UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED JANUARY 31, 2005
or
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-9389
C&D TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
State or other jurisdiction of incorporation or organization: Delaware
I.R.S. Employer Identification Number: 13-3314599
Address of principal executive offices: 1400 Union Meeting Road
Blue Bell, Pennsylvania 19422
Registrant's telephone number, including area code: (215) 619-2700
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of Class on which registered
-------------- -------------------
Common Stock, New York Stock Exchange
par value $.01 per share
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes |x| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act): Yes |x| No |_|
Aggregate market value of the voting and non-voting common equity held by
nonaffiliates of the Registrant, based on the closing price on July 31, 2004:
$395,147,256
Number of shares outstanding of each of the Registrant's classes of common
stock as of April 18, 2005: 25,345,513 shares of Common Stock, par value $.01
per share.
Documents incorporated by reference:
Part III - Portions of Registrant's Proxy Statement to be filed pursuant to
Regulation 14A within 120 days after the end of Registrant's fiscal year covered
by this Form 10-K.
(This page intentionally left blank)
C&D TECHNOLOGIES, INC.
FORM 10-K
For the Fiscal Year Ended January 31, 2005
INDEX
Part I
Item 1 Business 1
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Part II
Item 5 Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases
of Equity Securities 15
Item 6 Selected Financial Data 17
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 18
Item 7A Quantitative and Qualitative Disclosure about Market Risk 26
Item 8 Financial Statements and Supplementary Data 27
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 27
Item 9A Controls and Procedures 27
Item 9B Other Information 28
Part III
Item 10 Directors and Executive Officers of the Registrant 29
Item 11 Executive Compensation 29
Item 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder 29
Matters
Item 13 Certain Relationships and Related Transactions 29
Item 14 Principal Accountant Fees and Services 29
Part IV
Item 15 Exhibits and Financial Statement Schedules 30
Signatures 36
Index to Financial Statements and Financial Statement Schedule F-1
I
C&D TECHNOLOGIES, INC.
PART I
Item 1. Business
About Our Company
C&D Technologies, Inc. (together with its operating subsidiaries, "we,"
"our" or "C&D") is a technology company that produces and markets systems for
the conversion and storage of electrical power, including reserve power systems
and embedded, high frequency switching power supplies. Our integrated reserve
power systems are comprised of the following:
o industrial lead acid batteries;
o power rectifiers;
o power control equipment;
o power distribution equipment; and
o related accessories.
Our power products are comprised of the following:
o DC to DC converters;
o AC to DC and DC to DC power supplies;
o magnetics (transformers and inductors);
o custom architectures;
o data acquisition components; and
o digital meters.
Common applications for our power products and system portfolio include:
o telecommunications equipment, including optical switches, remote
switches, Voice Over Internet Protocol (VOIP), central office
backup;
o data centers and networked (LAN and WAN) computing architecture;
o high availability industrial computing;
o industrial temperature control systems;
o industrial imaging equipment;
o displays (signs, scanning equipment);
o broadband cable television ("CATV") powering;
o advanced office electronic machines, such as digital copiers;
o motive power systems for electric industrial vehicles; and
o military.
We sell both individual components and integrated power systems.
We were organized in November 1985 to acquire all the assets of the
eighty-year old C&D Power Systems Division (the "Division") of Allied
Corporation ("Allied"). The Division's business essentially was unchanged by the
acquisition, which was completed on January 28, 1986. Shares of our Common
Stock, par value $.01 per share ("Common Stock"), were first issued to the
public in February 1987.
In March 1999, we purchased substantially all of the assets of the
Specialty Battery Division of Johnson Controls, Inc. ("JCI"), a Milwaukee,
Wisconsin-based designer, manufacturer, marketer and distributor of industrial
batteries. These assets included all of the ordinary shares of Johnson Controls
Battery (U.K.) Limited, an indirect wholly owned subsidiary of JCI. In addition,
in August 1999, we acquired JCI's 67% ownership interest in a joint venture
battery business in Shanghai, China. The joint venture manufactures and markets
industrial batteries. For reporting purposes, the Specialty Battery Division and
JCI's 67% ownership interest in the joint venture battery business in Shanghai,
China, are included in the results of operations in the Standby Power Division.
1
In June 2000, we completed a two-for-one stock split, effected in the form
of a 100% stock dividend. All share and per share amounts have been adjusted.
In December 2000 (effective as of November 26, 2000), we acquired the
Newport Components Division of Newport Technology Group Limited, a producer of
electronic power conversion products (primarily DC to DC converters) based in
the United Kingdom. For reporting purposes, this acquisition is included as part
of the Power Electronics Division and is referred to as C&D Technologies (NCL)
Limited ("NCL").
In September 2003, we acquired certain assets from Matsushita Battery
Industrial Corporation of America and Matsushita Battery Industrial de Mexico,
S.A. de C.V. Acquired assets included a 240,000 square foot facility, in
Reynosa, Mexico, and the equipment in the facility historically used for the
manufacture of large, valve regulated lead acid batteries for standby power
applications. In addition, we entered into a worldwide technology license
agreement with Matsushita Battery Industrial Co. Ltd. of Japan for selected
patents and know-how relating to the manufacturing technology for the
aforementioned products. Our Reynosa, Mexico, facility produces product for both
the Standby Power and Motive Power divisions.
On February 1, 2004, we combined our Powercom and Dynasty divisions into
the newly created Standby Power Division.
Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we
acquired Celab Limited ("Celab"), based in Hampshire, United Kingdom, a provider
of power conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004, we acquired Datel
Holding Corporation and its subsidiaries ("Datel"), a Mansfield,
Massachusetts-based manufacturer of DC to DC converters, data acquisition
components and digital meters. On September 30, 2004, we acquired the Power
Systems division of Celestica, Inc., which we now operate as "CPS", a Toronto,
Ontario-based company. CPS develops DC to DC converters and AC to DC power
supplies which are sold on a direct basis to large computing and communications
original equipment manufacturers ("OEMs"). For reporting purposes, these
acquisitions are part of the Power Electronics Division.
Fiscal Year
Our fiscal year ends on the last day of January. Any references to a
fiscal year means the 12-month period ending January 31 of the year mentioned.
Forward-Looking Statements
Statements and information contained in this Annual Report on Form 10-K
that are not historical facts are "forward-looking" statements made pursuant to
the safe-harbor provisions of the Private Securities Litigation Act of 1995.
Forward-looking statements may be identified by their use of words like "plans,"
"expects," "will," "anticipates," "intends," "may," "projects," "estimates,"
"believes" or other words of similar meaning. All statements that address
expectations or projections about the future, including, but not limited to,
statements about our strategy for growth, goals, trends, product development,
market position, market conditions, expenditures, sales and financial results,
are forward-looking statements. Forward-looking statements are based on certain
assumptions and expectations of future events and involve a number of risks and
uncertainties. We cannot guarantee that these assumptions and expectations are
accurate or will occur. We caution readers not to place undue reliance on these
forward-looking statements. These statements speak only as of the date of this
Annual Report on Form 10-K, and we undertake no obligation to update or revise
these statements to reflect events or circumstances occurring after the date of
this Annual Report on Form 10-K.
o We operate worldwide and derive a portion of our revenue from sales
outside the United States. Changes in the laws or policies of
governmental and quasi-governmental agencies, as well as social and
economic conditions, in the countries in which we operate (including
the United States) could affect our business and our results of
operations. In addition, economic factors (including inflation and
fluctuations in interest rates and foreign currency exchange rates)
and competitive factors (such as price competition and business
combinations or reorganizations of competitors) or a decline in
industry sales or cancelled or delayed orders due to economic
weakness or changes in economic conditions, either in the United
States or other countries in which we conduct business, could affect
our results of operations. (See Item 1. Business - International
Operations, Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Impact of the
Economy and Shift in Customer Demand, and Item 7A. Quantitative and
Qualitative Disclosure about Market Risk - Market Risk Factors.)
