fix the interest rate on a portion of the Company's floating rate
debt and the exchange rate on Canadian and Mexican assets, liabilities and cash
flows. Under current accounting standards, no gain or loss is recognized on
changes in the fair value of these derivatives. Under this statement, gains or
losses will be recognized based on changes in the fair value of the derivatives
which generally occur as a result of changes in interest rates and foreign
currency exchange rates. The Company is currently evaluating the financial
impact of adoption of this statement. The Company believes that the adoption of
SFAS No. 133 will not have a material effect on its financial position or
results of operations.
8. SUBSEQUENT EVENT
On November 23, 1998, the Company entered into an agreement with Johnson
Controls, Inc. ("JCI") to acquire the assets of JCI's industrial battery
business for $135 million plus the assumption of certain liabilities, subject to
adjustment based, among other things, on the Company's investigation of the
business prior to closing. Consummation of the acquisition is subject to a
number of conditions, including the obtaining of consents under material
contracts, the receipt of all necessary regulatory approvals and the Company's
obtaining of financing. See "Management's Discussion and Analysis -- Liquidity
and Capital Resources." The closing of the acquisition is expected to occur on
or about February 1, 1999. A portion of the business consists of an interest in
a joint venture in Shanghai, People's Republic of China, the closing of which
may take place at a later date if the consent of the joint venture partner and
relevant government authorities is not timely obtained.
15
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
C&D TECHNOLOGIES, INC.
We have reviewed the accompanying consolidated balance sheet of C&D
TECHNOLOGIES, INC. and Subsidiaries as of October 31, 1998, the related
consolidated statements of income for the three and nine months ended October
31, 1998 and 1997, the related consolidated statements of cash flows for the
nine months ended October 31, 1998 and 1997 and the related consolidated
statements of comprehensive income for the three and nine months ended October
31, 1998 and 1997. These financial statements are the responsibility of the
Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying consolidated financial statements for them to be in
conformity with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet as of January 31, 1998 and the related
consolidated statements of income, stockholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated March 10, 1998,
we expressed an unqualified opinion on those consolidated financial statements.
In our opinion, the information set forth in the accompanying consolidated
balance sheet as of January 31, 1998, is fairly presented, in all material
respects, in relation to the consolidated balance sheet from which it has been
derived.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
November 24, 1998
16
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Net sales for the fiscal 1999 third quarter were flat at $81,598,000 versus
$81,381,000 for the same period of the prior year. Fiscal 1999 third quarter
sales to the telecommunications, control and UPS markets were up three percent,
27 percent and 10 percent, respectively, compared to the third quarter of fiscal
1998. These sales increases were offset by lower non-telecommunications-related
power conversion sales and motive power sales, which were down 16 percent and
five percent, respectively. On a company-wide basis, fiscal 1999 third quarter
telecommunications-related sales were approximately 51 percent of total company
sales versus 50 percent of sales for the third quarter of fiscal 1998.
Telecommunications-related sales in the third quarter of the current year were
adversely affected by significantly lower cellular phone battery charger sales
versus the same quarter of the prior year. This resulted from the
discontinuation by a major customer of a particular type of phone for which this
charger was supplied. The Company expects this shortfall to continue throughout
the fourth quarter of fiscal 1999. Net sales for the nine months ended October
31, 1998 increased $10,478,000 or five percent over the equivalent period in
fiscal 1998. The increase in sales for the nine months ended October 31, 1998
compared to the same period in the prior year was primarily due to higher sales
to the telecommunications and control markets, up 10 percent and 11 percent,
respectively, partially offset by an 11 percent decrease in
non-telecommunications-related power conversion sales. On a company-wide basis,
telecommunications-related sales were approximately 50 percent of total company
sales during the first nine months of fiscal 1999 versus 48 percent for the
comparable period of the prior year.
Gross profit increased $3,199,000 or 15 percent for the third quarter of
fiscal 1999 and increased $7,169,000 or 12 percent for the nine-month period
ended October 31, 1998 over the comparable periods in the prior year. Gross
margin increased to 29.2 percent for the third quarter of fiscal 1999 versus
25.4 percent for the comparable quarter of the prior year, primarily as a result
of lower material costs, shift in product mix and improved operating
efficiencies. For the nine months ended October 31, 1998, gross margin increased
to 27.6 percent, up from 25.7 percent from the same nine-month period of fiscal
1998, primarily as a result of lower material costs and improved operating
efficiencies.
