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 April 30, 1999
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 June 4, 1999:
12,758,327
C&D TECHNOLOGIES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION Page No.
Item 1 - Financial Statements
Consolidated Balance Sheets -
April 30, 1999 and January 31, 1999................... 3
Consolidated Statements of Income -
Three Months Ended April 30, 1999 and 1998............ 5
Consolidated Statements of Cash Flows -
Three Months Ended April 30, 1999 and 1998............ 6
Consolidated Statements of Comprehensive Income
Three Months Ended April 30, 1999 and 1998............ 8
Notes to Consolidated Financial Statements............. 9
Report of Independent Accountants...................... 17
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 18
PART II. OTHER INFORMATION ................................... 24
SIGNATURES ................................................... 25
2
PART I. FINANCIAL INFORMATION
Item 1 - Financial Statements
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
(Unaudited)
April 30, January 31,
1999 1999
---- ----
ASSETS
Current assets:
Cash and cash equivalents................. $ 9,930 $ 5,003
Accounts receivable, less allowance for
doubtful accounts of $1,625 and
$1,635, respectively................. 64,425 44,232
Inventories............................... 60,173 49,855
Deferred income taxes..................... 7,305 7,305
Other current assets...................... 960 2,318
------- -------
Total current assets........... 142,793 108,713
Property, plant and equipment, net.............. 90,117 62,388
Intangible and other assets, net................ 4,072 4,393
Goodwill, net................................... 87,350 10,148
------- -------
Total assets................... $324,332 $185,642
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt......... $ 8,552 $ 532
Accounts payable.......................... 33,660 23,997
Accrued liabilities....................... 23,525 17,714
Income taxes ............................. 546 -
Other current liabilities................. 3,621 2,782
------- -------
Total current liabilities...... 69,904 45,025
Deferred income taxes........................... 3,097 2,887
Long-term debt.................................. 106,590 1,750
Other liabilities............................... 15,207 12,442
------- -------
Total liabilities.............. 194,798 62,104
------- -------
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)
April 30, January 31,
1999 1999
---- ----
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value, 75,000,000
shares authorized; 13,467,429 and
13,368,719 shares issued,
respectively ........................... 135 134
Additional paid-in capital.................. 44,585 43,429
Treasury stock, at cost, 905,102 shares .... (10,819) (10,819)
Accumulated other comprehensive loss........ (319) (169)
Retained earnings........................... 95,952 90,963
------- -------
Total stockholders' equity....... 129,534 123,538
------- -------
Total liabilities and
stockholders' equity........... $324,332 $185,642
======= =======
The accompanying notes are an integral part of these statements.
4
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share data)
(Unaudited)
Three months ended
April 30,
1999 1998
---- ----
Net sales............................ $ 99,611 $ 78,909
Cost of sales........................ 73,072 58,221
------- -------
Gross profit..................... 26,539 20,688
Selling, general and
administrative expenses.......... 14,369 9,512
Research and development
expenses......................... 2,259 2,035
------- -------
Operating income................. 9,911 9,141
Interest expense, net................ 1,439 30
Other expense, net................... 136 46
------- -------
Income before income taxes....... 8,336 9,065
Provision for income taxes........... 3,001 3,309
------- -------
Net income....................... $ 5,335 $ 5,756
======= =======
Net income per common share*......... $ .43 $ .47
======= =======
Net income per common share -
assuming dilution*............... $ .42 $ .45
======= =======
Dividends per share*................. $ .0275 $ .01375
======= =======
* 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
(see Footnote 2).