2
o Terrorist acts or acts of war, whether in the United States or
abroad, could cause damage or disruption to our operations, our
suppliers, channels to market or customers, or could cause costs to
increase, or create political or economic instability, any of which
could have a material adverse effect on our results of operations.
o Our results of operations could be adversely affected by conditions
in the domestic and global economies or the markets in which we
conduct business, such as telecommunications, uninterruptible power
supply ("UPS"), CATV, switchgear and control, material handling and
military.
o Our operating results could be adversely affected by increases in
the cost of raw materials, particularly lead, the primary component
cost of our battery products, or other product parts or components.
We may not be able to fully offset the effects of higher costs of
raw materials through price increases to customers or productivity
improvements. A significant increase in the price of one or more raw
materials, parts or components could have a material adverse effect
on results of operations. (See Item 7. Management's Discussion and
Analysis of Financial Condition and Results of Operations - Raw
Material Pricing and Productivity; and Inflation.)
o Our ability to meet customer demand depends, in part, on our ability
to obtain timely and adequate supply and delivery of raw materials,
including lead, which is the primary component cost of our battery
products, or other product parts or components from our suppliers
and internal manufacturing capacity. Although we work closely with
both our internal and external suppliers (and, as to the continuing
availability of lead, our industry associations) to avoid
encountering unavailability or shortages, there can be no assurance
that we will not encounter them in the future. The cessation,
reduction or interruption of supply of raw materials (including
lead), product parts or components, could have a material adverse
effect on our operations. The loss of a key supplier or the
inability to obtain certain key products or components could cause
delays or reductions in shipments of our products or increase our
costs.
o Our growth objectives are largely dependent on our ability to renew
our pipeline of new products and to bring these products to market.
This ability may be adversely affected by difficulties or delays in
product development, such as the inability to: introduce viable new
products; successfully complete research and development projects or
integrate or otherwise capitalize upon purchased or licensed
technology; obtain adequate intellectual property protection;
maintain or improve product quality; or gain market acceptance of
the new products. Our growth could also be affected by competitive
products and technologies.
o Our ability to implement our business strategies may be hindered or
delayed. As part of our strategy for growth, we have made and may
continue to make acquisitions, and in the future, may make
divestitures and form strategic alliances. There can be no assurance
that these will be completed or beneficial to us. Acquisitions
present significant challenges and risks relating to the integration
of the business into our company, including substantial management
time and financial and other resources, and there can be no
assurance that we will manage acquisitions successfully.
o We have undertaken and may continue to undertake productivity
initiatives, including, among others, re-organizations, including
the shut down or sale of portions of our business, and facility
rationalizations to improve performance or generate cost savings. In
addition, we may from time to time relocate or consolidate one or
more of our operations. There can be no assurance that any planned
performance improvements or cost savings from such activities will
be realized or that delays or other interruptions in production or
delivery of products will not occur as the result of any
rationalization, relocation or consolidation. A rationalization,
relocation or consolidation could also cause asset impairments
and/or trigger environmental remediation obligations. Further, there
can be no assurance that any of these initiatives will be completed
or beneficial to us.
o Our facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental
laws and regulations, as well as participation in voluntary
programs, are significant and will continue to be so for the
foreseeable future. We are also subject to potentially significant
fines and penalties for non-compliance with applicable laws and
regulations. Our accruals for such costs and liabilities may not be
adequate since the estimates on which the accruals are based depend
on a number of factors including, but not limited to, the nature of
the problem, the complexity of the issues, the nature of the remedy,
the outcome of discussions with regulatory agencies and/or the
government or third parties and, as applicable, other potentially
responsible parties ("PRPs") at multi-party sites, the number and
financial viability of other PRPs and risks associated with
litigation. (See Item 1. Business - Environmental Regulations.)
3
o We are exposed to the credit risk of our customers, including risk
of insolvency and bankruptcy. Although we have programs in place to
monitor and mitigate the associated risk, there can be no assurance
that such programs will be effective in reducing our credit risks or
risks associated with potential bankruptcy of our customers. (See
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.)
o Our business, results of operations and financial condition could be
affected by significant pending and future litigation or claims
adverse to us. These could potentially include, but are not limited
to, the following: product liability, contract, employment-related,
labor relations, personal injury or property damage, intellectual
property, stockholder claims and claims arising from any injury or
damage to persons, property or the environment from hazardous
substances used, generated or disposed of in the conduct of our
business (or that of a predecessor to the extent we are not
indemnified for those liabilities). (See Item 3. Legal Proceedings.)
o Our performance depends on our ability to attract and retain
qualified personnel. We cannot assure that we will be able to
continue to attract or retain qualified personnel. A portion of our
workforce is unionized. From time to time, we engage in collective
bargaining negotiations with the unions that represent them. If we
are unable to reach agreement with any of our unionized work groups
on future negotiations regarding the terms of their collective
bargaining agreements, or if additional segments of our workforce
become unionized, we may be subject to work interruptions or
stoppages. Strikes or labor disputes with our employees may
adversely affect our ability to conduct our business. (See Item 1.
Business - Employees.)
o Our credit facility and covenants under our credit facility restrict
our operational and financial flexibility and impose significant
interest and financing costs. Also, our credit facility permits
dividends to be paid on our Common Stock as long as there is no
default under that agreement. Subject to that restriction and the
provisions of Delaware law, future dividends will depend on our
earnings, financial condition and other factors.
o Our overall profitability may not meet expectations if our products,
customers or geographic mix are substantially different than
anticipated. Our profit margins vary among products, customers and
geographic markets. Consequently, if our mix of any of these is
substantially different from what is anticipated in any particular
period, our earnings could be lower than anticipated.
o In spite of having a disaster recovery plan in place, infrastructure
failures could have a material adverse effect on our business. We
are highly dependent on our systems infrastructure in order to
achieve our business objectives. If we experience a problem that
impairs our infrastructure, such as a power outage, computer virus,
intentional disruption of information technology systems by a third
party, equipment failure or computer or telephone system failure,
the resulting disruptions could impede our ability to book or
process orders, manufacture and ship products in a timely manner or
otherwise carry on our business in the ordinary course. Any such
events could cause us to lose significant customers or revenue and
could require us to incur significant expense to eliminate these
problems and address related security concerns.
o In response to the European Union's "Restriction on Use of Hazardous
Substances in Electrical and Electronic Equipment," or ("RoHS,") we
established a schedule for compliance. We will continue to strive
for elimination, and seek to have our component part suppliers
eliminate prohibited hazardous substances consistent with
legislative requirements. We will continue to actively monitor
decisions around environmental legislation and align our compliance
with those decisions and the needs of our customers. There is no
assurance that these efforts will be successful or timely completed,
the failure of either of which could have an adverse effect on our
results of operations.
o We are a party to time-limited supply agreements with certain of our
customers. There is no assurance that these contracts will be
renewed or, if renewed, that they will be renewed on as favorable
terms to us as existing agreements.
The foregoing list of important factors is not all-inclusive, or
necessarily in order of importance.
4
Reportable Segments
Our operations are classified into the following reportable business
segments:
o Standby Power Division
o Power Electronics Division
o Motive Power Division
Segments are determined using the "management approach," which means the
way management organizes the segments within the enterprise for making operating
decisions and assessing performance. Effective February 1, 2004, we combined the
Dynasty and Powercom divisions into the newly created Standby Power Division.
Effective April 2005, the Motive Power Division reports to the general manager
of the Standby Power Division.
The financial information regarding our three business segments, which
includes net sales and operating income for each of the three years in the
period ended January 31, 2005, is provided in Note 15 to the Consolidated
Financial Statements. See Part II, Item 8.
The Market for Our Products
We manufacture and market products in the following general categories by
business segment:
o Standby Power Division - industrial batteries and fully integrated
reserve power systems and components for the standby power market,
which includes UPS applications for computer systems and corporate
data networks, telecommunications reserve power systems, CATV signal
powering, utilities and solar.
o Power Electronics Division - custom, standard and modified standard
DC to DC converters, embedded high frequency AC to DC and DC to DC
switching power supplies and magnetics (transformers and inductors);
digital meters and data acquisition components.
o Motive Power Division - motive power systems for the material
handling equipment market.
We market our products through independent manufacturer's representatives,
national and global distributors, specialty resellers and our own sales
personnel to end users and OEMs.