Selling, general and administrative expenses for the three months ended
October 31, 1998 increased $1,608,000 or 17 percent over the comparable period
of the prior year. This increase was primarily due to higher payroll and new
sales branch location related costs, commission expense and due diligence costs
in the third quarter of fiscal 1999 versus the equivalent period of the prior
year. For the nine-month period ended October 31, 1998, selling, general and
administrative expenses increased $2,378,000 or eight percent over the same
period of the prior year. This increase was primarily due to higher commission
expense, payroll and new sales branch location related costs, travel expense and
due diligence costs for the first nine months of fiscal 1999, partially offset
by the absence in the current nine-month period of charges related to the
accelerated write-off of goodwill and intangible assets and the resolution of
legal disputes that occurred in the comparable period of the prior year.
Research and development expenses remained proportional to sales at three
percent of sales for the third quarter and first nine months of both fiscal 1999
and 1998.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
Interest expense, net, decreased $287,000 in the third quarter of fiscal
1999 versus the comparable period of the prior year primarily due to lower debt
balances outstanding. For the nine-month period ended October 31, 1998, interest
expense, net, decreased $951,000 compared to the same period in fiscal 1998
primarily due to lower debt balances outstanding coupled with higher capitalized
interest related to plant expansions.
Other expense, net, for the third quarter of fiscal 1999 decreased $85,000
primarily due to higher purchase price discounts compared to the third quarter
of fiscal 1998. For the nine months ended October 31, 1998, other expense, net,
decreased $654,000 from the comparable period in the prior year primarily due to
the absence in the current nine-month period of amortization expense associated
with the write-off of capitalized debt acquisition costs related to the
Company's credit facility and the Development Authority of Rockdale County
Industrial Revenue Bonds. Also contributing to this decrease was higher purchase
price discounts for the first nine months of fiscal 1999 versus the same period
of the prior year.
Income tax expense for the third quarter and first nine months of fiscal
1999 increased $595,000 and $2,252,000, respectively, over the comparable
periods of the prior year, primarily as a result of higher income before taxes,
partially offset by a lower effective tax rate. The reduction in the effective
tax rate for the first nine months of fiscal 1999 to 36.0 percent versus 36.6
percent in the same period of the prior year was primarily due to tax credits
related to research and development.
As a result of the above, net income increased 27 percent for the third
quarter of fiscal 1999 and increased 31 percent for the nine-month period ended
October 31, 1998 versus the comparable periods of the prior year. Net income in
the third quarter of fiscal 1999 increased to $6,772,000 or 55 cents per common
share - basic and 53 cents per common share - assuming dilution. For the nine
months ended October 31, 1998, net income increased to $18,528,000 or $1.50 per
common share - basic and $1.45 per common share - assuming dilution.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities decreased $5,600,000 or 25
percent to $16,844,000 for the nine-month period ended October 31, 1998 compared
to $22,444,000 in the comparable period of the prior year. The decrease in net
cash provided by operating activities was primarily due to a larger increase in
inventory and accounts receivable during the first nine months of fiscal 1999
compared to the same period of the prior year, partially offset by higher net
income during the current year. The increase in inventory was primarily related
to the Company's power conversion business.
Net cash used by investing activities during the first nine months of
fiscal 1999 increased $2,492,000 to $11,744,000 versus the comparable period of
the prior year. This increase was primarily due to higher spending related to
the acquisition of property, plant and equipment.
Net cash used by financing activities for the nine-month period ended
October 31, 1998 decreased $5,410,000 to $5,783,000 compared to $11,193,000
during the same period of the prior year. The decrease in net cash used by
financing activities was primarily the result of lower cash flows provided by
operations and higher capital spending during the first nine months of fiscal
1999 compared to the same period of the prior year, coupled with a decrease in
cash in the current year versus an increase in the prior year.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company has signed an agreement to acquire the industrial battery
business of JCI, subject to a number of conditions. These conditions include the
obtaining of financing for the acquisition and for subsequent operations by the
Company, on terms satisfactory to the Company. The Company has obtained a
commitment from NationsBanc Montgomery Securities regarding the arranging of
financing, which is also subject to a number of conditions. The majority of the
business is expected to be acquired on or about February 1, 1999. There can be
no assurance that the acquisition will be consummated or that financing will be
obtained on terms satisfactory to the Company.