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)
Three months ended
April 30,
1999 1998
---- ----
Cash flows provided (used) by operating activities:
Net income ..................................... $ 5,335 $ 5,756
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............. 4,881 3,058
Deferred income taxes..................... 210 -
Loss on disposal of assets................ 111 157
Changes in:
Accounts receivable................. (5,696) (1,839)
Inventories......................... 258 (1,723)
Other current assets................ 405 (162)
Accounts payable.................... 5,131 (1,597)
Accrued liabilities................. 2,938 741
Income taxes payable................ 2,122 (85)
Other current liabilities........... 39 (155)
Other liabilities................... 790 596
Other, net................................ 114 -
-------- --------
Net cash provided by operating activities........... 16,638 4,747
-------- --------
Cash flows provided (used) by investing activities:
Acquisition of business, net ................... (121,465) -
Acquisition of property, plant and equipment.... (3,205) (4,333)
Proceeds from disposal of property, plant
and equipment................................ 1 4
-------- --------
Net cash used by investing activities............... (124,669) (4,329)
-------- --------
Cash flows provided (used) by financing activities:
Repayment of long-term debt..................... (2,554) (578)
Proceeds from new borrowings ................... 118,051 -
Financing costs of long-term debt .............. (2,749) -
Repayment of note receivable from stockholder... - 1,057
Proceeds from issuance of common stock, net..... 544 188
Payment of common stock dividends............... (343) (169)
-------- --------
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)
Three months ended
April 30,
1999 1998
---- ----
Net cash provided by financing activities......... 112,949 498
-------- --------
Effect of exchange rate changes on cash........... 9 5
-------- --------
Increase in cash and cash equivalents............. 4,927 921
Cash and cash equivalents at beginning
of period...................................... 5,003 1,167
-------- --------
Cash and cash equivalents at end of period........ $ 9,930 $ 2,088
======== ========
SCHEDULE OF NONCASH INVESTING AND
FINANCIAL ACTIVITIES
Acquired business
Estimated fair value of assets acquired ...... $ 53,714 $ -
Goodwill and identifiable intangible assets... 77,973 -
Cash paid, net of cash acquired .............. (121,465) -
-------- --------
Liabilities assumed .......................... $ 10,222 $ -
======== ========
Dividends declared but not paid .................. $ 346 $ 169
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)
Three months ended
April 30,
1999 1998
---- ----
Net income ............................ $5,335 $5,756
Other comprehensive (loss) income,
net of tax:
Foreign currency
translation adjustments ........ (150) 40
----- -----
Total comprehensive income............. $5,185 $5,796
===== =====
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, 1999. The January 31, 1999 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
April 30, 1999 and the consolidated statements of income for the three months
ended April 30, 1999 and 1998 and the consolidated statements of cash flows for
the three months ended April 30, 1999 and 1998 and the consolidated statements
of comprehensive income for the three months ended April 30, 1999 and 1998.
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, including all share and per share amounts, have been adjusted to
reflect this transaction.
3. ACQUISITION
Effective March 1, 1999, the Company acquired substantially all of the
assets of the Specialty Battery Division of Johnson Controls, Inc. ("JCI"),
(subsequently re-named the Dynasty Division by the Company) including, without
limitation, certain assets of Johnson Controls Technology Company, a wholly
owned subsidiary of JCI, and 100% of the ordinary shares of Johnson Controls
Battery (U.K.) Limited, an indirect wholly owned subsidiary of JCI. In
consideration of the assets acquired, the Company paid approximately $120,000,
subject to certain adjustments as set forth in the purchase agreement. In
addition, the Company assumed certain liabilities of the seller. The acquisition
of an interest of the Specialty Battery Division in a joint venture in Shanghai,
China, for approximately $15,000, plus the assumption of certain liabilities, is
expected to be consummated in the near future, subject to certain third party
consents. The joint venture manufactures, markets and distributes industrial and
starting, lighting and ignition batteries.
The Specialty Battery Division was engaged in the business of designing,
manufacturing, marketing and distributing industrial batteries. The Company
intends to continue using the assets acquired in such business. The source of
the funds for the acquisition was advances under a new credit agreement
consisting of a term loan in the amount of $100,000 and a revolving loan not to
exceed $120,000 which includes a letter of credit facility not to exceed $30,000
and swingline loans not to exceed $10,000.
9
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
3. ACQUISITION (continued)
The following unaudited pro forma financial information combines the
consolidated results of operations as if the acquisition of the Specialty
Battery Division (excluding the interest in the joint venture in Shanghai, China
which is expected to be consummated in the near future) 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 and expected to have a continuing impact. The pro forma adjustments
contained in the table below include amortization of intangibles and goodwill,
depreciation adjustments due to the write up of property, plant and equipment to
estimated fair market value, amortization of deferred debt costs and interest
expense on the acquisition debt, working capital management fees which will not
continue and the related income tax effects.