We sell some products to the U.S. Government. These sales accounted for
less than 5% of our total Company sales during each of our last three fiscal
years.
Products and Customers by Business Segment
Standby Power Division - Reserve Power Systems and Components
Through our Standby Power Division, we manufacture and market integrated
reserve power systems and components for the standby power market, which
includes telecommunications, UPS, cable and utilities. Integrated reserve power
systems monitor and regulate electric power flow and provide backup power in the
event of a primary power loss or interruption. The Standby Power Division also
produces the individual components of these systems, including reserve
batteries, power rectifiers, system monitors, power boards and chargers. Major
applications of these products include wireless and wireline telephone
infrastructure, CATV signal powering, corporate data center powering and
computer network backup for use during power outages. Our customers include
industry-leading OEMs, broadband and telecommunications providers, large
investor owned utilities as well as large end user customers.
We manufacture lead acid batteries for use in reserve power systems. We
sell these batteries in a wide range of sizes and configurations in two broad
categories:
o flooded batteries; and
o valve-regulated lead acid batteries ("VRLA") (sealed type).
Flooded batteries require periodic watering and maintenance. VRLA
batteries require less maintenance and are often smaller.
5
To meet the needs of our customers, our reserve power systems include a
wide range of power electronics products, consisting principally of power
rectifiers and distribution and monitoring equipment. Our power rectifiers
convert or "rectify" external AC power into DC power at the required voltage to
constantly charge the reserve battery and operate the user's equipment. For
installations with end applications that require varied power levels, our power
control and distribution equipment distributes the rectified power for each of
the applications.
Uninterruptible Power Supplies. The Standby Power Division produces
batteries for UPS systems, which provide instant battery backup in the event of
primary power loss or interruption, thereby permitting an orderly shutdown of
equipment or continued operation for a limited period of time until a power
source comes back on-line. C&D offers distinct product families to meet the
needs and requirements of this growing industry. Our Dynasty(R) High Rate VRLA
Series batteries have been engineered specifically for UPS applications and
deliver extended life while complying with rigorous industry standards. In
addition, the Standby Power Division offers a line of premium replacement VRLA
batteries for UPS applications called the MAXRATE(TM), which we believe provides
a longer life and improved runtime in the same space as that of original
equipment batteries currently supplied by UPS manufacturers. Our flooded XT &
XTPlus products are utilized for large system back up in major data centers and
critical 24X7 applications. As a critical component to overall power backup
solutions, our Standby Power Division continues to work closely with major
global UPS OEMs to design a cost-effective, reliable product to meet customer
expectations.
Telecommunications. As with UPS, the Standby Power Division produces
battery solutions to fill the many application needs of today's
telecommunications industry. Designed specifically for the telecommunications
need for long life and extended runtime, our flooded MCT and LCT family of
products have become the battery of choice for central office and critical back
up applications. With the addition of our facility in Reynosa, Mexico, in fiscal
year 2004, we have added the VRLA MSE and msEndur(TM) family of products
designed for wireless applications, as well as other applications for
non-flooded requirements. In addition, our Dynasty(R) Tel Series VRLA Long
Duration batteries are designed to Telcordia standards to meet the demanding
requirements of telecommunications applications. These batteries operate in a
wide variety of environmental conditions, meet prolonged run time needs so as to
maintain operations during power loss and protect sophisticated electronics
equipment. Our customers use the majority of our standby power products in
telecommunications applications, such as central telephone exchanges, microwave
relay stations, private branch exchange ("PBX") systems and wireless telephone
systems. Our major telecommunications customers include national long distance
companies, competitive local exchange carriers, wireline and wireless system
operators, paging systems and PBX telephone locations using fiber optic,
microwave transmission or traditional copper-wired systems.
CATV Signal Powering and Broadband. Dynasty(R) Broadband Series batteries
are designed for demanding standby float applications in abusive environments.
These batteries have been designed to offer the best combination of run time and
service life for CATV signal powering and broadband applications. Our gelled
electrolyte technology provides excellent heat transfer properties, which enable
these batteries to perform in high temperature environments. Unlike other
competitive gel technologies, the Dynasty(R) Broadband Series does not require
cycling subsequent to delivery to meet 100% of rated capacity. Our Dynasty(R)
Broadband Series of batteries is considered the market leader for CATV powering
in North America.
Modular Power Plants. We offer several modular power plants, which are a
type of integrated reserve power system. These products, which are referred to
as the Liberty(R) AGM Series Power Plant and the Liberty(R) ACM Series Power
Plant, integrate advanced rectifiers with virtually maintenance-free
valve-regulated batteries. Also, the Standby Power Division offers the
Sageon(TM) family of power systems products, which are designed to fit virtually
any application that demands stable, reliable and easily expandable DC power.
Equipment for Electric Utilities and Industrial Control Applications. We
produce rectifiers and batteries used in reserve power systems for switchgear
and instrumentation control systems used in electric utilities and industrial
control applications. These power systems provide auxiliary power that enables
fossil fuel, hydro and nuclear power generating stations, switching substations
and industrial control facilities to be shut down in an orderly fashion during
emergencies or power failures until a power source comes back on-line.
6
Power Electronics Division - DC to DC Converters, Power Supplies and
Magnetics
Through our Power Electronics Division, we manufacture and market custom,
standard and modified-standard electronic power supply systems, including DC to
DC converters, for large OEMs of telecommunications and networking equipment, as
well as office and industrial equipment. In addition, as a result of recent
acquisitions, the division also manufactures power conversion products sold into
military and CATV applications as well as digital panel meters and data
acquisition components.
We sell the majority of our power supply products to OEMs of electronic
products on either a custom, standard or modified-standard basis. Power supplies
are embedded in almost all electronic products and are used to convert available
AC or DC voltage to the required level and quality of DC voltage to power the
associated equipment.
Our power supplies incorporate advanced technology and are designed for
reliable operation of the host equipment. These products include DC to DC
converters, AC to DC and DC to DC power supplies and magnetics (transformers and
inductors) for use in a wide variety of applications, with outputs ranging from
sub one watt to several kilowatts. DC to DC products are circuit board mounted
devices used to convert available system power to required component voltages.
DC to DC converters are widely used in distributed power and intermediate bus
architecture where system voltages require conversion to a higher or lower
voltage to power components such as microprocessors and arrays. AC to DC power
supplies convert alternating current, the form in which virtually all power is
delivered by electric utilities to end users, into precisely controlled direct
current that is required by sensitive electronic application architecture.
In the telecommunications industry, our power supplies are broadly used in
central office and transmission equipment. We also produce power supplies for
networking equipment (switches, routers, hubs, etc.), office equipment (mass
storage, digital printing, etc.), and industrial equipment (computing,
automation and test instrumentation).
Motive Power Division - Motive Power Systems
The Motive Power Division manufactures complete systems and individual
components (including power electronics and batteries) to power, monitor, charge
and test the batteries used in electric industrial vehicles, including fork-lift
trucks, automated guided vehicles and airline ground support equipment. These
products are marketed to end users in a broad array of industries, dealers of
fork-lift trucks and other material handling vehicles, and, to a lesser extent,
OEMs.
We offer a broad line of motive power equipment including the C-Line(TM)
battery, which we believe is the industry standard for long life and the
V-Line(R) battery for general material handling applications. We also offer a
broad line of battery charging and associated specialty equipment and parts.
Sales, Installation and Servicing
The sales, installation and servicing of certain Standby Power and Motive
Power products are performed through several networks of independent
manufacturer's representatives located throughout North America. Most of our
independent manufacturer's representatives (or contractors in the case of
installation or service) operate under contracts providing for compensation on a
commission basis or as a distributor with product purchased for resale. Certain
Standby Power and Power Electronics products are sold via a network of
independent manufacturer's representatives as well as independent distributors
located throughout the world.
In addition to these networks of independent manufacturer's
representatives and distributors, we employ internal sales management consisting
of regional sales managers, account specific sales persons and product/market
specialists. The regional sales managers are each responsible for managing a
number of independent manufacturer's representatives and for developing
long-term relationships with large end users, OEMs and national accounts. We
also employ a separate sales organization that works with the independent
manufacturer's representative network and directly with certain large customers.