If the acquisition described above is not consumated, the Company's
availability, under the current loan agreement, is expected to be sufficient to
meet its ongoing cash needs for working capital requirements, debt service and
capital expenditures. Capital expenditures in the first nine months of fiscal
1999 were incurred primarily to fund capacity expansion, new product
development, a continuing series of cost reduction programs, normal maintenance
capital, and regulatory compliance. Aggregate fiscal 1999 capital expenditures
are expected to be approximately $16,000,000 for similar purposes.
READINESS FOR YEAR 2000
The Company is taking action to ensure its operations will not be adversely
affected by potential Year 2000 computer failures and has developed a Year 2000
Readiness Plan. The Company's Chief Financial Officer is responsible for
overseeing the execution of the plan and reports quarterly to the Audit
Committee of the Company's Board of Directors on the status of the Year 2000
Readiness Plan. The plan addresses the following four areas: (a) information
technology systems (consisting of computer hardware and software related to the
Company's business systems as well as its engineering and test equipment); (b)
non-information technology systems (including embedded technology such as
microcontrollers, which are typically found in such things as telephone systems,
security systems, fax machines, etc.); (c) products sold to customers; and (d)
third party issues (including significant suppliers and customers). The
Company's Year 2000 Readiness Plan generally includes the following phases for
each of the four areas noted above: identification and risk assessment;
development and implementation of a remediation plan; acceptance testing; and
contingency planning for high risk critical areas.
The Company has identified certain deficiencies related to its information
technology systems and is in the process of addressing them through upgrades or
other remediation. The Company has two main computer systems that are utilized
to run its business systems. These computer systems, one located at the
Company's headquarters and the other located in Tucson, Arizona, are undergoing
remediation efforts and currently are in the acceptance testing phase. These
information technology remediation efforts are expected to be completed by the
end of the first quarter of fiscal 2000.
In terms of non-information technology systems, the Company has identified
those items which may require remediation or replacement. The Company is in the
process of addressing those items and expects to complete remediation or
replacement and testing by the middle of fiscal 2000.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
The Company has completed its assessment of Year 2000 compliance with
respect to its battery and electronics products that are currently being sold to
customers and has concluded that all significant products are compliant.
With respect to third parties, the Company is in the process of identifying
and contacting its significant suppliers and will shortly begin to contact its
major customers to determine the extent to which the Company may be vulnerable
to such third parties' failure to address their own year 2000 issues. This
process includes the solicitation of written responses to questionnaires and/or
meetings with certain of such third parties. As a result, the Company's
assessment will be substantially dependent on information provided by third
parties. The Company expects to materially complete this assessment process by
the end of the first quarter of fiscal 2000.
Based upon the Company's current estimates, additional out-of-pocket costs
associated with its Year 2000 compliance are expected to be immaterial. These
costs are anticipated to be incurred primarily in fiscal 1999 and include third
party consultants and programmers; remediation of existing software; and
replacement or remediation of embedded chips. Such costs do not include internal
management time, which is not expected to be material to the Company's results
of operations or financial condition.
The Company believes that its most significant risk with respect to Year
2000 issues relates to the performance and readiness status of third parties. As
with all manufacturing companies, a reasonable worst case Year 2000 scenario
would be the result of failures of third parties (including without limitation,
governmental entities, utilities and entities with which the Company has no
direct involvement) that negatively impact the Company's raw material supply
chain or ability to provide products to customers or the ability of customers to
purchase products, or events affecting regional, national or global economies
generally. The impact of these failures cannot be estimated at this time;
however, the Company is considering contingency plans to limit, to the extent
possible, the financial impact of these failures on the Company's results of
operations. Any such plans would necessarily be limited to matters over which
the Company can reasonably control.
The Company's Year 2000 efforts are ongoing and its overall plan, as well
as the consideration of contingency plans, will continue to evolve as new
information becomes available. While the Company anticipates continuity of its
business activities, that continuity will be dependent upon its ability, and the
ability of third parties with whom the Company relies on directly, or
indirectly, to be Year 2000 compliant.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information," which is effective for fiscal years
beginning after December 15, 1997. This statement establishes standards for the
disclosure of segment results. It requires that segments be determined using the
"management approach," which means the way management organizes the segments
within the enterprise for making operating decisions and assessing performance.