Three months
ended April 30,
1999 1998
---- ----
Net sales ......................... $107,359 $102,060
Net income ........................ $ 5,270 $ 4,573
Net income per common share ....... $ 0.42 $ 0.37
Net income per common share -
assuming dilution ............ $ 0.41 $ 0.36
The pro forma financial information does not necessarily reflect the
operating results that would have occurred had the acquisition been consummated
as of the above dates, nor is such information indicative of future operating
results. In addition, the pro forma financial results contain estimates since
the acquired business did not maintain information on a period comparable with
the Company's fiscal year-end.
4. INVENTORIES
Inventories consisted of the following:
April 30, January 31,
1999 1999
---- ----
Raw materials ........................... $21,670 $20,013
Work-in-progress ........................ 12,546 10,785
Finished goods .......................... 25,957 19,057
------ ------
$60,173 $49,855
====== ======
10
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
5. INCOME TAXES
A reconciliation of the provision for income taxes from the statutory rate
to the effective rate is as follows:
Three months ended
April 30,
1999 1998
---- ----
U.S. statutory income tax ...................... 35.0% 35.0%
State tax, net of federal income tax benefit.... 3.2 3.5
Foreign sales corporation ...................... (0.3) (1.1)
Tax effect of foreign operations ............... (1.3) (0.9)
Research and development credit ................ (0.8) -
Other........................................... 0.2 -
---- ----
36.0% 36.5%
==== ====
6. NET INCOME PER COMMON SHARE
Net income per common share for the three months ended April 30, 1999 and
1998 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)
Three months ended
April 30,
1999 1998*
---- ----
Net income (A).................... $5,335 $5,756
Weighted average shares
of common stock
outstanding (B)................ 12,489,862 12,329,846
Assumed conversion of stock
options, net of shares
assumed reacquired............. 337,063 485,676
------- -------
Weighted average common
shares - assuming
dilution (C)................... 12,826,925 12,815,522
Net income per common
share (A/B).................... $0.43 $0.47
Net income per common
share - assuming
dilution (A/C)................. $0.42 $0.45
* Restated to reflect the Company's two-for-one stock split, effected in the
form of a 100% stock dividend, where appropriate.
11
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES
With regard to the following contingent liabilities there have been no
material changes since January 31, 1999.
Because the Company uses lead and other hazardous substances in its
manufacturing processes, it is subject to numerous international, federal, 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 therefore), 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
agreement provided for their joint funding on a proportionate basis of certain
remedial investigation and feasibility study activities with respect to that
site.
12
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES (continued)
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 was completed during fiscal
1999. 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 EPA has proposed a cost
allocation plan, however, the allocation percentages between parties and the
basis for allocation of cost are not defined in the plan or elsewhere.
Therefore, a reliable range of the potential cost to the Company of this phase
of the clean-up cannot currently be determined. Accordingly, the Company has not
established any 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 Company and the PRPs
initiated remedial action at the site in 1998 and expect to complete the
majority of the action by the end of 1999. 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 during 1999. 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 or state
environmental agencies with regard to four other Third Party Facilities, one in
September 1991, one (the "Chicago Site") in October 1991, one (the "ILCO Site")
in October 1993, and the fourth (the "M&J Site") in March 1999. Of the four
sites, the Company has been identified as a PRP at the ILCO, Chicago, and M&J
Sites only.
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 a 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
13
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
7. CONTINGENT LIABILITIES (continued)
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.
Sufficient information is not yet available for the M&J site to estimate
the Company's allocable share of liability. However, based on the information
currently available, the Company's liability exposure at this site appears to be
limited and is not expected to have a material adverse effect on the Company.
Allied has accepted responsibility under the Acquisition Agreement for
potential liabilities relating to all Third Party Facilities other than the
aforementioned Sites.
The Company is also aware of the existence of potential contamination at
two of its properties which may require expenditures for further investigation
and remediation. At the Company's Huguenot, New York facility, fluoride
contamination in an inactive lagoon exceeding the state's groundwater standards,
which existed prior to the Company's acquisition of the site, has resulted in
the site being listed on the registry of inactive hazardous waste disposal sites
maintained by the New York State Department of Environmental Conservation. The
prior owner of the site ultimately may bear some, as yet undetermined, share of
the costs associated therewith.