We have internal product management and marketing personnel in each of our
divisions to manage the development of new products from the initial concept
definition and management approval stages through the engineering, production
and sales processes. They are also responsible for applications engineering,
technical training of sales representatives and the marketing communications
function.
We maintain branch sales and service facilities in North America, Europe
and Asia, with the support of our headquarters and service personnel, and have
business relationships with sales representatives and distributors throughout
the world.
7
No single customer of C&D accounted for 10% or more of our net sales for
the year ended January 31, 2005. We typically sell our products with terms
requiring payment in full within 30 days. We warrant our battery products for
various periods of time depending on the type of product and its application.
The longest warranties generally are applicable to flooded standby power
batteries sold by our Standby Power Division. Power supply products from our
Power Electronics Division are generally sold with a one year warranty.
Backlog
The level of unfilled orders at any given date during the year may be
materially affected by the timing and product mix of orders, customer
requirements and, taking into account considerations of manufacturing capacity
and flexibility, the speed with which we fill those orders. Period-to-period
comparisons may not be meaningful. Occasionally orders may be canceled by the
customer prior to shipment.
Our order backlog at March 31, 2005, was $90,838,000 and at March 31,
2004, was $50,034,000. The increase in backlog was primarily the result of the
acquisitions in fiscal year 2005. We expect to fill virtually all of the March
31, 2005, backlog during fiscal year 2006.
Manufacturing and Raw Materials
We manufacture our products at nine domestic plants, two plants in China,
two plants in Mexico and two plants in the United Kingdom. We manufacture most
key product lines at a single focused plant in order to optimize manufacturing
efficiency, asset management and quality control.
Consolidation. No manufacturing facilities were closed during fiscal year
2005 or in fiscal year 2004; however, in fiscal year 2005, we completed the
transition of the Motive Power V-Line(R) and former Standby Power HD products
(now replaced by the MSE and msEndur(TM)) to the Company's Reynosa, Mexico,
facility from the Company's Huguenot, New York, and Leola, Pennsylvania,
facilities, respectively. In fiscal year 2003, we closed the metal fabrication
operations at our Conshohocken, Pennsylvania, facility and now purchase products
previously manufactured at this location from third parties. We also closed our
Shannon, Ireland, facility in fiscal year 2003, shifting its manufacturing and
design capabilities to other Power Electronics Division facilities.
Raw Materials. The principal raw materials used in the manufacture of our
products include lead, steel, copper, plastics, printed circuit boards and
electronic components, all of which are generally available from multiple
suppliers. We use a number of suppliers to satisfy our raw materials needs.
8
ISO 9001 Recognition. ISO certification assures customers that our
internal processes and systems meet internationally recognized standards. We are
ISO 9001:2000 standard certified at the following locations:
Domestic
o Conyers, Georgia;
o Dunlap, Tennessee;
o Mansfield, Massachusetts;
o Milwaukee, Wisconsin;
o Milwaukie, Oregon; and
o Tucson, Arizona.
International
o Bordon, United Kingdom;
o Guangzhou, China;
o Milton Keynes, United Kingdom;
o Nogales, Mexico;
o Romsey, United Kingdom;
o Shanghai, China, Standby Division joint venture; and
o Toronto, Canada.
We are working towards certification at our battery plants in Attica,
Indiana, and Reynosa, Mexico, and our Power Electronics Research and Development
facility in Shanghai, China.
Competition
Our products compete on the basis of:
o product quality and reliability;
o reputation;
o customer service;
o delivery capability; and
o technology.
We also offer competitive pricing and highly value our relationships with
our customers. In addition, we believe that we have certain competitive
advantages in specific product lines.
We believe that we are one of the four largest producers of both reserve
and motive power systems in North America. We believe that the ability to
provide a single source for design, engineering, manufacturing and service is an
important element in our competitive position.
In reserve power systems, we believe we are the only major North American
company that manufactures complete, integrated reserve power systems consisting
of both electronics and batteries. Our other major competitors manufacture
either electronics or batteries, but not both.
When lead prices rise, certain of our battery competitors that own
smelting operations may have lower lead costs than we have. However, when lead
prices decline, the high fixed costs associated with these operations may
provide C&D with a cost advantage.
Having completed the acquisitions of Celab, Datel and CPS (formerly the
Celestica Power Systems division of Celestica, Inc.), we believe we have the
building blocks to firmly establish our Power Electronics Division as a
significant power platform in the industry. We believe our Power Electronics
Division is a leading supplier of board mounted DC to DC technologies worldwide.
In addition we have leading technology in the area of AC to DC and DC to DC
power supplies, data acquisition, digital panel meters and magnetics. Our
channels-to-market and preferred supplier position at major global OEMs set us
apart in the power electronics field. We have several major technology licenses
(with other power companies) and development alliances with industry-leading
9
silicon vendors that give us a competitive portfolio in the power electronics
space. Our Power Electronics Division's value proposition is rooted in
technology, quality and reliability coupled with strategically located
manufacturing facilities worldwide to meet the cost and logistic needs of our
customers.
Research and Development
Research and development expenses for the fiscal years ended January 31,
2005, 2004 and 2003, were $19,105,000, $9,542,000 and $9,502,000.
We maintain extensive technology departments concentrating on
electrochemical and electronics technologies. We focus on:
o design and development of new products;
o development and improvement of existing products;
o sustaining engineering;
o production engineering (including quality testing and managing the
changes in production capacity); and
o evaluation of competitive products.
We have research and development facilities in North America, China and
Europe which utilize computer-aided design tools and testing equipment. Notable
new product achievements in fiscal year 2005 include:
o Standby Power Division. We launched two new flooded product lines -
the DJ line for UPS and utility applications and the LCT HP line for
the telecommunications industry. We also launched the msEndur(TM)
product line, which is based on technology acquired as part of the
Reynosa facility purchase from Matsushita in fiscal year 2004. It is
a complete line of two-volt sealed product for telecommunications
and UPS applications, which we believe has superior performance as
compared with equivalent competitive products. The Standby Power
Division also launched, under the Dynasty(R) brand, the new global
MAXRATE(TM) product with attributes specifically targeting the
European UPS battery market.
o Power Electronics Division. We launched many industry-leading
products during fiscal year 2005, including:
o Our design team introduced new products in low power DC to DC,
medium power DC to DC, and standard and custom AC to DC
products. Examples include the NNL series of non-isolated
point of load converters, the SLC series of 100-watt quarter
bricks, Compact-PCI 200 and 325 watt family releases, enhanced
IPMI programmable functionality on several PCI models and a
large, 5000-watt three phase, digitally-controlled power
supply for a customer in the blade rack server market.
o Celab Limited, our specialist military and CATV subsidiary
developed or enhanced products for customers in its two
primary markets. Celab also started two major new programs for
its military customers, namely the SP1920 which powers a
ship-borne SONAR system and SP1940 which powers a land-based
radar system.
o Our Datel business unit developed and announced new products
across all three of its product lines (DC to DC converters,
digital panel meters, and data-acquisition components),
including a DC to DC ULE Series of high-density, isolated
eighth-bricks. It also greatly expanded its
already-industry-leading offering of non-isolated, point of
load devices. In data-acquisition components, Datel developed
and introduced the ADSD-1410 whose single package contains
simultaneous, high-speed (10MHz), high-resolution (14-bits)
sampling analog-to-digital (A/D) converters.
o Our CPS business unit developed and announced products in
fixed ratio DC to DC, custom DC to DC, and custom AC to DC.
The CPS acquisition included a technology alliance with Vicor
for factorized power architecture.
In addition, the Power Electronics Division continued to develop alliances
with major power management companies for reference designs, and is negotiating
development agreements with major silicon companies and other power conversion
companies for alternative technologies such as the Power One Z-One Digital IBA
architecture.
10
International Operations
Along with our domestic manufacturing facilities, we have international
manufacturing facilities in China, Mexico, and the United Kingdom. Our 67% joint
venture facility in Shanghai, China, manufactures industrial batteries that are
sold primarily in China and Europe. Our Power Electronics Division facilities in
China and the United Kingdom manufacture electronics that are sold primarily in
Europe, North America, and the Far East. International sales accounted for
26.3%, 17.4% and 18.0% of net sales for the years ended January 31, 2005, 2004
and 2003, respectively.
