UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2004
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
Securities registered pursuant to Section 12(b) of the Act:
Title of Class Name of each exchange
-------------- on which registered
Common Stock, -----------------------
par value $.01 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes |x| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes |x| No |_|
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant, based on the closing price on July 31, 2003:
$380,896,402
Number of shares outstanding of each of the Registrant's classes of common
stock as of April 7, 2004: 25,403,472 shares of Common Stock, par value $.01 per
share.
Documents incorporated by reference:
Portions of Registrant's Proxy Statement Part III
to be filed pursuant to Regulation 14A (Part of Form 10-K into which
within 120 days after the end of Registrant's Document is incorporated)
fiscal year covered by this Form 10-K
TABLE OF CONTENTS
Page
----
Part I
Item 1 Business ............................................... 1
Item 2 Properties ............................................. 14
Item 3 Legal Proceedings ...................................... 15
Item 4 Submission of Matters to a Vote of
Security Holders ................................... 15
Part II
Item 5 Market for Registrant's Common Equity
and Related Stockholder Matters .................... 16
Item 6 Selected Financial Data ................................ 17
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations ................ 19
Item 7A Quantitative and Qualitative Disclosure
About Market Risk .................................. 28
Item 8 Financial Statements and Supplementary Data ............ 29
Item 9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ............. 29
Item 9A Controls and Procedures ................................ 29
Part III
Item 10 Directors and Executive Officers of the Registrant ..... 30
Item 11 Executive Compensation ................................. 30
Item 12 Security Ownership of Certain Beneficial
Owners and Management and Related
Stockholder Matters ................................ 30
Item 13 Certain Relationships and Related Transactions ......... 30
Item 14 Principal Auditor Fees and Services .................... 30
Part IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K ................................ 31
Signatures ............................................................. 36
Index to Financial Statements and Financial Statement Schedule.......... F-1
I
C&D TECHNOLOGIES, INC.
PART I
Item 1. Business
About Our Company
C&D Technologies, Inc. (together with its operating subsidiaries, "we,"
"our" or "C&D") is a technology company that produces and markets systems for
the conversion and storage of electrical power, including reserve power systems
and embedded, high frequency switching power supplies. Our integrated reserve
power systems are comprised of the following:
o industrial lead acid batteries;
o power rectifiers;
o power control equipment;
o power distribution equipment; and
o related accessories.
Our power supplies are comprised of the following:
o DC to DC converters;
o AC to DC and DC to DC power supplies;
o Magnetics (transformers and inductors); and
o custom architectures.
Common applications for our power supply product and system portfolio
include:
o telecommunications equipment, including optical switches, remote
switches, Voice Over Internet Protocol (VOIP), central office
backup;
o data centers and networked (LAN and WAN) computing architecture;
o high availability industrial computing;
o industrial temperature control systems;
o industrial imaging equipment;
o displays (signs, scanning equipment);
o broadband cable television ("CATV") powering;
o advanced office electronic machines, such as digital copiers; and
o motive power systems for electric industrial vehicles.
We sell both individual components and integrated power systems.
We were organized in November 1985 to acquire all the assets of the
eighty-year old C&D Power Systems Division (the "Division") of Allied
Corporation ("Allied"). The Division's business essentially was unchanged by the
acquisition, which was completed on January 28, 1986. Shares of our Common
Stock, par value $.01 per share ("Common Stock"), were first issued to the
public in February 1987.
In March 1999, we purchased substantially all of the assets of the
Specialty Battery Division of Johnson Controls, Inc. ("JCI"), a Milwaukee,
Wisconsin-based designer, manufacturer, marketer and distributor of industrial
batteries. These assets included all of the ordinary shares of Johnson Controls
Battery (U.K.) Limited, an indirect wholly owned subsidiary of JCI. In addition,
in August 1999, we acquired JCI's 67%
1
ownership interest in a joint venture battery business in Shanghai, China. The
joint venture manufactures and markets industrial batteries. For reporting
purposes, we have re-named the Specialty Battery Division and JCI's 67%
ownership interest in the joint venture battery business in Shanghai, China, the
Dynasty Division.
In June 2000, we completed a two-for-one stock split, effected in the form
of a 100% stock dividend.
In December 2000 (effective as of November 26, 2000), we acquired the
Newport Components Division of Newport Technology Group Limited, a producer of
electronic power conversion products (primarily DC to DC converters) based in
the United Kingdom. For reporting purposes, this acquisition is included as part
of the Power Electronics Division and is referred to as C&D Technologies (NCL)
Limited ("NCL").
In September 2003, we acquired certain assets from Matsushita Battery
Industrial Corporation of America and Matsushita Battery Industrial de Mexico,
S.A. de C.V. Acquired assets included a 240,000 square foot facility, in
Reynosa, Mexico and the equipment in the facility historically used for the
manufacture of large, valve regulated lead acid batteries for standby power
applications. In addition, we entered into a worldwide technology license
agreement with Matsushita Battery Industrial Co. Ltd. of Japan for selected
patents and know-how relating to the manufacturing technology for the
aforementioned products. For reporting purposes, the acquisition of the Reynosa
facility and associated operating results are included in the Powercom Division.
Fiscal Year
Our fiscal year ends on the last day of January. Any references to a
fiscal year means the 12-month period ending January 31 of the year mentioned.
Forward-Looking Statements
Certain of the statements and information contained in this Form 10-K 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)
and, accordingly, are subject to risks and uncertainties. For such statements,
we claim the protection of the safe-harbor for forward-looking statements
contained in the Private Securities Litigation Act of 1995. The factors that
could cause actual results to differ materially from anticipated results
expressed or implied in any forward-looking statement include those referenced
in the forward-looking statement, following the forward-looking statement,
described in the notes to the Consolidated Financial Statements and other
factors discussed in this Form 10-K and our other filings with the Securities
and Exchange Commission. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date of this Form
10-K. We undertake no obligation to update or revise these statements to reflect
events or circumstances occurring after the date of this Form 10-K.
Forward-looking statements may be identified by their use of words like
"plans," "expects," "will," "anticipates," "intends," "may," "projects,"
"estimates," "believes" or other words of similar meaning. All statements that
address expectations or projections about the future, including, but not limited
to, statements about our strategy for growth, product development, market
position, market conditions, expenditures and financial results, are
forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events. We cannot guarantee that these
assumptions and expectations are accurate or will be realized. Following are
some of the important factors that could cause our actual results to differ
materially from those projected in any such forward-looking statements:
o We operate worldwide and derive a portion of our revenue from sales
outside the United States. Changes in the laws or policies of
governmental and quasi-governmental agencies, as well as social and
economic conditions, in the countries in which we operate (including
the United States) could
2
affect our business and our results of operations. In addition,
economic factors (including inflation and fluctuations in interest
rates and foreign currency exchange rates) and competitive factors
(such as price competition and business combinations of competitors)
or a decline in industry sales or cancelled or delayed orders due to
economic weakness or changes in economic conditions, either in the
United States and other countries in which we conduct business could
affect our results of operations. (See Item 1. Business -
International Operations, Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Impact
of the Economy and Shift in Customer Demand, and Item 7A.
Quantitative and Qualitative Disclosure About Market Risk - Market
Risk Factors.)
o Terrorist acts or acts of war, whether in the United States or
abroad, could cause damage or disruption to our operations, our
suppliers, channels to market or customers, or could cause costs to
increase, or create political or economic instability, any of which
could have a material adverse effect on our business.
o Our results of operations could be adversely affected by conditions
in the domestic and global economies or the markets in which we
conduct business, such as telecommunications, UPS, CATV, switchgear
and control and material handling.
o Our ability to grow earnings could be affected by increases in the
cost of raw materials, particularly lead, the primary constituent of
our battery products, or other product parts or components. We may
not be able to fully offset the effects of higher costs of raw
materials through price increases or productivity improvements. A
significant increase in the price of one or more raw materials,
parts or components could have a material adverse effect on our
operations. (See Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Raw Material Pricing
and Productivity; and Inflation.)
o Our ability to meet customer demand depends, in part, on our ability
to obtain timely and adequate supply and delivery of raw materials,
including lead, which is the primary constituent of our battery
products or other product parts or components from our suppliers and
internal manufacturing capacity. Although we work closely with both
our internal and external suppliers (and, as to the continuing
availability of lead, our industry associations) to avoid
encountering unavailability or shortages, there can be no assurance
that we will not encounter them in the future. The cessation,
reduction or interruption of supply of raw materials (including
lead), product parts or components, could have a material adverse
effect on our operations.
o Our growth objectives are largely dependent on our ability to renew
our pipeline of new products and to bring these products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: introduce viable new
products; successfully complete research and development projects or
integrate purchased or licensed technology; obtain adequate
intellectual property protection; or gain market acceptance of the
new products. Our growth could also be affected by new competitive
products and technologies.
o As part of our strategy for growth, we have made and may continue to
make acquisitions, and in the future, may make divestitures and form
strategic alliances. There can be no assurance that these will be
completed or beneficial to us.
o We have undertaken and may continue to undertake productivity
initiatives, including re-organizations to improve performance or
generate cost savings. In addition, we may from time to time
relocate or consolidate one or more of C&D's operations. There can
be no assurance that any planned performance improvements or cost
savings from such activities will be realized or that delays or
other interruptions in production or delivery of products will not
occur as the result of any
3
relocation or consolidation. Further, there can be no assurance that
any of these initiatives will be completed or beneficial to C&D.
o Our facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental
laws and regulations, as well as participation in voluntary
programs, are significant and will continue to be so for the
foreseeable future. We are also subject to potentially significant
fines and penalties for non-compliance with applicable laws and
regulations. Our accruals for such costs and liabilities may not be
adequate since the estimates on which the accruals are based depend
on a number of factors including, but not limited to, the nature of
the problem, the complexity of the issues, the nature of the remedy,
the outcome of discussions with regulatory agencies and/or the
government or third parties and, as applicable, other potentially
responsible parties ("PRPs") at multiparty sites, the number and
financial viability of other PRPs and risks associated with
litigation. (See Business - Environmental Regulations.)