The Company's Conyers, Georgia facility is listed on the Georgia State
Hazardous Sites Inventory. Soil at the site, which was likely contaminated from
a leaking underground acid neutralization tank and possibly storm water runoff,
has been excavated and disposed. A hydrogeologic study was undertaken to assess
the impact to groundwater. That study did not reveal any groundwater impact, and
assessment and remediation of off-site contamination has been completed and the
full remediation report was submitted to the state on February 22, 1999. The
state environmental agency may request further information and additional
investigation or remediation may be necessary before the site may be removed
from its Hazardous Sites Inventory.
The Company, together with JCI, is conducting an assessment and remediation
of contamination at the newly acquired Dynasty Division facility in Milwaukee,
Wisconsin. The majority of this project is expected to be completed by the end
of fiscal 2000. Under the purchase agreement with JCI, the Company is
responsible for (i) one-half of the cost of the assessment and remediation, with
a cap of $1,750, (ii) any environmental liabilities at the facility which are
not remediated as part of the current project and (iii) environmental
liabilities for claims made after the fifth anniversary of the closing that
arise from migration from a pre-closing condition at the facility to locations
other than the facility, but specifically excluding liabilities relating to
pre-closing offsite disposal. JCI has retained all other environmental
liabilities.
Based on currently available information, management of the Company
believes that the foregoing will not have a material adverse effect on Company's
business, financial condition 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)
8. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. In May 1999, the FASB delayed the
effective date of this statement by one year to fiscal years beginning after
June 15, 2000. 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 a
portion of the Company's foreign 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.
9. RESTRUCTURING CHARGE
During the first quarter of fiscal 2000, the Company recorded a pre-tax
charge of $1,627, or $.08 per share after-tax, primarily relating to the
restructuring of the Power Electronics Division. The restructuring includes the
closing of the Company's Costa Mesa, California power supply production
facility. These production activities will be transferred to the Company's
existing facilities in Tucson, Arizona and Nogales, Mexico. $1,251 of this
pre-tax charge is included in selling, general and administrative expenses with
the remaining $376 included in cost of sales in the accompanying consolidated
statement of income for the three months ended April 30, 1999. The $1,627
restructuring charge relates to severance, inventory and property, plant and
equipment write downs, and other related costs. Of this amount $376 is included
as a reduction of inventory and the remainder is included in accrued liabilities
as of April 30, 1999.
15
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Dollars in thousands, except per share data)
(UNAUDITED)
10. OPERATIONS BY INDUSTRY SEGMENT
The Company has identified the following four reportable business segments:
The Powercom Division manufactures and markets integrated reserve power
systems and components for the standby power market which includes
telecommunications, uninterruptible power supplies and utilities and controls.
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
Powercom Division also produces the individual components of these systems,
including power rectifiers, system monitors, power boards, chargers and reserve
batteries.
The Dynasty Division manufactures and markets industrial batteries
primarily for the uninterruptible power supply, telecommunications and broadband
cable markets.
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,
original equipment manufacturers ("OEMs").
The Power Electronics Division manufactures and markets custom, standard
and modified standard electronic power supply systems for large OEMs of
telecommunications equipment, office products, computers and workstations. The
Power Electronics Division also manufactures cellular phone battery chargers.
Summarized financial information related to the Company's business segments
for the three months ended April 30, 1999 and 1998 is shown below:
Motive Power
Powercom Dynasty Power Electronics
Division Division Division Division Consolidated
-------- -------- -------- ----------- ------------
Three months ended April 30, 1999:
Net sales.................................. $49,868 $17,376 $18,977 $13,390 $99,611
Operating income........................... $8,343 $3,162 $788 $(2,382) $9,911
Three months ended April 30, 1998:
Net sales.................................. $40,468 $ - $17,195 $21,246 $78,909
Operating income........................... $6,047 $ - $1,031 $2,063 $9,141
16
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 ("the Company") as of April 30, 1999 and the
related consolidated statements of income and comprehensive income for each of
the three-month periods ended April 30, 1999 and 1998, and the related
consolidated statements of cash flows for the three-month periods ended April
30, 1999 and 1998. 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 interim financial statements for them
to be in conformity with generally accepted accounting principles.