Patents and Trademarks
Our practice is to apply for patents on new inventions, designs and
processes that have strategic value or are associated with existing or
prospective product lines, service offerings or operations. We believe that the
growth of our business will depend primarily upon the quality and reliability of
our products and our relationships with our customers, rather than the extent of
our patent protection. While we believe that patents are important to our
business operations, the loss of any single or several patents would not have a
material adverse effect on our company.
We regard our trademarks C&D(R), C&D TECHNOLOGIES(R), C&D TECHNOLOGIES
POWER SOLUTIONS(R), DATEL(R), DYNASTY(R), LIBERTY(R), and LIBERTY SERIES(R) as
being of substantial value in the marketing of our products and have registered
these trademarks in the United States Patent and Trademark Office. Our
trademarks also include C-LINE(TM), COMPUCHARGE(R), FERRO FIVE(R), FERRO
1500(R), HYPERON(R), MAXRATE(R), msEndur(TM), POSITION PERFECT(TM), RANGER(R),
REVOLUTION(TM), SAGEON(TM), SCOUT(R), SMARTBATTERY(R), and V-LINE(R).
Employees
On February 28, 2005, we employed 2,977 people. Of these employees, 1,964
were employed in manufacturing and 1,013 were employed in field sales,
technology, manufacturing support, sales support, marketing and administrative
activities. Our management considers our employee relations to be satisfactory.
Employees at five North American plants are represented by five different unions
under collective bargaining agreements.
Environmental Regulations
Our operations are subject to extensive and evolving environmental laws
and regulations regarding the clean-up and protection of the environment, worker
health and safety and the protection of third parties. These laws and
regulations include, but are not limited to, the following:
o requirements relating to the handling, storage, use and disposal of
lead and other hazardous materials used in manufacturing processes
and contained in solid wastes;
o record keeping and periodic reporting to governmental entities
regarding the use and disposal of hazardous materials;
o monitoring and permitting of air emissions and water discharge; and
o monitoring worker exposure to hazardous substances in the workplace
and protecting workers from impermissible exposure to hazardous
substances, including lead, used in our manufacturing process.
We operate under a comprehensive environmental, health and safety
compliance program, which is headed by an environmental vice-president and
staffed with trained environmental professionals. As part of our program, we:
o prepare environmental and health and safety practice manuals and
policies;
o conduct employee training;
o develop and implement waste minimization initiatives;
o undertake periodic internal and oversee external audits of our
operations and environmental and health and safety programs;
o practice and engage in routine sampling and monitoring of employee
chemical and physical exposure levels;
o engage in sampling and monitoring of potential points of
environmental emissions; and
o prepare and/or review internal reports to regulatory bodies and
interface with them regarding environmental, safety and other
issues.
11
In addition, we also have installed certain pollution abatement equipment
to reduce emissions and discharges of regulated pollutants into the environment.
Our program monitors and seeks to resolve potential environmental liabilities
that result from, or may arise from, current and historic hazardous materials
handling and waste disposal practices. We have in place a spent product
recapture and recycling program for our facilities and our customers.
While we believe that we are in material compliance with the applicable
environmental requirements, we have received, and in the future may receive,
citations and notices from governmental regulatory authorities that certain of
our operations are not in compliance with our permits or applicable
environmental requirements. Occasionally we are required to pay a penalty or
fine, to install control technology or to make equipment or process changes (or
a combination thereof) as a result of the non-compliance or changing regulatory
requirements. When we become aware of a non-compliance or change in regulatory
requirements, we take immediate steps to correct and resolve the issues. The
associated costs have not had a material adverse effect on our business,
financial condition or results of operations.
Notwithstanding our efforts to maintain compliance with applicable
environmental requirements, if injury or damage to persons or the environment
arises from hazardous substances used, generated or disposed of in the conduct
of our business (or that of our predecessors to the extent we are not
indemnified therefor), we may be held liable for certain damages, the costs of
the investigation and remediation, and potential fines and penalties, which
could have a material adverse effect on our business, financial condition or
results of operations. However, under the terms of the purchase agreement with
Allied for the acquisition of C&D (the "Acquisition Agreement"), Allied was
obligated to indemnify C&D for any liabilities of this type resulting from
conditions existing at January 28, 1986, that were not disclosed by Allied to
C&D in the schedules to the Acquisition Agreement. These obligations have since
been assumed by Allied's successor in interest, Honeywell ("Honeywell").
C&D, along with numerous other parties, has been requested to provide
information to the United States Environmental Protection Agency (the "EPA") in
connection with investigations of the source and extent of contamination at
three lead smelting facilities (the "Third Party Facilities") to which C&D had
made scrap lead shipments for reclamation prior to the date of the acquisition.
C&D and four other PRPs agreed upon a cost sharing arrangement for the
design and remediation phases of a project related to one of the Third Party
Facilities, the former NL Industries site in Pedricktown, New Jersey, acting
pursuant to a Consent Decree. The PRPs identified and sued additional PRPs for
contribution. In April 2002, one of the original four PRPs, Exide Technologies
("Exide"), filed for relief under Chapter 11 of Title 11 of the United States
Code. In August 2002, Exide notified the PRPs that it would no longer be taking
an active role in any further action at the site and discontinued its financial
participation. This resulted in a pro rata increase in the liabilities of the
other PRPs, including C&D, for which C&D's allocated share rose from 5.25% to
7.79%.
We also responded to requests for information from the EPA and the state
environmental agency with regard to another Third Party Facility, the "Chicago
Site," in October 1991.
In August 2002, we were notified of our involvement as a PRP at the NL
Atlanta, Northside Drive Superfund site. NL Industries, Inc. ("NL") and Norfolk
Southern Railway Company have been conducting a removal action on the site,
preliminary to remediation. We, along with other PRPs, are currently in
negotiations with NL at this site regarding our share of the allocated
liability, which we expect will not have a material adverse effect on our
business, financial condition or results of our operations.
We are also aware of the existence of contamination at our Huguenot, New
York, facility, which is expected to require expenditures for further
investigation and remediation. The site is listed by the New York State
Department of Environmental Conservation ("NYSDEC") on its registry of inactive
hazardous waste disposal sites due to the presence of fluoride and other
contaminants in amounts that exceed state groundwater standards, and the agency
has issued a Record of Decision for the soil remediation portion of the site. A
final remediation plan for the ground water portion has not yet been finalized
with or approved by the State of New York. In February 2000, we filed suit
against the prior owner of the site, Avnet, Inc., which is ultimately expected
to bear some, as yet undetermined, share of the costs associated with
remediation of contamination in place at the time the Company acquired the
property. The parties' attempts to resolve the matter through mediation were not
successful; therefore, we are aggressively pursuing available legal remedies.
Should the parties fail to reach a negotiated settlement, and unless an
alternative resolution can be achieved, NYSDEC may conduct the remediation and
seek recovery from the parties.
C&D, together with Johnson Controls, Inc. ("JCI"), is conducting an
assessment and remediation of contamination at and near its facility in
Milwaukee, Wisconsin. The majority of the on-site soil remediation portion of
this project was completed as of October 2001. Under the purchase agreement with
JCI, C&D is responsible for (i) one-half of the cost of the on-site assessment
12
and remediation, with a maximum liability of $1,750,000 (ii) any environmental
liabilities at the facility that are not remediated as part of the ongoing
cleanup project and (iii) environmental liabilities for any new claims made
after the fifth anniversary of the closing, i.e. March 2004, that arise from
migration from a pre-closing condition at the Milwaukee facility to locations
other than the Milwaukee facility, but specifically excluding liabilities
relating to pre-closing offsite disposal. JCI retained the environmental
liability for the off-site assessment and remediation of lead. In March 2004, we
entered into an agreement with JCI to continue to share responsibility as set
forth in the original purchase agreement. We are currently in negotiation with
JCI regarding the allocation of costs for assessment and remediation of certain
off-site chlorinated volatile organic compounds ("CVOCs") in groundwater.