o We are exposed to the credit risk of our customers, including risk
of insolvency and bankruptcy. Although we have programs in place to
monitor and mitigate the associated risk, there can be no assurance
that such programs will be effective in reducing our credit risks or
risks associated with potential bankruptcy of our customers. (See
Item 7A. Quantitative and Qualitative Disclosure About Market Risk.)
o Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims
adverse to us. These could potentially include, but are not limited
to, the following: product liability, contract, employment-related,
labor relations, personal or property damage or stockholder claims
and claims arising from any injury or damage to persons, property or
the environment from hazardous substances used, generated or
disposed of in the conduct of our business (or that of a predecessor
to the extent we are not indemnified for those liabilities). (See
Item 3. Legal Proceedings.)
o Our performance depends on our ability to attract and retain
qualified personnel. We cannot assure that we will be able to
continue to attract or retain qualified personnel.
o Our bank loan agreement permits dividends to be paid on our Common
Stock as long as there is no default under that agreement. Subject
to that restriction and the provisions of Delaware law, our Board of
Directors currently intends to continue paying dividends. We cannot
assure you that we will continue to do so since future dividends
will depend on our earnings, financial condition and other factors.
o Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than
anticipated. Our profit margins vary among products, customers and
geographic markets. Consequently, if our mix of any of these is
substantially different from what is anticipated in any particular
period, our earnings could be lower than anticipated.
o In spite of having a disaster recovery plan in place, infrastructure
failures could have a material adverse effect on our business. We
are highly dependent on our systems infrastructure in order to
achieve our business objectives. If we experience a problem that
impairs our infrastructure, such as a power outage, computer virus,
intentional disruption of information technology systems by a third
party, equipment failure or telephone system failure, the resulting
disruptions could impede our ability to book or process orders,
manufacture and ship products in a timely manner or otherwise carry
on our business in the ordinary course. Any such events could cause
C&D to lose significant customers or revenue and could require C&D
to incur significant expense to eliminate these problems and address
related security concerns.
4
The foregoing list of important factors is not all inclusive, or necessarily in
order of importance.
Reportable Segments
Our operations are classified into the following reportable business
segments:
o Dynasty Division
o Powercom Division
o Power Electronics Division
o Motive Power Division
Segments are determined using the "management approach," which means the
way management organizes the segments within the enterprise for making operating
decisions and assessing performance. Effective February 1, 2004, we combined the
Dynasty and Powercom divisions into the newly created Standby Power Division.
The financial information regarding our four business segments, which
includes net sales and operating income for each of the three years in the
period ended January 31, 2004, is provided in Note 15 to the Consolidated
Financial Statements. See Part II, Item 8.
The Market for Our Products
We manufacture and market products in the following general categories by
business segment:
o Dynasty Division - industrial batteries used in uninterruptible
power supplies ("UPS") applications for computer systems and
corporate data networks, telecommunications reserve power systems
and CATV signal powering;
o Powercom Division - fully integrated reserve power systems and
components for the standby power market, which includes
telecommunications, UPS, utilities and solar;
o Power Electronics Division - custom, standard and modified standard
DC to DC converters, embedded high frequency AC to DC and DC to DC
switching power supplies and magnetics (transformers and inductors);
and
o Motive Power Division - motive power systems for the material
handling equipment market.
We market our products through independent manufacturer's representatives,
national and global distributors, specialty resellers and our own sales
personnel to end users and original equipment manufacturers ("OEMs").
We sell some products to the U.S. Government. These sales accounted for
less than 5% of our total company sales during each of our last three fiscal
years.
Products and Customers by Business Segment
Dynasty Division - Reserve Power Batteries
Through our Dynasty Division, we design, manufacture and distribute
valve-regulated (sealed) batteries for use in reserve power systems for a wide
variety of end use markets. Our product range focuses on batteries that provide
less than 200-ampere hours. These products are sold primarily to customers in
the UPS, telecommunications and cable markets. Major applications of these
products include corporate data center
5
backup, computer network backup for use during power outages, CATV signal
powering and wireless and wireline telephone infrastructure. Our customers
include industry-leading OEMs serving the UPS, broadband and telecommunications
markets.
Uninterruptible Power Supplies. The Dynasty Division produces batteries
for UPS systems, which provide instant battery backup in the event of primary
power loss or interruption, thereby permitting an orderly shutdown of equipment
or continued operation for a limited period of time until a power source comes
back on-line. Our Dynasty(R) High Rate Series batteries have been engineered
specifically for UPS applications and deliver extended life while complying with
rigorous industry standards. In addition, during fiscal 2004, the Dynasty
Division introduced a new line of premium replacement 10 year life VRLA
batteries for UPS applications called the MAXRATE(TM), which we believe provides
a longer life and improved runtime in the same space as that of original
equipment batteries currently supplied by UPS manufacturers. As a critical
component to overall power backup solutions, our Dynasty Division has worked
closely with major global UPS OEMs to design a cost-effective, reliable product
to meet customer expectations.
Telecommunications. Our Dynasty(R) Tel Series Long Duration batteries are
designed to Telcordia Standards to meet the demanding requirements of
telecommunications applications. These batteries operate in a wide variety of
environmental conditions, meet prolonged run time needs so as to maintain
operations during power loss and protect sophisticated electronics equipment.
CATV Signal Powering and Broadband. Dynasty(R) Broadband Series batteries
are designed for demanding standby float applications in abusive environments.
These batteries have been designed to offer the best combination of run time and
service life for CATV signal powering and broadband applications. Our gelled
electrolyte technology provides excellent heat transfer properties, which enable
these batteries to perform in high temperature environments. Unlike other
competitive gel technologies, the Dynasty(R) Broadband Series does not require
cycling subsequent to delivery to meet 100% of rated capacity. Our Dynasty(R)
Broadband Series of batteries is considered the market leader for CATV powering
in North America.
Powercom Division - Reserve Power Systems
We are a leading producer of fully integrated reserve power systems that
monitor and regulate electric power flow and provide backup power in the event
of a primary power loss or interruption. We also produce the individual
components of these systems, including power rectifiers, system monitors, power
boards, chargers and reserve batteries.
We manufacture lead acid batteries for use in reserve power systems. We
sell these batteries in a wide range of sizes and configurations in two broad
categories:
o flooded batteries; and
o valve-regulated (sealed) batteries.
Flooded batteries require periodic watering and maintenance.
Valve-regulated batteries require less maintenance and are often smaller.
To meet the needs of our customers, our reserve power systems include a
wide range of power electronics products, consisting principally of power
rectifiers and distribution and monitoring equipment. Our power rectifiers
convert or "rectify" external AC power into DC power at the required level and
quality of voltage and apply the DC power to constantly charge the reserve
battery and operate the user's equipment. For installations with end
applications that require varied power levels, our power control and
distribution equipment distributes the rectified power for each of the
applications.
6
Telecommunications Customers. Our customers use the majority of our
standby power products in telecommunications applications, such as central
telephone exchanges, microwave relay stations, private branch exchange ("PBX")
systems and wireless telephone systems. Our major telecommunications customers
include national long distance companies, competitive local exchange carriers,
wireline and wireless system operators, paging systems and PBX telephone
locations using fiber optic, microwave transmission or traditional copper-wired
systems.
Modular Power Plants. We offer several modular power plants, which are a
type of integrated reserve power system. These products, which are referred to
as the Liberty(R) AGM Series Power Plant and the Liberty(R) ACM Series Power
Plant, integrate advanced rectifiers with virtually maintenance-free
valve-regulated batteries. The Powercom Division introduced the Sageon(TM) power
system in fiscal 2004. The Sageon(TM) family of power systems products is
designed to fit virtually any application that demands stable, reliable and
easily expandable DC power.
Uninterruptible Power Supplies. Similar to our Dynasty Division, we
produce batteries for UPS systems, which provide instant battery backup in the
event of primary power loss or interruption, thereby permitting an orderly
shutdown of equipment or continued operation for a limited period of time until
a power source comes back on-line. Large UPS systems are used principally for
mainframe computers, minicomputers, networks and computer-controlled equipment.
Equipment for Electric Utilities and Industrial Control Applications. We
produce rectifiers and batteries used in reserve power systems for switchgear
and instrumentation control systems used in electric utilities and industrial
control applications. These power systems provide auxiliary power that enables
fossil fuel, hydro and nuclear power generating stations, switching substations
and industrial control facilities to be shut down in an orderly fashion during
emergencies or power failures until a power source comes back on-line.
Power Electronics Division - DC to DC Converters, Power Supplies and
Magnetics
Through our Power Electronics Division we design, manufacture and market
custom, standard and modified-standard electronic power supplies. Our Power
Electronics Division services several major market segments including
telecommunications, networking equipment, office equipment, industrial
automation and test instrumentation. In addition, our Power Electronics Division
manufactures rectifiers for reserve power applications that are sold by our
Powercom Division and provides electronic contract manufacturing services for
key clients in the Southwest United States.
We sell the majority of our power supply products to OEMs of electronic
products on either a custom, standard or modified-standard basis. Power supplies
are embedded in almost all electronic products and are used to convert available
AC or DC voltage to the required level and quality of DC voltage to power the
associated equipment.
Our power supplies incorporate advanced technology and are designed for
reliable operation of the host equipment. These products include DC to DC
converters, AC to DC and DC to DC power supplies and magnetics (transformers and
inductors) for use in a wide variety of applications, with outputs ranging from
sub one watt to several kilowatts. DC to DC products are circuit board mounted
devices used to convert available system power to required component voltages.