The Company has not yet determined the impact of the implementation of SFAS No.
131.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (continued)
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement significantly
changes current financial statement disclosure requirements from those that were
required under SFAS No. 87, "Employers' Accounting for Pensions," SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," and SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." Some of the more
significant effects of SFAS No. 132 are that it: (i) standardizes the disclosure
requirements for pensions and other postretirement benefits and presents them in
one footnote; (ii) requires that additional information be disclosed regarding
changes in the benefit obligation and fair values of plan assets; (iii)
eliminates certain disclosures that are no longer considered useful, including
general descriptions of the plans; (iv) permits the aggregation of information
about certain plans; (v) provides reduced disclosure requirements for nonpublic
entities; (vi) revises disclosures about defined contribution plans; and (vii)
changes disclosures relating to multi-employer plans. SFAS No. 132 does not
change the existing measurement or recognition provisions of SFAS Nos. 87, 88 or
106. SFAS No. 132 is effective for fiscal years beginning after December 15,
1997. The Company believes that the adoption of SFAS No. 132 will not have a
material effect on its financial position or results of operations.
In April 1998, the American Institute of Certified Public Accountants
issued SOP 98-5, "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires costs of start-up activities and organization costs to be charged to
expense as incurred. SOP 98-5 is effective for financial statements for years
beginning after December 15, 1998. The Company believes that the adoption of
SOP 98-5 will not have a material effect on its financial position or results of
operations.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes new procedures
for accounting for derivatives and hedging activities and supersedes and amends
a number of existing standards. This statement is effective for fiscal years
beginning after June 15, 1999. The Company currently uses derivatives such as
interest rate swap agreements, currency swaps and currency forwards to
effectively fix the interest rate on a portion of the Company's floating rate
debt and the exchange rate on Canadian and Mexican assets, liabilities and cash
flows. Under current accounting standards, no gain or loss is recognized on
changes in the fair value of these derivatives. Under this statement, gains or
losses will be recognized based on changes in the fair value of the derivatives
which generally occur as a result of changes in interest rates and foreign
currency exchange rates. The Company is currently evaluating the financial
impact of adoption of this statement. The Company believes that the adoption of
SFAS No. 133 will not have a material effect on its financial position or
results of operations.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
FORWARD LOOKING STATEMENTS
Certain information contained in this Quarterly Report on Form 10-Q,
including, without limitation, information appearing under Item 2, "Management's
Discussion and Analysis of Financial Condition and Results of Operations," are
forward-looking statements (within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934). Factors
that appear with the forward-looking statements, or in the Company's other
Securities and Exchange Commission filings, could affect the Company's actual
results and could cause the Company's actual results to differ materially from
those expressed in any forward-looking statements made by the Company in this
Quarterly Report on Form 10-Q.
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Employment Agreement, dated October 22, 1998, between Wade H.
Roberts, Jr. and the Company (filed herewith).
10.2 Purchase and Sale Agreement, dated as of November 23, 1998, among
Johnson Controls, Inc. and Its Subsidiaries as Seller and C&D
TECHNOLOGIES, INC. and C&D Acquisition Corp. as Purchaser (filed
herewith).
15. Letter from PricewaterhouseCoopers LLP, independent accountants
for the Company, regarding unaudited interim financial infor-
mation (filed herewith).
27. Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
None
23
SIGNATURES
- -------------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
C&D TECHNOLOGIES, INC.
December 11, 1998 BY: /s/ Alfred Weber
---------------------------------
Alfred Weber
Chairman and Chief Executive
Officer
December 11, 1998 BY: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance and
Treasurer
(Principal Financial and
Accounting Officer)
24
EXHIBIT INDEX
10.1 Employment Agreement, dated October 22, 1998, between Wade H.
Roberts, Jr. and the Company.
10.2 Purchase and Sale Agreement, dated as of November 23, 1998, among
Johnson Controls, Inc. and Its Subsidiaries as Seller and C&D
TECHNOLOGIES, INC. and C&D Acquisition Corp. as Purchaser.
15. Letter from PricewaterhouseCoopers LLP, independent accountants
for the Company, regarding unaudited interim financial infor-
mation.
27. Financial Data Schedule.
25