In January 1999, we received notification from the EPA of alleged
violations of permit effluent and pretreatment discharge limits at our plant in
Attica, Indiana. We submitted a compliance plan to the EPA in April 2002. We
engaged in negotiations with both the EPA and Department of Justice through
March 2003 regarding a potential resolution of this matter. The government filed
suit against C&D in March 2003 for alleged violations of the Clean Water Act.
The complaint requests injunctive relief and civil penalties of up to the
amounts provided by statute. We anticipate that the matter will result in a
penalty assessment and compliance obligations. We continue to seek a negotiated
or mediated resolution, failing which we intend to vigorously defend the action.
In October 2004, we accrued estimated environmental clean-up and impaired
equipment decontamination charges of $3,881,000 associated with the impairment
charges related to the Leola, Pennsylvania, and Huguenot, New York, facilities,
the timing for which has not been ascertained.
In February 2005, we received a verbal request from EPA to conduct
exploratory testing to determine if the historical municipal landfill located on
the C&D Attica, Indiana, property is the source of elevated levels of
trichloroethylene detected in two city wells downgradient of the C&D property.
No formal claim has been made against C&D. The scope of this potential exposure
is not defined at this time. C&D has retained environmental counsel and is fully
assessing the matter. At this time, we do not believe that this matter will have
a material adverse effect on our business, financial condition or results of
operations.
We accrue reserves for liabilities in our consolidated financial
statements and periodically reevaluate the reserved amounts for these
liabilities in view of the most current information available in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 5, "Accounting for
Contingencies." As of January 31, 2005, accrued environmental reserves totaled
$6,570,000 consisting of $2,362,000 in other current liabilities and $4,208,000
in other liabilities. Based on currently available information, we believe that
appropriate reserves have been established with respect to the foregoing
contingent liabilities and that they are not expected to have a material adverse
effect on our business, financial condition or results of operations.
Certifications
C&D has included as Exhibits 31.1 and 31.2 to its Annual Report on 10-K
for fiscal year ended January 31, 2005, filed with the Securities and Exchange
Commission ("SEC"), certifications of the Chief Executive Officer and Chief
Financial Officer of C&D regarding the quality of C&D's public disclosure. In
June 2004, C&D submitted to the New York Stock Exchange the certification of the
Chief Executive Officer required by the rules of the New York Stock Exchange
certifying that he was not aware of any violation by C&D of the New York Stock
Exchange corporate governance listing standards.
Available Information
C&D maintains an Internet web site (www.cdtechno.com) and makes available
free of charge on or through the web site its Annual Report on Form 10-K, its
Quarterly Reports on Form 10-Q and its Current Reports on Form 8-K as soon as
reasonably practicable after it electronically files such material with, or
furnishes it to, the SEC. C&D also makes available on its web site and in
printed form upon request, C&D's Code of Business Conduct, Code of Ethics for
C&D's Chief Executive Officer and Financial Employees and C&D's Corporate
Governance Guidelines.
13
Item 2. Properties
Set forth below is certain information, as of April 1, 2005, with respect
to our principal properties.
Square
Location Footage Products Manufactured at or Use of Facility
==============================================================================================================
United States Properties:
Milwaukee, Wisconsin (1) 370,000 Small standby power batteries
Attica, Indiana (1) 295,000 Large standby power batteries
Leola, Pennsylvania (1) (4) 240,000 Round Cell and battery R&D laboratory
Mansfield, Massachusetts (1) 180,000 Power supplies, data acquisition and digital meters
Conyers, Georgia (1) 161,000 Small standby power batteries
Huguenot, New York (1) 148,000 Motive power batteries
Dunlap, Tennessee (2) 72,000 Standby power and motive power electronics products
Blue Bell, Pennsylvania (2) 63,000 Corporate headquarters, Standby Power and Motive Power
divisional headquarters and electronics R&D laboratory
Milwaukie, Oregon (2) 50,000 Design, development and manufacture of power supplies
Tucson, Arizona (2) 45,000 DC to DC converters, power supplies, headquarters of Power
Electronics Division and electronics R&D laboratory
International Properties:
Shanghai, China (3) 315,000 Small standby power batteries
Reynosa, Mexico (1) 240,000 Large standby power batteries and motive power batteries
Nogales, Mexico (2) 81,000 DC to DC converters and AC to DC power supplies
Hampshire, United Kingdom (2) 42,000 Low voltage switchmode power supply units
Guangzhou, China (2) 35,000 DC to DC converters and wound magnetics
Milton Keynes, United Kingdom (2) 33,000 DC to DC converters, wound magnetics and electronics R&D
laboratory
Toronto, Canada (2) 24,000 Design and development of power supplies
Romsey, United Kingdom (2) 21,000 Distribution center
Mississauga, Canada (2) 20,000 Canadian headquarters, sales office and distribution center
(1) Property is owned by C&D.
(2) Property is leased by C&D.
(3) Building is owned by a joint venture, of which the Company owns 67%;
however, the land is leased under a 50-year agreement, of which 40 years
remain. The Chinese government previously notified our joint venture that
it will be required to relocate the Shanghai facility and has paid our
joint venture approximately $15,547,000 as a partial payment, which the
Company is applying towards construction of a new facility in the Pudong
Development Zone. Our joint venture is prepared to break ground in the
third quarter of fiscal year 2006 and anticipates production will begin in
the fourth quarter of fiscal year 2007. Upon return of the existing
property to the Chinese government, it will pay the joint venture an
additional $1,727,000.
(4) One of the buildings in the Leola, Pennsylvania, location is held for
sale.
Item 3. Legal Proceedings
We are involved in ordinary, routine litigation incidental to the conduct
of our business. None of this litigation, individually or in the aggregate, is
material or is expected to be material to our business, financial condition or
results of operations in any year. See Business - Environmental Regulations for
a description of certain administrative proceedings in which we are involved.
On March 24, 2003, C&D was sued in an action captioned United States of
America v. C&D Technologies, Inc., in the United States District Court for the
Southern District of Indiana, for alleged violations of the Clean Water Act by
virtue of alleged violations of permit effluent and pretreatment discharge
limits at our plant in Attica, Indiana. The complaint requests injunctive relief
and civil penalties of up to the amounts provided by statute. The parties are in
the process of negotiating a resolution of the matter, failing which we intend
to aggressively defend the matter.
Item 4. Submission of Matters to a Vote of Security Holders
None.
14
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters, and
Issuer Purchases of Equity Securities
Our Common Stock is traded on The New York Stock Exchange under the symbol
CHP. The approximate number of beneficial and registered record holders of our
Common Stock on April 18, 2005, was 3,400.
The following table sets forth, for the periods indicated, the high and
low sales prices for our Common Stock as reported by the New York Stock
Exchange. These prices represent actual transactions, but do not reflect
adjustment for retail markups, markdowns or commissions.
Years Ended January 31,
2005 2004
--------------------- --------------------
Fiscal Quarter High Low High Low
=============================================================================
First Quarter $20.86 $14.59 $17.82 $11.30
Second Quarter 18.20 13.55 15.55 11.20
Third Quarter 20.26 13.64 21.80 14.43
Fourth Quarter 19.55 14.36 23.43 17.70
Dividends. We began paying cash dividends on our Common Stock in April
1987. For the years ended January 31, 2005 and 2004, we declared dividends per
share as follows:
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
================================================================================
2005 $ 0.01375 $ 0.02750 $ -- $ 0.01375
2004 $ 0.01375 $ 0.01375 $ 0.01375 $ 0.01375
Our Amended and Restated Credit Facility permits dividends to be paid on
our Common Stock so long as there is no uncured default under that agreement.
Subject to that restriction and the provisions of Delaware law, future dividends
will depend on our earnings, financial condition and other factors. (See Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources.)