DC to DC converters are widely used in distributed power and intermediate bus
architecture where system voltages require conversion to a higher or lower
voltage to power components such as microprocessors and arrays. AC to DC power
supplies convert alternating current, the form in which virtually all power is
delivered by electric utilities to end users, into precisely controlled direct
current that is required by sensitive electronic application architecture.
In the telecommunications industry, our power supplies are broadly used in
central office and transmission equipment. We also produce power supplies for
networking equipment (switches, routers, hubs, etc.), office
7
equipment (mass storage, digital printing, etc.), and industrial equipment
(computing, automation and test instrumentation).
Motive Power Division - Motive Power Systems
Our customers use the majority of our motive power products to provide
power for material handling vehicles. A significant portion of our motive power
sales includes products and systems to recharge motive power batteries.
We produce complete systems and individual components (including power
electronics and batteries) to monitor, charge, test and manage the batteries
used in powering electric industrial vehicles, including fork-lift trucks and
automated guided vehicles. Our customers include end users in a broad array of
industries, dealers of material handling equipment and, to a lesser extent,
OEMs.
We offer a broad line of motive power equipment including the C-Line(TM)
battery, which we believe is the industry standard for long life and the
V-Line(R) battery for general material handling applications. We also offer a
broad line of battery charging and associated specialty equipment and parts.
Sales, Installation and Servicing
The sales, installation and servicing of our Powercom and Motive Power
products are performed through several networks of independent manufacturer's
representatives located throughout North America. Most of our independent
manufacturer's representatives (or contractors in the case of installation or
service) operate under contracts providing for compensation on a commission
basis or as a distributor with product purchased for resale. Dynasty and Power
Electronics products are sold via a network of independent manufacturer's
representatives as well as independent distributors located throughout the
world.
In addition to these networks of independent manufacturer's
representatives and distributors, we employ internal sales management consisting
of regional sales managers, account specific sales persons and product/market
specialists. The regional sales managers are each responsible for managing a
number of independent manufacturer's representatives and for developing
long-term relationships with large end users, OEMs and national accounts. We
also employ a separate sales organization that works with the independent
manufacturer's representative network and directly with certain large customers.
We have internal product management and marketing personnel in each of our
divisions to manage the development of new products from the initial concept
definition and management approval stages through the engineering, production
and sales processes. They are also responsible for applications engineering,
technical training of sales representatives and the marketing communications
function.
We maintain branch sales and service facilities in North America, Europe
and Asia, with the support of our headquarters and service personnel, and have
business relationships with sales representatives and distributors throughout
the world.
No single customer of C&D accounted for 10% or more of our net sales for
the year ended January 31, 2004. We typically sell our products with terms
requiring payment in full within 30 days. We warrant our battery products on a
full and/or pro-rata basis, to perform as rated for specified periods of time,
ranging from 1 to 25 years, depending on the type of product and its
application. The longest warranties generally are applicable to flooded standby
power batteries sold by our Powercom Division. Power supply products from our
Power Electronics Division are generally sold with a full one year warranty.
8
Backlog
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of orders, customer
requirements and, taking into account considerations of manufacturing capacity
and flexibility, the speed with which we fill those orders. Period-to-period
comparisons may not be meaningful. Occasionally orders may be canceled by the
customer prior to shipment.
Our order backlog at March 31, 2004 was $50,034,000 and at March 31, 2003
was $43,253,000. We expect to fill virtually all of the March 31, 2004 backlog
during fiscal 2005.
Manufacturing and Raw Materials
We manufacture our products at seven domestic plants, two plants in China,
two plants in Mexico and one plant in the United Kingdom. We manufacture most
key product lines at a single focused plant in order to optimize manufacturing
efficiency, asset management and quality control.
Consolidation. No manufacturing facilities were closed during fiscal 2004.
In fiscal 2003, we closed the metal fabrication operations at our Conshohocken,
Pennsylvania facility and now purchase products previously manufactured at this
location from third parties. We also closed our Shannon, Ireland facility in
fiscal 2003, shifting its manufacturing and design capabilities to other Power
Electronics Division facilities. In fiscal 2002, we closed our Workington,
United Kingdom facility and transferred production to our other Power
Electronics Division facilities.
Raw Materials. The principal raw materials used in the manufacture of our
products include lead, steel, copper, plastics, printed circuit boards and
electronic components, all of which are generally available from multiple
suppliers. Other than the required use of one supplier of lead and one supplier
of lead oxide for the production of Round Cell batteries for one customer, we
use a number of suppliers to satisfy our raw materials needs.
ISO 9000 Recognition. ISO certification assures customers that our
internal processes and systems meet internationally recognized standards. We are
ISO 9001:2000 standard certified at the following domestic locations: Conyers,
Georgia; Dunlap, Tennessee; Milwaukee, Wisconsin and Tucson, Arizona.
Internationally, our operations in Guangzhou, China; Milton Keynes and Romsey,
United Kingdom; Nogales, Mexico and Shanghai, China are also ISO 9001:2000
standard certified.
Competition
Our products compete on the basis of:
o product quality and reliability;
o reputation;
o customer service;
o delivery capability; and
o technology.
We also offer competitive pricing and highly value our relationships with
our customers. In addition, we believe that we have certain competitive
advantages in specific product lines.
9
We believe that we are one of the four largest producers of both reserve
and motive power systems in North America. We believe that the ability to
provide a single source for design, engineering, manufacturing and service is an
important element in our competitive position.
In reserve power systems, we believe we are the only major North American
company that manufactures complete, integrated reserve power systems consisting
of both electronics and batteries. Our other major competitors manufacture
either electronics or batteries, but not both.
When lead prices rise, certain of our battery competitors that own
smelting operations may have lower lead costs than we have. However, when lead
prices decline, the high fixed costs associated with these operations may
provide C&D with a cost advantage.
Research and Development
We maintain extensive technology departments concentrating on
electrochemical and electronics technologies. We focus on:
o the design and development of new products;
o the ongoing development and improvement of existing products;
o sustaining engineering;
o production engineering (including quality testing and managing the
changes in production capacity); and
o the evaluation of competitive products.
Our research and development facilities in the United States and Europe
feature advanced computer-aided design and testing equipment. Technology and
engineering personnel coordinate all activities closely with operations, sales
and marketing in order to better meet the needs of customers. We continue to
develop new products in our businesses. During fiscal 2004, the Dynasty Division
introduced a new line of premium replacement 10 year life VRLA batteries for UPS
applications called the MAXRATE(TM), which we believe provides a longer life and
improved runtime in the same space as that of original equipment batteries
currently supplied by UPS manufacturers. The Powercom Division introduced the
Sageon(TM) power system in fiscal 2004. The Sageon(TM) family of power systems
products is designed to fit virtually in any application that demands stable,
reliable and easily expandable DC power. The Power Electronics Division
introduced a significant number of new products during fiscal 2004 year
including the WPA60, sixty-watt, dual output voltage, DC to DC converter to meet
the ever-increasing power and voltage needs of today's semiconductor
technologies. In addition, the NTH series, isolated, two watt, dual output,
surface mount device was introduced with leadframe technology and transfer
molding techniques to bring all of the benefits of IC style packaging to hybrid
circuitry. In our Motive Power Division, we introduced the IFR charger line
which extends our ability to provide chargers not only for our own line of
Motive batteries, but also those of our competition.
International Operations
Along with our domestic manufacturing facilities, we have international
manufacturing facilities in China, Mexico and the United Kingdom. Our 67% joint
venture facility in Shanghai, China manufactures industrial batteries that are
sold primarily in China and Europe. Our Power Electronics Division facilities in
China and the United Kingdom manufacture electronics that are sold primarily in
Europe, North America, and the Far East. International sales accounted for
17.4%, 18.0% and 20.4% of net sales for the years ended January 31, 2004, 2003
and 2002, respectively.
10
Patents and Trademarks
Our practice is to apply for patents on new inventions, designs and
processes, which have strategic value or which are associated with existing or
prospective product lines, service offerings or operations. We believe that the
growth of our business will depend primarily upon the quality and reliability of
our products and our relationships with our customers, rather than the extent of
our patent protection. While we believe that patents are important to our
business operations, the loss of any single or several patents would not have a
material adverse effect on our company.
We regard our trademarks C&D(R), C&D TECHNOLOGIES(R), C&D TECHNOLOGIES
POWER SOLUTIONS(R), DYNASTY(R), LIBERTY(R), LIBERTY SERIES(R), LIBERTY SERIES
2000 MAX(R) and MAXIMIZER(R) as being of substantial value in the marketing of
our products and have registered these trademarks in the United States Patent
and Trademark Office. Our trademarks also include C-LINE(TM), COMPUCHARGE(R),
FERRO FIVE(R), FERRO 1500(R), HYPERON(R), MAXRATE(TM), POSITION PERFECT(R),
RANGER(R), SAGEON(TM), SMARTBATTERY(R) and V-LINE(R).
Employees
On February 29, 2004 we employed 2,345 people. Of these employees, 1,861
were employed in manufacturing and 484 were employed in field sales, technology,
manufacturing support, sales support, marketing and administrative activities.
Our management considers our employee relations to be satisfactory. Employees at
five North American plants are represented by five different unions under
collective bargaining agreements. Of these agreements, only the collective
bargaining agreement associated with our Attica, Indiana facility is scheduled
to expire in fiscal 2005.
Environmental Regulations
Our operations are subject to extensive and evolving environmental laws
and regulations regarding the clean-up and protection of the environment, worker
health and safety and the protection of third parties. These laws and
regulations include, but are not limited to, the following:
o requirements relating to the handling, storage, use and disposal of
lead and other hazardous materials used in manufacturing processes
and solid wastes;
o record keeping and periodic reporting to governmental entities
regarding the use and disposal of hazardous materials;
o monitoring and permitting of air emissions and water discharge; and
o monitoring worker exposure to hazardous substances in the workplace
and protecting workers from impermissible exposure to hazardous
substances, including lead, used in our manufacturing process.