We previously audited in accordance with generally accepted auditing standards
the consolidated balance sheet as of January 31, 1999 and the related
consolidated statements of income, stockholders' equity, cash flows and
comprehensive income for the year then ended (not presented herein), and in our
report dated March 8, 1999 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, 1999, 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
May 27, 1999
17
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Effective March 1, 1999, C&D TECHNOLOGIES, INC. (together with its
operating subsidiaries, "we", "our" or "C&D") purchased substantially all of the
assets of the Specialty Battery Division of Johnson Controls, Inc. ("JCI"),
(subsequently re-named the Dynasty Division by C&D), a designer, manufacturer,
marketer and distributor of industrial batteries based in Milwaukee, Wisconsin.
These assets included all of the ordinary shares of Johnson Controls Battery
(U.K.) Limited, an indirect wholly owned subsidiary of JCI. In addition, we
expect to consummate the acquisition of an interest of the Specialty Battery
Division in a joint venture in Shanghai, China in the near future, subject to
certain third party consents. The joint venture manufactures, markets and
distributes industrial and starting, lighting and ignition batteries.
Net sales for the fiscal 2000 first quarter increased $20,702,000 or 26
percent compared to the equivalent quarter of the prior year. This increase was
primarily the result of $17,376,000 of net sales recorded by the recently
acquired Dynasty Division, coupled with higher Powercom and Motive Power
Divisional net sales, up $9,400,000 and $1,782,000, respectively, partially
offset by a $7,856,000 decrease in net sales by the Power Electronics Division.
The Powercom net sales increase of 23 percent in the first quarter of fiscal
2000 over the same quarter of the prior year was mainly due to higher sales to
the telecommunications markets. Power Electronics net sales decreased 37 percent
during the first quarter of fiscal 2000 versus the comparable period of the
prior year, primarily as a result of lower sales of cellular phone battery
chargers to the telecommunications market, as well as lower sales to
non-telecommunications related markets. The Company expects the lower sales
volumes of cellular phone battery chargers to continue at least into the third
quarter of fiscal 2000.
Gross profit for the first quarter of fiscal 2000 increased $5,851,000 or
28 percent to $26,539,000 from $20,688,000 in the fist quarter of fiscal 1999,
resulting in a gross margin of 26.6 percent versus 26.2 percent in the first
quarter of the prior year. The increase in gross profit was primarily due to the
gross profit generated by the Dynasty Division as well as increased gross
profits related to the higher sales volumes provided by the Powercom and Motive
Power Divisions during the first quarter of fiscal 2000 as compared to the first
quarter of the prior year. These increases in gross profits were partially
offset by lower gross profit generated by the Power Electronics Division as a
result of lower sales volume during the first quarter of fiscal 2000 versus the
same period of the prior year. During the first quarter of fiscal 2000, we
incurred a $1,627,000 pre-tax charge (or eight cents per share after-tax),
primarily related to the restructuring of the Power Electronics Division. The
restructuring charge included $376,000 related to inventory obsolescence that
was charged to cost of sales. The balance of the restructuring charge, or
$1,251,000, was charged to selling, general and administrative expenses.
Selling, general and administrative expenses for the first quarter of
fiscal 2000 increased $4,857,000 or 51 percent over the comparable period of the
prior year. This increase was primarily due to selling, general and
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
administrative expenses (including amortization of intangibles and goodwill)
related to the recent acquisition of the Dynasty Division, the aforementioned
$1,251,000 restructuring charge, and higher fixed and variable selling expenses
related to the Powercom and Motive Power Divisions. The increase in Motive Power
Divisional fixed selling expenses during the first quarter of fiscal 2000
includes costs associated with sales branches added in the last half of fiscal
1999 which have not yet met anticipated sales levels.
Research and development expenses increased $224,000 in the first quarter
of fiscal 2000 versus the same quarter of the prior year primarily as a result
of research and development costs incurred by the recently acquired Dynasty
Division. Research and development expenses as a percent of sales decreased
slightly from 2.6 percent in the first quarter of fiscal 1999 to 2.3 percent in
the first quarter of fiscal 2000.
Operating income increased $770,000 (after the aforementioned $1,627,000
restructuring charge) to $9,911,000 in the first quarter of fiscal 2000 compared
to $9,141,000 in the first quarter of fiscal 1999 as a result of operating
income generated by the recently acquired Dynasty Division, coupled with higher
Powercom Divisional operating income. These increases in operating income were
partially offset by lower Motive Power Divisional operating income during the
first quarter of fiscal 2000 and an operating loss incurred by the Power
Electronics Division in the current quarter versus operating income in the first
quarter of fiscal 1999. We expect our Power Electronics Division to incur an
operating loss in the second quarter of fiscal 2000.