On February 22, 2000, the Board of Directors of C&D declared a dividend of
one common stock purchase right (a "Right") for each share of Common Stock
outstanding on March 3, 2000 to the stockholders of record on that date. The
description and terms of the Rights are set forth in a Rights Agreement between
C&D and Mellon Investor Services, LLC (formerly ChaseMellon Shareholder
Services, L.L.C.), as rights agent. On November 15, 2004, an amendment was
signed among C&D, Mellon Investor Services LLC and the Bank of New York whereby
Mellon Investor Services LLC resigned as rights agent effective as of 12:00
A.M., New York time, November 30, 2004. We appointed the Bank of New York as
successor rights agent effective as of 12:01 A.M., New York time, December 1,
2004. Upon the occurrence of certain events, each Right will entitle the
registered holder to purchase from C&D one one-hundredth of a share of Common
Stock at a purchase price of $150 per one one-hundredth of a share, subject to
adjustment, as stated in the Rights Agreement. Upon the occurrence of certain
events involving a hostile takeover of C&D, unless our Board of Directors acts
otherwise, each holder of a Right, other than Rights beneficially owned by the
acquiring company, will thereafter have the right to receive upon exercise: (i)
that number of shares of our common stock having a market value equal to two
times the purchase price of the Right or (ii) that number of shares of common
stock of the acquiring company that at the time of the transaction has a market
value of two times the exercise price of the Right.
15
The following table provides information regarding repurchases by C&D of
our common stock during the fourth quarter of fiscal year 2005.
Total Number Maximum Number
of Shares (or Approximate
Publicly Dollar Value) of
Total Number Announced Shares that May Yet
of Shares Average Price Plans Be Purchased Under
Period Purchased Paid per Share or Programs the Plans or Programs
====================================================================================================================
November 1 - November 30, 2004 151 $ 19.08 -- 1,000,000
December 1 - December 31, 2004 505 $ 17.10 -- 1,000,000
January 1 - January 31, 2005 1,199 $ 16.74 -- 1,000,000
- ------------------------------------------------ -----
Total 1,855 --
================================================ =====
Our share repurchase program was approved by our Board of Directors and
publicly announced on July 24, 2002. The program authorizes the repurchase of up
to 1,000,000 shares of our common stock (having a total purchase price of no
greater than $35,000,000) from time to time, directly or through brokers or
agents, and has no expiration date.
On September 30, 2004, our Board of Directors authorized a new stock
repurchase program. Under the program, the Company is permitted to repurchase up
to 1,000,000 shares of C&D Technologies common stock having a total purchase
price of no greater than $25,000,000. This program entirely replaces and
supersedes all previously authorized stock repurchase programs. None of the
shares purchased during the fourth quarter of fiscal year 2005 were purchased
pursuant to the September 30, 2004, repurchase program; 1,855 shares were
purchased through deferred compensation plans.
16
Item 6. Selected Financial Data
The following selected historical financial data for the periods indicated
have been derived from C&D's consolidated financial statements, which have been
audited by PricewaterhouseCoopers LLP, independent registered public accounting
firm. The information below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
C&D's consolidated financial statements, which appear in Items 7 and 15 of this
Form 10-K.
STATEMENT OF OPERATIONS DATA
(In thousands, except share and per share data)
Fiscal 2005 (1)(2) 2004 (3) 2003 2002 2001 (4)
===================================================================================================================
NET SALES $ 414,738 $324,824 $335,745 $471,641 $ 615,678
- -------------------------------------------------------------------------------------------------------------------
COST OF SALES 348,080 248,145 257,046 343,370 439,135
- -------------------------------------------------------------------------------------------------------------------
GROSS PROFIT 66,658 76,679 78,699 128,271 176,543
OPERATING EXPENSES:
Selling, general and administrative expenses 47,480 40,459 34,647 50,406 66,243
Research and development expenses 19,105 9,542 9,509 10,291 10,281
Goodwill impairment 74,233 -- 489 -- --
- -------------------------------------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (74,160) 26,678 34,054 67,574 100,019
- -------------------------------------------------------------------------------------------------------------------
Interest expense, net 5,015 1,268 3,800 6,700 6,315
Other expense (income), net 1,612 1,641 1,457 1,239 (725)
- -------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES (80,787) 23,769 28,797 59,635 94,429
AND MINORITY INTEREST
(Benefit) provision for income taxes (21,289) 8,795 9,414 22,244 35,883
- -------------------------------------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE MINORITY INTEREST (59,498) 14,974 19,383 37,391 58,546
Minority interest (5) 83 91 1,317 2,651
- -------------------------------------------------------------------------------------------------------------------
NET (LOSS) INCOME $ (59,493) $ 14,891 $ 19,292 $ 36,074 $ 55,895
===================================================================================================================
Net (loss) income per common share - basic (5) $ (2.35) $ 0.58 $ 0.75 $ 1.38 $ 2.13
===================================================================================================================
Net (loss) income per common share - diluted (6) $ (2.35) $ 0.58 $ 0.74 $ 1.35 $ 2.05
===================================================================================================================
Dividends per common share $ 0.055 $ 0.055 $ 0.055 $ 0.055 $ 0.055
===================================================================================================================
BALANCE SHEET DATA
Working capital $ 115,897 $ 64,005 $ 53,776 $ 55,014 $ 75,895
Total assets 481,408 385,950 382,156 395,558 455,519
Short-term debt 1,874 -- 14,062 27,255 18,172
Long-term debt 135,004 19,620 25,857 46,892 98,849
Stockholders' equity 209,328 269,533 258,274 241,858 218,054
(1) On May 27, 2004, we acquired Celab Limited, based in Hampshire, United
Kingdom, a provider of power conversion products, predominately sold into
military, CATV and telecommunications applications in Europe. On June 30, 2004,
we acquired Datel Holding Corporation and its subsidiaries, a Mansfield,
Massachusetts-based manufacturer of primarily DC to DC converters, with
additional product offerings in data acquisition components and digital panel
meters. On September 30, 2004, we acquired the Power Systems division of
Celestica, Inc., which we now operate as "CPS," a Toronto, Ontario-based
company. CPS develops DC to DC converters and AC to DC power supplies which are
sold on a direct basis to large computing and communications OEMs. For reporting
purposes, these three acquisitions are included in the Power Electronics
Division.
(2) The following charges are included in the Statement of Operations for
the fiscal year ended January 31, 2005: Cost of sales includes non-cash fixed
asset impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602; environmental clean-up charges at these two
facilities in the amount of $3,881; and rigging, transportation and severance
costs related to the transfer of production to our Reynosa, Mexico, facility of
$1,426. Operating expenses include non-cash goodwill and intangible asset
impairment charges of $74,233 and $464, respectively, relating to the Power
Electronics Division.
17
(3) On September 25, 2003, C&D and its wholly owned Mexican subsidiary,
C&D Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery
Industrial Corporation of America, and its Mexican subsidiary, Matsushita
Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in
Reynosa, Mexico, and the equipment in that facility historically used for the
manufacture of large, valve regulated lead acid batteries ("VRLA batteries") for
standby power applications. In addition, C&D entered into a worldwide technology
license agreement with Matsushita Battery Industrial Co. Ltd. of Japan for
selected patents and know-how relating to the manufacturing technology for the
aforementioned products. For reporting purposes, the acquisition of the Reynosa
facility and associated operating results are included in both the Motive Power
and Standby Power divisions. We continue to use the assets acquired for the
manufacture of large, VRLA batteries for standby power applications.
(4) In December 2000 (effective as of November 26, 2000), we acquired NCL,
a producer of electronic power conversion products (primarily DC to DC
converters) based in Milton Keynes, United Kingdom. For reporting purposes, the
acquisition of NCL is included in the Power Electronics Division. We continue to
use the assets acquired in such business.
(5) Based on 25,349,488, 25,536,628, 25,818,024, 26,153,715 and 26,223,684
weighted average shares outstanding - basic.
(6) Based on 25,349,488, 25,731,961, 26,025,179, 26,688,011 and 27,264,528
weighted average shares outstanding - diluted.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All dollar amounts in this Item 7 are in thousands, except per share
amounts and per pound lead amounts.
Overview
During fiscal year 2005, major items that impacted our financial results
include: (i) a $74,233 non-cash pre-tax goodwill impairment charge related to
our Power Electronics Division; (ii) the aforementioned acquisitions and
associated financial results of Celab, Datel and CPS, which are included in the
results of operations of our Power Electronics Division; and (iii) the increased
cost of lead, which had a significant negative impact on the results of our
Standby Power and Motive Power divisions. (See Item 15. Exhibits and Financial
Statement Schedules related to the goodwill impairment charge.)