We operate under a comprehensive environmental, health and safety
compliance program, which is headed by an environmental vice-president and
staffed with trained environmental professionals. As part of our program, we:
o prepare environmental and health and safety practice manuals and
policies;
o conduct employee training;
o develop and implement waste minimization initiatives;
o undertake periodic internal and oversee external audits of our
operations and environmental and health and safety programs;
11
o practice and engage in routine sampling and monitoring of employee
chemical and physical exposure levels;
o engage in sampling and monitoring of potential points of
environmental emissions; and
o prepare and/or review internal reports to regulatory bodies and
interface with them regarding environmental, safety and other
issues.
In addition, we also have installed certain pollution abatement equipment
to reduce emissions and discharges of regulated pollutants into the environment.
Our program monitors and seeks to resolve potential environmental liabilities
that result from, or may arise from, current and historic hazardous materials
handling and waste disposal practices. We have in place a spent product
recapture and recycling program for our facilities and our customers.
While we believe that we are in material compliance with the applicable
environmental requirements, we have received, and in the future may receive,
citations and notices from governmental regulatory authorities that certain of
our operations are not in compliance with our permits or applicable
environmental requirements. Occasionally we are required to pay a penalty or
fine, to install control technology or to make equipment or process changes (or
a combination thereof) as a result of the non-compliance or changing regulatory
requirements. When we become aware of a non-compliance or change in regulatory
requirements, we take immediate steps to correct and resolve the issues. The
associated costs have not had a material adverse effect on our business,
financial condition or results of operations.
Notwithstanding our efforts to maintain compliance with applicable
environmental requirements, if injury or damage to persons or the environment
arises from hazardous substances used, generated or disposed of in the conduct
of our business (or that of our predecessors to the extent we are not
indemnified therefor), we may be held liable for certain damages, the costs of
the investigation and remediation, and potential fines and penalties, which
could have a material adverse effect on our business, financial condition or
results of operations. However, under the terms of the purchase agreement with
Allied for the acquisition of C&D (the "Acquisition Agreement"), Allied was
obligated to indemnify C&D for any liabilities of this type resulting from
conditions existing at January 28, 1986 that were not disclosed by Allied to C&D
in the schedules to the Acquisition Agreement. These obligations have since been
assumed by Allied's successor in interest, Honeywell ("Honeywell").
C&D, along with numerous other parties, has been requested to provide
information to the United States Environmental Protection Agency (the "EPA") in
connection with investigations of the source and extent of contamination at
three lead smelting facilities (the "Third Party Facilities") to which C&D had
made scrap lead shipments for reclamation prior to the date of the acquisition.
C&D and four other PRPs agreed upon a cost sharing arrangement for the
design and remediation phases of a project related to one of the Third Party
Facilities, the former NL Industries site in Pedricktown, New Jersey, acting
pursuant to a Consent Decree. The PRPs identified and sued additional PRPs for
contribution. In April 2002, one of the original four PRPs, Exide Technologies
("Exide"), filed for relief under Chapter 11 of Title 11 of the United States
Code. In August 2002, Exide notified the PRPs that it would no longer be taking
an active role in any further action at the site and discontinued its financial
participation. This resulted in a pro rata increase in the liabilities of the
other PRPs, including C&D.
We also responded to requests for information from the EPA and the state
environmental agency with regard to another Third Party Facility, the "Chicago
Site," in October 1991.
In August 2002, we were notified of our involvement as a PRP at the NL
Atlanta, Northside Drive Superfund site. We are currently in negotiations with
the other PRPs at this site regarding our share of the allocated liability,
which we expect to be de minimis.
12
We are also aware of the existence of contamination at our Huguenot, New
York facility, which is expected to require expenditures for further
investigation and remediation. The site is listed by the New York State
Department of Environmental Conservation ("NYSDEC") on its registry of inactive
hazardous waste disposal sites due to the presence of fluoride and other
contaminants in amounts that exceed state groundwater standards, and the agency
has issued a Record of Decision for the soil remediation portion of the site. A
final remediation plan for the ground water portion has not yet been finalized
with or approved by the State of New York. In February 2000, we filed suit
against the prior owner of the site, Avnet, Inc., which is ultimately expected
to bear some, as yet undetermined, share of the costs associated with
remediation of contamination in place at the time the Company acquired the
property. The parties are attempting to resolve the matter through mediation,
failing which we intend to aggressively pursue all available legal remedies.
Should the parties fail to reach a mediated settlement, and unless an
alternative resolution can be achieved, NYSDEC may conduct the remediation and
seek recovery from the parties.
Together with JCI, we are conducting an assessment and remediation of
contamination at our Dynasty Division facility in Milwaukee, Wisconsin. The
majority of the on-site portion of this project was completed as of October
2001. Under the purchase agreement with JCI, we are responsible for (i) one-half
of the cost of the on-site assessment and remediation, with a maximum liability
of $1,750,000, (ii) any environmental liabilities at the facility that are not
remediated as part of the current project and (iii) environmental liabilities
for any new claims made after the fifth anniversary of the closing, i.e. March
2004, that arise from migration from a pre-closing condition at the Milwaukee
facility to locations other than the Milwaukee facility, but specifically
excluding liabilities relating to pre-closing offsite disposal. In March 2004,
C&D entered into an agreement with JCI to continue to share responsibility as
set forth in the original purchase agreement.
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
engaged in negotiations with both the EPA and Department of Justice through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 for alleged violations of the Clean Water Act.
The complaint requests injunctive relief and civil penalties of up to the
amounts provided by statute. We anticipate that the matter will result in a
penalty assessment and compliance obligations. We continue to seek a negotiated
or mediated resolution, failing which we intend to vigorously defend the action.
We accrue reserves for liabilities in our consolidated financial
statements and periodically reevaluate the reserved amounts for these
liabilities in view of the most current information available in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies." As of January 31, 2004 accrued environmental reserves totaled
$2,525,000 consisting of $2,223,000 in other current liabilities and $302,000 in
other liabilities. Based on currently available information, we believe that
appropriate reserves have been established with respect to the foregoing
contingent liabilities and that they are not expected to have a material adverse
effect on our business, financial condition or results of operations.
Available Information
C&D maintains an Internet web site (www.cdtechno.com) and makes available
free of charge on or through the web site its Annual Report on Form 10-K, its
quarterly reports on Form 10-Q and its current reports on Form 8-K as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. C&D also makes available on its website and in printed
form upon request, C&D's Code of Business Conduct, Code of Ethics for C&D's
Chief Executive Officer and Financial Employees and C&D's Corporate Governance
Guidelines.
13
Item 2. Properties
Set forth below is certain information, as of April 1, 2004, with respect
to our principal properties.
Square Products Manufactured
Location Footage at or Use of Facility
-------- ------- ---------------------
United States Properties:
Milwaukee, Wisconsin (1)......................... 370,000 Small standby power batteries
Attica, Indiana (1).............................. 295,000 Large standby power batteries
Leola, Pennsylvania (1).......................... 240,000 Large standby power batteries, Round Cell,
distribution center and battery R&D
laboratory
Conyers, Georgia (1)............................. 161,000 Small standby power batteries
Huguenot, New York (1)........................... 148,000 Motive power batteries
Dunlap, Tennessee (2)............................ 72,000 Standby power and motive power electronics
products
Blue Bell, Pennsylvania (2)...................... 63,000 Corporate headquarters, Standby Power and
Motive Power divisional headquarters and
electronics R&D laboratory
Tucson, Arizona (2).............................. 55,000 DC to DC converters, power supplies,
headquarters of Power Electronics Division
and electronics R&D laboratory
International Properties:
Shanghai, China (3)............................. 315,000 Small standby power batteries
Reynosa, Mexico (1).............................. 240,000 Large standby power batteries
Nogales, Mexico (2).............................. 97,000 DC to DC converters and AC to DC power
supplies
Guangzhou, China (2)............................. 35,000 DC to DC converters and wound magnetics
Milton Keynes, United Kingdom (2)................ 33,000 DC to DC converters, wound magnetics and
electronics R&D laboratory
Romsey, United Kingdom (2)....................... 21,000 Distribution center
Mississauga, Canada (2).......................... 20,000 Canadian headquarters, sales office and
distribution center
(1) Property is owned by C&D.
(2) Property is leased by C&D.
(3) Building is owned by the joint venture; however, the land is leased under
a 50-year agreement, of which 41 years remain. The Chinese government has
notified our joint venture that it will be required to relocate the
Shanghai plant. Negotiations are in process between the joint venture and
the Chinese government regarding the details surrounding the specific
location, timing and cost responsibilities related to the relocation of
the Shanghai plant. Our joint venture has tentatively agreed to an
arrangement with the Chinese government whereby we will relocate our
Shanghai facility to a site elsewhere in the Pudong Development Zone. We
anticipate that the new factory will be complete by the end of fiscal year
2006.
14
Item 3. Legal Proceedings
We are involved in ordinary, routine litigation incidental to the conduct
of our business. None of this litigation, individually or in the aggregate, is
material or is expected to be material to our financial condition or results of
operations in any year. See Business - Environmental Regulations for a
description of certain administrative proceedings in which we are involved.
On March 24, 2003, C&D was sued in an action captioned United States of
America v. C&D Technologies, Inc., in the United States District Court for the
Southern District of Indiana, for alleged violations of the Clean Water Act by
virtue of alleged violations of permit effluent and pretreatment discharge
limits at our plant in Attica, Indiana. The complaint requests injunctive relief
and civil penalties of up to the amounts provided by statute.
Item 4. Submission of Matters to a Vote of Security Holders
None.
15
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on The New York Stock Exchange under the symbol
CHP. The approximate number of beneficial and registered record holders of our
Common Stock on April 7, 2004 was 4,400.