Interest expense, net, increased $1,409,000 from the first quarter of
fiscal 1999 to the first quarter of fiscal 2000 due to higher debt balances
outstanding used to finance the recent acquisition of the Dynasty Division.
Income tax expense decreased $308,000 primarily as a result of lower income
before income taxes during the first quarter of fiscal 2000 versus the same
quarter of the prior year.
As a result of the above, net income decreased $421,000 from the first
quarter of fiscal 1999 to $5,335,000 or 43 cents per common share - basic and 42
cents per common share - assuming dilution.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities increased $11,891,000 or 250
percent to $16,638,000 for the first quarter of fiscal 2000 compared to
$4,747,000 for the same quarter of the prior year. This increase was primarily
due to an increase in accounts payable in the first quarter of fiscal 2000
compared to a decrease in the prior year. The increase in accounts payable
during the first quarter of fiscal 2000 is mainly due to the timing of payments
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
to JCI related to services performed under a transition services agreement
associated with the recent acquisition of the Dynasty Division. Also
contributing to increased net cash provided by operating activities was an
increase in income taxes payable during the first quarter of fiscal 2000 versus
a slight decrease in the same quarter of the prior year due to timing of tax
payments. In addition, net cash provided by operating activities increased as a
result of a greater increase in accrued liabilities during the first quarter of
fiscal 2000 versus the comparable period of the prior year, primarily due to
accruals related to the aforementioned restructuring reserve and accrued
interest associated with the higher debt levels. These changes resulting in
higher net cash provided by operating activities, were partially offset by a
larger increase in accounts receivable during the current first quarter compared
to the first quarter of fiscal 1999 due to higher sales volumes.
Net cash used by investing activities totaling $124,669,000 in the first
quarter of fiscal 2000 includes our purchase of the Specialty Battery Division
of JCI (subsequently re-named the Dynasty Division by C&D).
Net cash provided by financing activities was $112,949,000 for the first
quarter of fiscal 2000 versus $498,000 in the prior year's first quarter. The
proceeds from new borrowings in the current year's first quarter were used
primarily for the funding of the acquisition of the Dynasty Division.
On March 1, 1999 we entered into a credit agreement in which the lenders
named therein, and Nationsbank, N.A. as administrative agent, provided a
$220,000,000 credit facility consisting of a term loan in the amount of
$100,000,000 and a revolving loan not to exceed $120,000,000. The funds borrowed
under this credit agreement were used to finance the acquisition of the
Specialty Battery Division of JCI, to refinance existing debt and to finance
working capital and certain other expenditures. Our availability under the
current loan agreement is expected to be sufficient to meet our ongoing cash
needs for working capital requirements, debt service, capital expenditures and
possible strategic acquisitions. Capital expenditures during the first quarter
of fiscal 2000 were incurred primarily to fund capacity expansion, new product
development, a continuing series of cost reduction programs, normal maintenance
capital, and regulatory compliance. Fiscal 2000 capital expenditures are
expected to be approximately $20,000,000 for similar purposes.
READINESS FOR YEAR 2000
We are taking action to ensure that our operations will not be adversely
affected by potential Year 2000 computer failures and have developed a Year 2000
Readiness Plan. Our Chief Financial Officer is responsible for overseeing the
execution of the plan and reports quarterly to our Board of Directors on the
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
status of the Year 2000 Readiness Plan. The plan addresses the following four
areas:
o information technology systems (consisting of computer hardware and
software related to our business systems as well as our engineering
and test equipment);
o 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.);
o products sold to customers; and
o third party issues (including significant suppliers and customers).
Our Year 2000 Readiness Plan generally includes the following phases for
each of the four areas noted above:
o identification and risk assessment;
o development and implementation of a remediation plan;
o acceptance testing; and
o contingency planning for high risk critical areas.