The following table sets forth, for the periods indicated, the high and
low sales prices for our Common Stock as reported by the New York Stock
Exchange. These prices represent actual transactions, but do not reflect
adjustment for retail markups, markdowns or commissions.
Year Ended
-----------------------------------
January 31, 2004 January 31, 2003
---------------- ----------------
Fiscal Quarter High Low High Low
-------------- ---- --- ---- ---
First Quarter .............. $17.82 $11.30 $23.04 $19.00
Second Quarter ............. 15.55 11.20 24.27 13.25
Third Quarter .............. 21.80 14.43 17.50 12.50
Fourth Quarter ............. 23.43 17.70 21.25 15.40
Dividends. We began paying cash dividends on our Common Stock in April
1987. For the years ended January 31, 2004 and 2003 we declared dividends per
share as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
2004 ............ $0.01375 $0.01375 $0.01375 $0.01375
2003 ............ $0.01375 $0.02750 -- $0.01375
Our bank loan agreement permits dividends to be paid on our Common Stock
so long as there is no default under that agreement. Subject to that restriction
and the provisions of Delaware law, our Board of Directors currently intends to
continue paying dividends. We cannot assure you that we will continue to do so
since future dividends will depend on our earnings, financial condition and
other factors.
On February 22, 2000, the Board of Directors of C&D declared a dividend of
one common stock purchase right (a "Right") for each share of Common Stock
outstanding on March 3, 2000 to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
C&D and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder
Services, L.L.C.), as rights agent. Upon the occurrence of certain events, each
Right will entitle the registered holder to purchase from C&D one one-hundredth
of a share of Common Stock at a purchase price of $150 per one one-hundredth of
a share, subject to adjustment, as stated in the Rights Agreement. Upon the
occurrence of certain events involving a hostile takeover of C&D, unless our
Board of Directors acts otherwise, each holder of a Right, other than Rights
beneficially owned by the acquiring company, will thereafter have the right to
receive upon exercise: (i) that number of shares of our common stock having a
market value equal to two times the purchase price of the Right or (ii) that
number of shares of common stock of the acquiring company that at the time of
the transaction has a market value of two times the exercise price of the Right.
16
Item 6. Selected Financial Data
The following selected historical financial data for the periods indicated
have been derived from C&D's consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, independent auditors. The information
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and C&D's consolidated
financial statements, which appear in Items 7 and 15 of this Form 10-K.
Fiscal Year
------------------------------------------------------------------
(In thousands, except share and
per share data)
2004 (1) 2003 2002 2001 (2) 2000 (3)
-------- ---- ---- -------- --------
Statement of Income Data:
Net sales .................... $ 324,824 $ 335,745 $ 471,641 $ 615,678 $ 482,182
Cost of sales ................ 248,145 257,046 343,370 439,135 357,802
--------- --------- --------- --------- ---------
Gross profit ................. 76,679 78,699 128,271 176,543 124,380
Selling, general and
administrative expenses ..... 40,459 35,136 50,406 66,243 59,315
Research and development
expenses .................... 9,542 9,509 10,291 10,281 8,941
--------- --------- --------- --------- ---------
Operating income ............. 26,678 34,054 67,574 100,019 56,124
Interest expense, net ........ 1,268 3,800 6,700 6,315 7,946
Other expense (income), net .. 1,641 1,457 1,239 (725) (20)
--------- --------- --------- --------- ---------
Income before income taxes and
minority interest ........... 23,769 28,797 59,635 94,429 48,198
Provision for income taxes ... 8,795 9,414 22,244 35,883 17,737
--------- --------- --------- --------- ---------
Net income before minority
interest .................... 14,974 19,383 37,391 58,546 30,461
Minority interest ............ 83 91 1,317 2,651 619
--------- --------- --------- --------- ---------
Net income ................... $ 14,891 $ 19,292 $ 36,074 $ 55,895 $ 29,842
========= ========= ========= ========= =========
Net income per common
share - basic (4) ........... $ 0.58 $ 0.75 $ 1.38 $ 2.13 $ 1.17
========= ========= ========= ========= =========
Net income per common
share - diluted (5) ......... $ 0.58 $ 0.74 $ 1.35 $ 2.05 $ 1.14
========= ========= ========= ========= =========
Dividends per common share ... $ 0.055 $ 0.055 $ 0.055 $ 0.055 $ 0.055
========= ========= ========= ========= =========
Balance Sheet Data:
Working capital .............. $ 64,005 $ 53,776 $ 55,014 $ 75,895 $ 65,079
Total assets ................. 385,950 382,156 395,558 455,519 354,115
Short-term debt .............. -- 14,062 27,255 18,172 20,393
Long-term debt ............... 19,620 25,857 46,892 98,849 76,459
Stockholders' equity ......... 269,533 258,274 241,858 218,054 162,066
(footnotes begin on the following page)
17
(1) On September 25, 2003, C&D and its wholly owned Mexican subsidiary,
C&D Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery
Industrial Corporation of America, and its Mexican subsidiary, Matsushita
Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in
Reynosa, Mexico and the equipment in that facility historically used for the
manufacture of large, valve regulated lead acid batteries ("VRLA Batteries") for
standby power applications. In addition, C&D has entered into a worldwide
technology license agreement with Matsushita Battery Industrial Co. Ltd. of
Japan for selected patents and know-how relating to the manufacturing technology
for the aforementioned products. For reporting purposes, the acquisition of the
Reynosa facility and associated operating results are included in the Powercom
Division. We continue to use the assets acquired for the manufacture of large,
VRLA batteries for standby power applications.
(2) In December 2000 (effective as of November 26, 2000), we acquired NCL,
a producer of electronic power conversion products (primarily DC to DC
converters) based in the United Kingdom. For reporting purposes, the acquisition
of NCL is included in the Power Electronics Division. We continue to use the
assets acquired in such business.
(3) Effective March 1, 1999, we 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. In addition, C&D assumed certain
liabilities of the seller. The Specialty Battery Division was engaged in the
business of designing, manufacturing, marketing and distributing industrial
batteries. We continue to use the assets acquired in such business. On August 2,
1999, we completed the acquisition of JCI's 67% ownership interest in a joint
venture battery business in Shanghai, China. The joint venture manufactures,
markets and distributes industrial batteries. We continue the joint venture
operations in such business. For reporting purposes, we have re-named the
Specialty Battery Division and JCI's 67% ownership interest of the joint venture
battery business in Shanghai, China the Dynasty Division.
(4) Based on 25,536,628, 25,818,024, 26,153,715, 26,223,684 and 25,529,778
weighted average shares outstanding - basic.
(5) Based on 25,731,961, 26,025,179, 26,688,011, 27,264,528 and 26,088,402
weighted average shares outstanding - diluted.
18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts in this Item 7 are in thousands, except per share
amounts and per pound lead amounts.
Impact of Economy and Shift in Customer Demand
During fiscal 2004, primarily due to continuing weak economic conditions,
particularly in the telecommunications market, there was a softening in demand
for our products, with the exception of products sold to the UPS market.
Raw Material Pricing and Productivity
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of our industrial batteries and electronics
products and, accordingly, represent a significant portion of our materials
costs. During fiscal 2004, 2003 and 2002, the average London Metals Exchange
("LME") price per pound of lead was as follows:
Fiscal year
2004 2003 2002
---- ---- ----
Average annual LME price per pound of lead $0.25 $0.20 $0.22
Lowest average monthly LME price per pound of lead $0.20 $0.19 $0.20
Highest average monthly LME price per pound of lead $0.34 $0.22 $0.23
We have a long-term cost containment program to minimize manufacturing
costs. Under the program, we continue to allocate a significant amount of our
normal annual capital expenditures to cost containment and productivity
improvement projects.
Inflation
The cost to C&D of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. Our ability to pass
along inflationary cost increases to our customers through higher prices may be
limited during periods of stable or declining lead prices because of industry
pricing practices that tend to link product prices and lead prices. During the
recent increase of lead prices in the second half of fiscal 2004, we have not
been able to fully offset the higher lead prices through selective price
increases. We believe that, over recent years, we have been able to offset
inflationary cost increases on items other than lead by:
o effective raw materials purchasing programs;
o increases in labor productivity;
o improvements in overall manufacturing efficiencies; and
o selective price increases of our products.
19
Results of Operations
The following table sets forth selected items in C&D's consolidated
statements of income as a percentage of sales for the periods indicated.
Fiscal Year
-------------------------
2004 2003 2002
---- ---- ----
Net sales ........................................ 100.0% 100.0% 100.0%
Cost of sales .................................... 76.4 76.6 72.8
----- ----- -----
Gross profit ................................... 23.6 23.4 27.2
Selling, general and administrative expenses ..... 12.5 10.5 10.7
Research and development expenses ................ 2.9 2.8 2.2
----- ----- -----
Operating income ............................... 8.2 10.1 14.3
Interest expense, net ............................ 0.4 1.1 1.4
Other expense, net ............................... 0.5 0.4 0.3
----- ----- -----
Income before income taxes and minority interest 7.3 8.6 12.6
Provision for income taxes ....................... 2.7 2.8 4.7
----- ----- -----
Net income before minority interest ............ 4.6 5.8 7.9
Minority interest ................................ 0.0 0.1 0.3
----- ----- -----
Net income ..................................... 4.6% 5.7% 7.6%
===== ===== =====
Critical Accounting Policies
We have identified the critical accounting policies that are most
important to the portrayal of our financial condition and results of operations.
The policies set forth below require management's most subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Litigation and Environmental Reserves
C&D is involved in litigation in the ordinary course of business,
including personal injury, property damage and environmental litigation. We also
expend funds for environmental remediation of both company-owned and
third-party locations. In accordance with Generally Accepted Accounting
Principles ("GAAP"), specifically SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," we record a
loss and establish a reserve for litigation or remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonably estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other PRPs, their ability to contribute
20
and prior experience. These judgments are reviewed quarterly as more information
is received and the amounts reserved are updated as necessary. However, the
reserves may materially differ from ultimate actual liabilities if the loss
contingency is difficult to estimate or if management's judgments turn out to be
inaccurate. If management believes no best estimate exists, the minimum loss is
accrued.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors we consider in deciding when to perform
an impairment review include significant under-performance of a business or
product line in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the
assets. Recoverability of assets that will continue to be used in our operations
is measured by comparing the carrying amount of the asset grouping to the
related total future net cash flows. If an asset grouping's carrying value is
not recoverable through those cash flows, the asset grouping is considered to be
impaired. The impairment is measured by the difference between the assets'
carrying amount and their fair value, based on the best information available,
including market prices or discounted cash flow analyses.
Pension and Other Employee Benefits
Certain assumptions are used in the calculation of the actuarial valuation
of our defined benefit pension plans and postretirement benefits. These
assumptions include the weighted average discount rate, rates of increase in
compensation levels, expected long-term rates of return on assets and increases
or trends in health care costs. If actual results are less favorable than those
projected by management, additional expense may be required.
Inventory Reserves
C&D adjusts the value of its obsolete and unmarketable inventory to the
estimated market value based upon assumptions of future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts
C&D maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required.
Warranty Reserves
C&D provides for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
suppliers' products and processes, C&D's warranty obligation is affected by
product failure rates, warranty replacement costs and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
warranty replacement costs or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be made.
Deferred Tax Valuation Allowance
C&D records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event C&D were to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an
21
adjustment to the deferred tax asset would increase income in the period such
determination was made. Likewise, should C&D determine that it would not be able
to realize all or part of its net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination was made.
Revenue Recognition
C&D recognizes revenue when the earnings process is complete. This occurs
when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past.
Impairment of Goodwill
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill and other "indefinite-lived"
assets are not amortized and are subject to the impairment rules of SFAS No.
142, "Goodwill and Other Intangible Assets," which C&D adopted on February 1,
2002. Goodwill is tested for impairment on an annual basis or upon the
occurrence of certain circumstances or events. C&D determines the fair market
value of its reporting units using quoted market rates and cash flow techniques.
The fair market value of the reporting units is compared to the carrying value
of the reporting units to determine if an impairment loss should be calculated.
If the book value of a reporting unit exceeds the fair value of the reporting
unit, an impairment loss is indicated. The loss is calculated by comparing the
fair value of the goodwill to the book value of the goodwill. If the book value
of the goodwill exceeds the fair value of the goodwill, an impairment loss is
recorded. Fair value of goodwill is determined by subtracting the fair value of
the identifiable assets of a reporting unit from the fair value of the reporting
unit. In the fiscal year ended January 31, 2003, we recorded an impairment of
goodwill in our Motive Power Division, resulting in the complete write-off of
all goodwill related to the Motive Power Division. No impairment to goodwill
existed in any of our other divisions as of January 31, 2003. No impairment to
goodwill in any division existed as of January 31, 2004.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development costs.
Fiscal 2004 Compared to Fiscal 2003
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal 2004 decreased $10,921 or 3% to $324,824 from
$335,745 in fiscal 2003. This decrease resulted from lower customer demand for
products of the Powercom, Power Electronics and Motive Power divisions,
partially offset by higher customer demand for products of the Dynasty Division.
Sales by the Powercom Division declined $18,750, or 13%, primarily due to lower
sales to the telecommunications market. The Powercom Division derives
approximately 60% of its sales from telecommunications infrastructure
22
spending, and we continue to be adversely affected by the decreased spending in
this industry. However, we understand from our major customers that they plan to
increase capital spending. Sales of the Power Electronics Division fell $7,760,
or 17%, mainly due to lower DC to DC converter sales. Power Electronics had a
solid fourth quarter, with revenue increasing across the division. End markets,
including networking and office automation, appear to be strengthening. This
division introduced over 30 new products in fiscal year 2004, accounting for
approximately 7% of the division's revenue. Motive Power divisional sales
dropped $1,487, or 3% due to lower sales of batteries and chargers. Dynasty
Division sales increased $17,076, or 19%, primarily due to an increase in demand
in the UPS market. The Dynasty Division generates approximately 70% of its sales
from this market.
Gross profit for fiscal 2004 decreased $2,020 or 3% to $76,679 from
$78,699 in the prior year. Gross margin increased slightly from 23.4% in fiscal
year 2003 to 23.6% in fiscal year 2004. Gross profit declined in the Powercom
Division, primarily as a result of lower sales volumes, startup costs of
approximately $1,300 at our new Reynosa, Mexico facility and higher lead costs,
partially offset by a favorable year-end LIFO inventory adjustment of $2,745.
Gross profit in the Motive Power Division increased on lower sales, primarily
due to the improvement in plant operational effectiveness in fiscal 2004,
partially offset by higher lead costs. Gross profit in the Power Electronics
Division increased on lower sales primarily due to the re-organization charges
of $1,263 recorded in the fourth quarter of fiscal 2003 related to the closure
of our Shannon, Ireland facility and the benefits of relocating certain Mexican
manufacturing activities to our Guangzhou, China facility, which has lower
manufacturing costs.
Selling, general and administrative expenses for fiscal 2004 increased
$5,323 or 15%. This increase was primarily due to $2,897 of higher warranty
costs, higher payroll related costs of $1,932 and the prior year gain of $1,610
recognized on the sale of our Conshohocken, Pennsylvania facility, partially
offset by lower variable selling costs of $803 associated with the decreased
sales volumes.
Research and development expenses for fiscal 2004 increased $33 or less
than 1%. As a percentage of sales, research and development expenses increased
from 2.8% of sales in fiscal 2003 to 2.9% of sales in fiscal 2004.
Operating income decreased $7,376 or 22% to $26,678 from $34,054 in the
prior year. This decrease was the result of lower operating income generated by
the Powercom Division, partially offset by a lower operating loss in the Motive
Power Division, operating income in the Power Electronics Division in fiscal
2004 compared to an operating loss in fiscal 2003 and higher operating income in
the Dynasty Division.
Interest expense, net, decreased $2,532 in fiscal 2004 compared to the
prior year, primarily due to lower average debt balances outstanding during the
year, coupled with a lower effective interest rate.
Income tax expense for fiscal 2004 decreased $619 from fiscal 2003,
primarily as the result of lower income before income taxes, partially offset by
an increase in our effective tax rate. The effective tax rate consists of
statutory rates adjusted for the tax impacts of foreign operations. The
effective tax rate for fiscal 2004 increased to 37.0% from 32.7% in the prior
year, primarily as a result of the favorable resolution of state tax audits in
the fourth quarter of fiscal 2003.
Minority interest of $83 in fiscal 2004 reflects the 33% ownership
interest in the joint venture battery business located in Shanghai, China that
is not owned by C&D. The decrease in minority interest was due to lower
profitability of the Shanghai joint venture.
As a result of the above, for fiscal 2004, net income decreased $4,401 or
23% to $14,891 or $0.58 per share - basic and $0.58 per share - diluted.
23
Future Outlook
The escalating price of lead negatively affects our business. In the
fourth quarter of fiscal 2004, the negative effect of higher lead prices over
the prior year's fourth quarter was approximately $0.06 cents per share. We
anticipate that high lead pricing will continue to adversely affect our
profitability in the near term. We have launched pricing initiatives to at least
partially offset rising lead prices. In the first quarter of fiscal 2005, we
expect revenues to increase modestly and to generate diluted earnings per share
of between $0.05 to $0.08 per share.
In addition, as we continue to assimilate the Reynosa facility, we expect
to record integration charges, including expenses of approximately $2,000 to
$2,500 for rigging and transporting equipment as well as severance. There may
also be asset impairment charges related to our Huguenot, New York and/or Leola,
Pennsylvania facilities in fiscal 2005, although we cannot with certainty
predict the magnitude or timing of such outcomes.
The Chinese government has notified our joint venture battery business
that it will be required to relocate the Shanghai plant. Negotiations are in
process between the joint venture and the Chinese government regarding the
details surrounding the specific location, timing and cost responsibilities
related to the relocation of the Shanghai plant. Our joint venture has
tentatively agreed to an arrangement with the Chinese government whereby we will
relocate our Shanghai facility to a site elsewhere in the Pudong Development
Zone. The tentative agreement calls for a payout of approximately $20,000 to
C&D, which will be supplemented by approximately $5,000 from the joint venture
to build a new facility. We anticipate that the new factory will be complete by
the end of fiscal year 2006.
Fiscal 2003 Compared to Fiscal 2002
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal 2003 decreased $135,896 or 29% to $335,745 from
$471,641 in fiscal 2002. This decrease resulted from lower customer demand for
products of all divisions. Sales by the Powercom Division declined $90,324, or
38%, primarily due to lower sales to the telecommunications and UPS markets.
This business continued to be affected by the lower spending levels in the
telecommunications sector. However, the division had more than $17,000 in sales
from products introduced during fiscal 2003. Dynasty Division sales decreased
$22,911, or 20%, also due to a decline in sales to the telecommunications and
UPS markets, partially offset by an increase in sales to the mobility market.
The lower market demand for sealed product continued to affect this division.
New products contributed approximated $4,000 of sales to this division. Sales of
the Power Electronics Division fell $16,315, or 26%, mainly due to lower DC to
DC converter sales, standard power supply sales and custom power supply sales.
The division was negatively impacted by a substantial reduction in the
requirements of a single customer. Although the overall pace of the Power
Electronics Division remained sluggish due to the continuing state of the
telecommunications market, we were encouraged by the number of new products we
brought to market. Over 15% of fiscal 2003 sales by the Power Electronics
Division came from products introduced since fiscal 2002. Additionally, we
overhauled the distribution channels of this division. Distributors were
replaced and upgraded during fiscal 2003, while the manufacturing representative
network was strengthened. Our web-based initiatives came on line in the latter
part of fiscal 2003 and we began to see positive results. Motive Power
divisional sales dropped $6,346, or 10% due to lower sales of batteries and
chargers. Motive Power sales increased modestly in the fourth quarter of fiscal
2003, based upon recent changes in sales channels. Additionally, we launched a
private branding program for batteries and chargers to customers with whom we
had not previously done business.