We have identified certain deficiencies related to our information
technology systems and have addressed them through upgrades or other
remediation. We have two main computer systems that are utilized to run our
business systems. Year 2000 remediation work on our business systems that run on
our computers located in Blue Bell, Pennsylvania and Tucson, Arizona have been
completed and these business systems are now Year 2000 compliant.
In terms of non-information technology systems, we have identified those
items which may require remediation or replacement. We are in the process of
addressing those items and expect to complete remediation or replacement and
testing by the middle of fiscal 2000.
We have completed our assessment of Year 2000 compliance with respect to
our battery and electronics products that are currently being sold to customers
and have concluded that all significant products are compliant.
With respect to third parties, we have identified and have been contacting
our significant suppliers and will shortly begin to contact our major customers
to determine the extent to which we 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, our assessment will be substantially
dependent on information provided by third parties. We have completed this
initial notification and solicitation process with our significant suppliers and
have now begun the next phase of re-contacting those companies who have not
responded. We believe this process will continue through the second and third
quarters of fiscal 2000.
Based upon our current estimates, total costs associated with our Year 2000
compliance are expected to be immaterial. The majority of these costs were
incurred in fiscal 1999 and include third party consultants and programmers,
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (continued)
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 our results of operations or financial condition.
We believe that our 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 we have no direct involvement) that
negatively impact our 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, we are considering
contingency plans to limit, to the extent possible, the financial impact of
these failures on our results of operations. Any such plans would necessarily be
limited to matters which we can reasonably control.
Our Year 2000 efforts are ongoing and our overall plan, as well as the
consideration of contingency plans, will continue to evolve as new information
becomes available. While we anticipate continuity of our business activities,
that continuity will be dependent upon our ability, and the ability of third
parties with whom we rely on directly, or indirectly, to be Year 2000 compliant.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("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. In May 1999, the FASB delayed the
effective date of this statement by one year to fiscal years beginning after
June 15, 2000. We currently use derivatives such as interest rate swap
agreements, currency swaps and currency forwards to effectively fix the interest
rate on a portion of our floating rate debt and the exchange rate on a portion
of our foreign 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. We are
currently evaluating the financial impact of adoption of this statement. We
believe that the adoption of SFAS No. 133 will not have a material effect on our
financial position or results of operations.
22
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 our actual results and
could cause our actual results to differ materially from those expressed in any
forward-looking statements made by C&D in this Quarterly Report on Form 10-Q.
23
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 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) (filed herewith).
10.2 C&D TECHNOLOGIES, INC. Incentive Compensation Plan (filed here-
with).
15. Letter from PricewaterhouseCoopers LLP, independent accountants
for C&D, regarding unaudited interim financial information (filed
herewith).
27. Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K:
C&D has filed with the Securities and Exchange Commission during
the quarter ended April 30, 1999 a Current Report on Form 8-K dated
March 1, 1999 (as amended by a Form 8-K/A filed May 14, 1999)
reporting under Item 2 that C&D had acquired substantially all of the
assets of the Specialty Battery Division of JCI, including, without
limitation, certain assets of Johnson Controls Technology Company, a
wholly owned subsidiary of JCI, and 100% of the ordinary shares of
Johnson Controls Battery (U.K.) Limited, an indirect wholly owned
subsidiary of JCI. The acquisition of an interest of the Specialty
Battery Division in a joint venture in Shanghai, China, is expected to
be consummated in the near future, subject to certain third party
consents. Additionally, we reported under Item 5 a credit agreement
entered into among C&D, the lenders named therein and NationsBank,
N.A. as administrative agent. The 8-K/A filed May 14, 1999 contains
historical financial statements and pro forma financial information of
the acquired business, including the joint venture in Shanghai, China.
24
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.
June 11, 1999 BY: /s/ Wade H. Roberts, Jr.
---------------------------------
Wade H. Roberts, Jr.
President, Chief Executive
Officer and Director
(Principal Executive Officer)
June 11, 1999 BY: /s/ Stephen E. Markert, Jr.
----------------------------------
Stephen E. Markert, Jr.
Vice President Finance
(Principal Financial and
Accounting Officer)
25
EXHIBIT INDEX
10.1 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).
10.2 C&D TECHNOLOGIES, INC. Incentive Compensation Plan.
15. Letter from PricewaterhouseCoopers LLP, independent accountants
for C&D, regarding unaudited interim financial information.
27. Financial Data Schedule.
26