Gross profit for fiscal 2003 decreased $49,572 or 39% to $78,699 from
$128,271 in the prior year, resulting in a decrease in gross margin from 27.2%
to 23.4%. Gross profit declined in the Powercom, Dynasty
24
and Motive Power divisions, primarily as a result of lower sales volumes,
coupled with plant operational difficulties in the Motive Power Division. Gross
profit in the Power Electronics Division increased on lower sales due to
inventory-related charges in the prior fiscal year, partially offset by
re-organization charges of $1,263 recorded in the fourth quarter of fiscal 2003
related to the closure of our Shannon, Ireland facility and the relocation of
certain Mexican manufacturing activities to our Guangzhou, China facility, which
has lower manufacturing costs.
Selling, general and administrative expenses for fiscal 2003 decreased
$15,270 or 30%. This decrease was primarily due to: (i) lower variable selling
costs of $5,876 associated with the decreased sales volumes; (ii) the
implementation of SFAS No. 142 in fiscal 2002, which discontinued the
amortization of goodwill of $6,372 (iii) costs recorded in fiscal 2002 of $2,793
related to a potential acquisition that did not close; (iv) lower
payroll-related expenses of $2,023; (v) the gain of $1,610 recognized on the
sale of our Conshohocken, Pennsylvania facility; and (vi) lower advertising
expenses of $512. Partially offsetting this decrease were: (i) higher warranty
expenses of $2,208; and (ii) the positive effect of the full recovery of certain
litigation and settlement costs of $2,036 from one of our insurance carriers
during the first quarter of fiscal 2002.
Research and development expenses decreased $782 or 8%, primarily due to
lower spending in the Power Electronics and Powercom divisions. As a percentage
of sales, research and development expenses increased from 2.2% of sales in
fiscal 2002 to 2.8% of sales in fiscal 2003 as a result of lower sales volumes.
Operating income decreased $33,520 or 50% to $34,054 from $67,574 in the
prior year. This decrease was the result of lower operating income generated by
the Powercom and Dynasty divisions, coupled with a higher operating loss
generated by the Motive Power Division. This decrease was partially offset by a
lower operating loss in the Power Electronics Division.
Interest expense, net, decreased $2,900 in fiscal 2003 compared to the
prior year, primarily due to lower average debt balances outstanding during the
year, coupled with lower effective interest rates.
Income tax expense for fiscal 2003 decreased $12,830 from fiscal 2002,
primarily as the result of lower income before income taxes and a decrease in
our effective tax rate. The effective tax rate consists of statutory rates
adjusted for the tax impacts of research and development credits and foreign
operations. The effective tax rate for fiscal 2003 decreased to 32.7% from 37.3%
in the prior year, primarily as a result of the resolution of state tax audits
in the fourth quarter of fiscal 2003.
Minority interest of $91 in fiscal 2003 reflects the 33% ownership
interest in the joint venture battery business located in Shanghai, China that
is not owned by C&D. The decrease in minority interest was due to lower
profitability of the Shanghai joint venture.
As a result of the above, for fiscal 2003, net income decreased $16,782 or
47% to $19,292 or $0.75 per share - basic and $0.74 per share - diluted.
Liquidity and Capital Resources
Net cash provided by operating activities decreased $13,772 or 25% to
$41,378 for the fiscal year ended January 31, 2004 compared to $55,150 in the
prior fiscal year. This decrease in net cash provided by operating activities
was primarily due to: (i) a smaller decrease in inventory in fiscal 2004 versus
fiscal 2003; (ii) a smaller increase in net deferred tax liabilities; (iii) a
decrease in net income; and (iv) a smaller increase in accounts payable in
fiscal 2004 versus fiscal 2003. These changes, resulting in lower net cash
provided by operating activities, were partially offset by a smaller increase in
other long-term assets in fiscal 2004 versus fiscal 2003, primarily due to
significantly lower pension contributions in fiscal 2004 and an increase in
other current liabilities in the current year (primarily due to warranty
accruals) versus a decrease in the prior year.
25
Net cash used by investing activities increased $12,137 or 346% to $15,648
in fiscal 2004 compared to $3,511 in fiscal 2003, due to the acquisition of the
Reynosa business, coupled with lower proceeds from the disposal of property,
plant and equipment. Fiscal 2003 proceeds included $3,000 from the sale of our
Conshohocken, Pennsylvania facility. The property was sold for $5,000, including
a $2,000 note receivable. Acquisition of property, plant and equipment
(excluding the purchase of the Reynosa business) decreased from $7,163 in fiscal
2003 to $3,697 in fiscal 2004.
Net cash used by financing activities decreased $20,981 or 44% to $26,667
in fiscal 2004 compared to $47,648 in the prior year. This decrease was
primarily due to a lower repayment of long-term debt, coupled with lower
purchases of treasury stock.
On November 20, 2003, we refinanced our existing five-year credit
facility, which was due to expire on March 1, 2004. The refinancing was arranged
by Bank of America and includes nine other lenders. The new agreement is a
$100,000 revolving credit facility, which has a termination date of November 20,
2006. The interest rates are determined by our leverage ratio and are available
at LIBOR plus 1.00% to LIBOR plus 2.00% or Prime to Prime plus .50%. Based on
our current leverage, the loans under the revolving credit facility are priced
at LIBOR plus 1.00%. The agreement requires C&D to pay a fee of .25% to .50% per
annum, depending on our leverage ratio, on any unused portion of the revolver.
The revolving credit facility includes a letter of credit facility not to exceed
$15,000 and swingline loans not to exceed $10,000.
The credit agreement contains restrictive covenants that require C&D to
maintain minimum ratios such as fixed charge coverage and leverage ratios as
well as minimum consolidated net worth. We were in compliance with our loan
agreement covenants at January 31, 2004. The availability under this agreement
is expected to be sufficient to meet our ongoing cash needs for working capital
requirements, debt service, capital expenditures and possible strategic
acquisitions. Capital expenditures during fiscal 2004 were incurred to fund cost
reduction programs, normal maintenance and regulatory compliance. Fiscal 2005
capital expenditures are expected to be in the range of $10,000 to $15,000,
primarily to fund investment in our Reynosa, Mexico and Shanghai, China
facilities, as well as cost reduction programs, normal maintenance and
regulatory compliance.
We intend to continue making prudent purchases of our stock, paying down
debt and selectively pursuing complementary acquisitions. Strategic acquisition
opportunities will be expected to enhance C&D's long-term competitive position
and growth prospects and may require external financing. We cannot assure,
however, that we will close on any such acquisitions.
Our bank loan agreement permits dividends to be paid on our Common Stock
as long as there is no default under that agreement. Subject to that restriction
and the provisions of Delaware law, our Board of Directors currently intends to
continue paying dividends. We cannot assure you that we will continue to do so
since future dividends will depend on our earnings, financial condition and
other factors.
26
Contractual Obligations and Commercial Commitments
The following tables summarize our contractual obligations and commercial
commitments as of January 31, 2004:
Payments Due by Period
-------------------------------------------------------
Less than 1 - 3 4 - 5 After 5
Contractual Obligations .......................... Total 1 year years years years
----- ------ ----- ----- -----
Operating leases ................................. $19,799 $ 3,299 $ 5,374 $ 4,458 $ 6,668
------- ------- ------- ------- -------
Total contractual cash obligations ............... $19,799 $ 3,299 $ 5,374 $ 4,458 $ 6,668
======= ======= ======= ======= =======
Amount of Commitment Expiration Per Period
-------------------------------------------------------
Total
Other Commercial Commitments ..................... Amounts Less than 1 - 3 4 - 5 After 5
Committed 1 year years years years
--------- ------ ----- ----- -----
Lines of credit .................................. $19,620 -- $19,620 -- --
Standby letters of credit ........................ 3,659 -- 3,659 -- --
------- ------- ------- ------- -------
Total commercial commitments ..................... $23,279 -- $23,279 -- --
======= ======= ======= ======= =======
New Accounting Pronouncements
In April 2003, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." This Statement amends and clarifies financial accounting and
reporting for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives) and for
hedging activities under SFAS No. 133, Accounting for Derivative Instruments and
Hedging Activities. SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except as stated below, and for hedging
relationships designated after June 30, 2003. In addition, except as stated
below, all provisions of SFAS No. 149 should be applied prospectively.
The provisions of SFAS No. 149 relate to SFAS No. 133 implementation
issues that have been effective for fiscal year quarters that began prior to
June 15, 2003 and should continue to be applied in accordance with their
respective effective dates. In addition, paragraphs 7 (a) and 23 (a), which
relate to forward purchases or sales of when-issued securities or other
securities that do not yet exist, should be applied to both existing contracts
and new contracts entered into after June 30, 2003. SFAS No. 149 had no
significant impact at the point of adoption on our consolidated statements of
income or financial position.
In December 2003, the FASB issued SFAS No. 132 (revised 2003),"Employers'
Disclosures about Pensions and Other Postretirement Benefits." The revisions to
SFAS No. 132 are intended to improve financial statement disclosures for defined
benefit plans and were initiated in 2003 in response to concerns raised by
investors and other users of financial statements about the need for greater
transparency of pension information. In particular, the standard requires that
companies provide more detail about their plan assets, benefit obligations, cash
flows, benefit costs and other relevant quantitative and qualitative
information. The guidance is effective for fiscal years ending after December
15, 2003. C&D has complied with these revised disclosure requirements.
27
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
All dollar amounts in this Item 7A are in thousands.
Market Risk Factors
We are exposed to various market risks. The primary financial risks
include fluctuations in interest rates and changes in currency exchange rates.
We manage these risks by using derivative instruments. We do not invest in
derivative securities for speculative purposes, but do enter into hedging
arrangements in order to reduce our exposure to fluctuations in interest rates
as well as to fluctuations in exchange rates.
Our financial instruments that are subject to interest rate risk consist
of debt instruments and interest rate swap contracts. The net market value of
our debt instruments was $19,620 and $39,919 at January 31, 2004 and 2003,
respectively. The debt instruments are subject to variable rate interest, and
therefore the market value is not sensitive to interest rate movements.
Interest rate swap contracts are used to manage our exposure to
fluctuations in interest rates on our underlying variable rate debt instruments.
We employ separate swap transactions rather than fixed rate obligations to take
advantage of the lower borrowing costs associated with floating rate debt while
also eliminating possible risk related to refinancing in the fixed rate market.
The net market value of our interest rate swaps was $(1,486) and $(1,898)
at January 31, 2004 and 2003, respectively. A 100-basis point increase in rates
at January 31, 2004 and 2003 would result in a $405 and a $525 increase in the
market value, respectively. A 100-basis point decrease in rates at January 31,
2004 and 2003 would result in a $404 and a $693 decrease in the market value,
respectively.
The above sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their year-end levels, with all other variables held
constant. We calculate the market value of the interest rate swaps by utilizing
a standard net present value model based on the market conditions as of the
valuation date.
We use currency forwards and swaps to hedge anticipated cash flows in
foreign currencies. The exposures currently hedged are the British Pound, the
Euro, the Mexican Peso and Canadian Dollar. These financial instruments
represent a net market value of $(923) and $(258) at January 31, 2004 and 2003,
respectively.
To monitor our currency exchange rate risk, we use sensitivity analysis to
measure the impact on earnings in the case of a 10% change in exchange rates.
The sensitivity analysis assumes an instantaneous 10% change in foreign
currency exchange rates from year-end levels, with all other variables being
held constant. At January 31, 2004 and 2003, a 10% strengthening of the US
Dollar versus these currencies would result in an increase of the net market
value of the forwards of $2,522 and $2,695, respectively. At January 31, 2004
and 2003, a 10% weakening of the US Dollar versus these currencies would result
in a decrease in the net market value of the forwards of $3,092 and $2,739,
respectively.
The market value of the instruments was determined by taking into
consideration the contracted interest rates and foreign exchange rates versus
those available for similar maturities in the market at January 31, 2004 and
2003, respectively.
Foreign exchange forwards are used to hedge our firm and anticipated
foreign currency cash flows. There is either a balance sheet or cash flow
exposure related to all of the financial instruments in the above sensitivity
analysis for which the impact of a movement in exchange rates would be in the
opposite direction and substantially equal to the impact on the instruments in
the analysis.
28
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in Item 15(a)(1)
hereof are incorporated herein by reference and are filed as part of this
report.
Item 9. Changes in and Disagreements with Auditors on Accounting and Financial
Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures:
C&D's management, with the participation of C&D's Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of C&D's disclosure
controls and procedures (as such term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of the end of the period covered by this
report. Based on such evaluation, C&D's Chief Executive Officer and Chief
Financial Officer have concluded that, as of the end of such period, C&D's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by C&D in the reports that it files or submits under the Exchange Act.
Internal Control over Financial Reporting:
There have not been any changes in C&D's internal control over financial
reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fourth quarter of fiscal 2004 that have materially
affected, or are reasonably likely to materially affect, C&D's internal control
over financial reporting.
29
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item 10 is incorporated by reference to
the information under the captions "Election of Directors," "Current Executive
Officers" and "Compliance with Section 16(a)" of the Securities Exchange Act of
1934" included in C&D's proxy statement for our 2004 Annual Meeting of
Stockholders to be filed with the Securities and Exchange Commission.
Item 11. Executive Compensation
The information required by this Item 11 is incorporated by reference to
the information under the caption "Executive Compensation" included in C&D's
proxy statement for our 2004 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required by this Item 12 is incorporated by reference to
the information under the captions "Principal Stockholders," "Beneficial
Ownership of Management" and "Equity Compensation Plan Information" included in
C&D's proxy statement for our 2004 Annual Meeting of Stockholders to be filed
with the Securities and Exchange Commission.
Item 13. Certain Relationships and Related Transactions
None.
Item 14. Principal Auditor Fees and Services
The information required by this Item 14 is incorporated by reference to
the information under the captions "Report of the Audit Committee -- Fees of
Independent Auditors" included in C&D's proxy statement for our 2004 Annual
Meeting of Stockholders to be filed with the Securities and Exchange Commission.
30
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) The following financial statements are included in this report on
Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES
Report of Independent Auditors
Consolidated Balance Sheets as of January 31, 2004 and 2003
Consolidated Statements of Income for the years ended January 31,
2004, 2003 and 2002
Consolidated Statements of Stockholders' Equity for the years ended
January 31, 2004, 2003 and 2002
Consolidated Statements of Cash Flows for the years ended January
31, 2004, 2003 and 2002
Consolidated Statements of Comprehensive Income for the years ended
January 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
(2) The following financial statement schedule is included in this
report on Form 10-K:
C&D TECHNOLOGIES, INC. AND SUBSIDIARIES for the years ended January
31, 2004, 2003 and 2002
II. Valuation and Qualifying Accounts
(3) Exhibits:
3.1 Restated Certificate of Incorporation of C&D, as amended
(incorporated by reference to Exhibits 3.1 and 3.2 to C&D's
Current Report on Form 8-K dated June 30, 1998).
3.2 Amended and Restated By-laws of C&D (incorporated by reference
to Exhibit 3.1 to C&D's Quarterly Report on Form 10-Q for the
fiscal quarter ended October 31, 2002).
4.1 Rights Agreement dated as of February 22, 2000 between C&D and
Mellon Investor Services, LLC (formerly ChaseMellon
Shareholder Services, L.L.C.), as rights agent, which includes
as Exhibit B thereto the form of rights certificate
(incorporated by reference to Exhibit 1 to C&D's Form 8-A
Registration Statement filed on February 28, 2000).
10.1 Purchase Agreement dated November 27, 1985, between Allied,
Allied Canada Inc. and C&D; Amendments thereto dated January
28 and October 8, 1986 (incorporated by reference to Exhibit
10.1 to C&D's Registration Statement on Form S-1, No.
33-10889).
31
10.2 Agreement dated December 15, 1986 between C&D and Allied
(incorporated by reference to Exhibit 10.2 to C&D's
Registration Statement on Form S-1, No. 33-10889).
10.3 Lease Agreement dated February 15, 1994 by and between
Sequatchie Associates, Incorporated and C&D Charter Power
Systems, Inc. (which has since been merged into C&D)
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1999);
Extension and Modification Agreement effective December 19,
2003 (filed herewith).
10.4 Purchase and Sale Agreement, dated as of November 23, 1998
among Johnson Controls, Inc. and its subsidiaries as Seller
and C&D and C&D Acquisition Corp. as Purchaser (incorporated
by reference to Exhibit 2.1 to C&D's Current Report on Form
8-K dated March 1, 1999).
10.5 Amended and Restated Credit Agreement dated as of November 20,
2003 among C&D Technologies, Inc. as the borrower, the
Subsidiaries of the Borrower identified herein as the
Guarantors, Bank of America, N.A., as Administrative Agent,
Swing Line Lender and L/C Issuer, JP Morgan Chase Bank as
Co-Agent, and the other Lenders Party Hereto arranged by Banc
of America Securities LLC, as Sole Lead Arranger and Sole Book
Manager (incorporated by reference to Exhibit 10.1 to C&D's
Quarterly Report on Form 10-Q for the quarter ended October
31, 2003).
10.6 Uncommitted loan facility dated June 5, 2001 between C&D
Holdings Limited and ABN Amro Bank N.V. (incorporated by
reference to Exhibit 10.2 to C&D's Quarterly Report on Form
10-Q for the period ended April 30, 2001).
10.7 Asset Purchase Agreement among Matsushita Battery Industrial
Corporation of America, Matsushita Battery Industrial de
Mexico, S.A. de C.V., C&D Technologies, Inc. and C&D
Technologies Reynosa, S. de R.L. de C.V., dated as of August
27, 2003 (incorporated by reference to C&D's Current Report on
Form 8-K dated September 25, 2003).
Management Contracts or Plans
10.8 Charter Power Systems, Inc. 1996 Stock Option Plan
(incorporated by reference to Exhibit 10.1 to C&D's Quarterly
Report on Form 10-Q for the quarter ended July 31, 1996),
First Amendment to C&D Technologies, Inc. 1996 Stock Option
Plan (formerly known as the Charter Power Systems, Inc. 1996
Stock Option Plan) dated April 27, 1999 (incorporated by
reference to Exhibit 10.3 to C&D's Quarterly Report on Form
10-Q for the quarter ended July 31, 1999).
10.9 C&D Technologies, Inc. Amended and Restated 1998 Stock Option
Plan (incorporated by reference to Exhibit 10.7 to C&D's
Annual Report on Form 10-K for fiscal year ended January 31,
2001).
10.10 C&D Technologies, Inc. Savings Plan as restated and amended
(incorporated by reference to Exhibit 10.9 to C&D's Annual
Report on Form 10-K for fiscal year ended January 31, 2002),
First Amendment thereto dated June 12, 2002 (incorporated by
reference to Exhibit 10.10 to C&D's Quarterly Report on Form
10-Q for the quarter ended October 31, 2002), Second Amendment
thereto dated November 20, 2002 (incorporated by reference to
Exhibit 10.11 to C&D's Quarterly Report on Form 10-Q for the
quarter ended October 31, 2002); Third Amendment thereto dated
June 18, 2003 (incorporated by reference to