Impact of Economy and Shift in Customer Demand
During fiscal year 2005, our Standby Power Division experienced higher
demand for products sold to the UPS markets, while demand for our Standby Power
products sold into the telecommunication markets continued to soften. Demand for
our Motive Power products and Power Electronics Division products (excluding the
fiscal year 2005 acquisitions) increased over fiscal 2004.
Raw Material Pricing and Productivity
Lead, steel, copper, plastics and electronic components are the major raw
materials used in the manufacture of our industrial batteries and electronics
products and, accordingly, represent a significant portion of our materials
costs. During fiscal years 2005, 2004 and 2003, the average London Metals
Exchange ("LME") price per pound of lead was as follows:
Fiscal 2005 2004 2003
=======================================================================================
Average annual LME price per pound of lead $ 0.41 $ 0.25 $ 0.20
Lowest average monthly LME price per pound of lead $ 0.34 $ 0.20 $ 0.19
Highest average monthly LME price per pound of lead $ 0.44 $ 0.34 $ 0.22
We have a long-term cost containment program to minimize manufacturing
costs. Under the program, we continue to allocate a significant amount of our
normal annual capital expenditures to cost containment and productivity
improvement projects.
18
Inflation
The cost to C&D of manufacturing materials and labor and most other
operating costs are affected by inflationary pressures. Lead prices continued to
rise in fiscal year 2005, and we have not been able to fully offset the higher
lead prices through selective price increases. We believe that, over recent
years, we have been able to offset inflationary cost increases on items other
than lead by:
o effective raw materials purchasing programs;
o increases in labor productivity;
o improvements in overall manufacturing efficiencies; and
o selective price increases of our products.
Results of Operations
The following table sets forth selected items in C&D's consolidated
statements of operations as a percentage of sales for the periods indicated.
Fiscal 2005 2004 2003*
====================================================================================
NET SALES 100.0% 100.0% 100.0%
- ------------------------------------------------------------------------------------
COST OF SALES 83.9 76.4 76.6
- ------------------------------------------------------------------------------------
GROSS PROFIT 16.1 23.6 23.4
OPERATING EXPENSES:
Selling, general and administrative expenses 11.5 12.5 10.3
Research and development expenses 4.6 2.9 2.8
Goodwill impairment 17.9 -- 0.2
- ------------------------------------------------------------------------------------
OPERATING (LOSS) INCOME (17.9) 8.2 10.1
- ------------------------------------------------------------------------------------
Interest expense, net 1.2 0.4 1.1
Other expense, net 0.4 0.5 0.4
- ------------------------------------------------------------------------------------
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (19.5) 7.3 8.6
(Benefit) provision for income taxes (5.2) 2.7 2.8
- ------------------------------------------------------------------------------------
NET (LOSS) INCOME BEFORE MINORITY INTEREST (14.3) 4.6 5.8
Minority interest (0.0) 0.0 0.1
- ------------------------------------------------------------------------------------
NET (LOSS) INCOME (14.3)% 4.6% 5.7%
====================================================================================
* Reclassified for comparative purposes.
Critical Accounting Policies
We have identified the critical accounting policies that are most
important to the portrayal of our financial condition and results of operations.
The policies set forth below require management's most subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain.
Litigation and Environmental Reserves
C&D is involved in litigation in the ordinary course of business,
including personal injury, property damage and environmental litigation. We also
expend funds for environmental remediation of both company-owned and third-party
locations. In accordance with SFAS No. 5, "Accounting for Contingencies" and
Statement of Position 96-1, "Environmental Remediation Liabilities," we record a
loss and establish a reserve for litigation or remediation when it is probable
that an asset has been impaired or a liability exists and the amount of the
liability can be reasonably estimated. Reasonable estimates involve judgments
made by management after considering a broad range of information including:
notifications, demands or settlements that have been received from a regulatory
authority or private party, estimates performed by independent engineering
companies and outside counsel, available facts, existing and proposed
technology, the identification of other PRPs, their ability to contribute and
prior experience. These judgments are reviewed quarterly as more information is
received and the amounts reserved are updated as necessary. However, the
reserves may materially differ from ultimate actual liabilities if the loss
contingency is
19
difficult to estimate or if management's judgments turn out to be inaccurate. If
management believes no best estimate exists, the minimum loss is accrued.
Valuation of Long-lived Assets
We assess the impairment of long-lived assets when events or changes in
circumstances indicate that the carrying value of the assets or the asset
grouping may not be recoverable. Factors we consider in deciding when to perform
an impairment review include significant under-performance of a business or
product line in relation to expectations, significant negative industry or
economic trends, and significant changes or planned changes in our use of the
assets. Recoverability of assets that will continue to be used in our operations
is measured by comparing the carrying amount of the asset grouping to the
related total future net cash flows. If an asset grouping's carrying value is
not recoverable through those cash flows, the asset grouping is considered to be
impaired. The impairment is measured by the difference between the assets'
carrying amount and their fair value, based on the best information available,
including market prices or discounted cash flow analyses.
Pension and Other Employee Benefits
Certain assumptions are used in the calculation of the actuarial valuation
of our defined benefit pension plans and postretirement benefits. These
assumptions include the weighted average discount rate, rates of increase in
compensation levels, expected long-term rates of return on assets and increases
or trends in health care costs. If actual results are less favorable than those
projected by management, additional expense may be required.
Inventory Reserves
C&D adjusts the value of its obsolete and unmarketable inventory to the
estimated market value based upon assumptions of future demand and market
conditions. If actual market conditions are less favorable than those projected
by management, additional inventory write-downs may be required.
Allowance for Doubtful Accounts
C&D maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its customers to make required payments. If the
financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances might be
required.
Warranty Reserves
C&D provides for the estimated cost of product warranties at the time
revenue is recognized. While we engage in extensive product quality programs and
processes, including actively monitoring and evaluating the quality of our
suppliers' products and processes, C&D's warranty obligation is affected by
product failure rates, warranty replacement costs and service delivery costs
incurred in correcting a product failure. Should actual product failure rates,
warranty replacement costs or service delivery costs differ from our estimates,
revisions to the estimated warranty liability would be made.
Deferred Tax Valuation Allowance
C&D records a valuation allowance to reduce its deferred tax assets to the
amount that is more likely than not to be realized. While we have considered
future taxable income and ongoing prudent and feasible tax planning strategies
in assessing the need for the valuation allowance, in the event C&D was to
determine that it would be able to realize its deferred tax assets in the future
in excess of its net recorded amount, an adjustment to the deferred tax asset
would increase income in the period such determination was made. Likewise,
should we determine that C&D would not be able to realize all or part of its net
deferred tax asset in the future, an adjustment to the deferred tax asset would
be charged to income in the period such determination was made.
Revenue Recognition
C&D recognizes revenue when the earnings process is complete. This occurs
when products are shipped to the customer in accordance with terms of the
agreement, title and risk of loss have been transferred, collectibility is
reasonably assured and pricing is fixed or determinable. Accruals are made for
sales returns and other allowances based on our experience. While returns have
historically been minimal and within the provisions established, we cannot
guarantee that we will continue to experience the same return rates that we have
in the past.
20
Impairment of Goodwill
Goodwill represents the excess of the cost over the fair value of net
assets acquired in business combinations. Goodwill and other "indefinite-lived"
assets are not amortized and are subject to the impairment rules of SFAS No.
142, "Goodwill and Other Intangible Assets," which C&D adopted on February 1,
2002. Goodwill is tested for impairment on an annual basis or upon the
occurrence of certain circumstances or events. C&D determines the fair value of
its reporting units using a combination of financial projections and discounted
cash flow techniques adjusted for risk characteristics, also giving
consideration to C&D's overall market capitalization. The fair market value of
the reporting units is compared to the carrying value of the reporting units to
determine if an impairment loss should be calculated. If the book value of a
reporting unit exceeds the fair value of the reporting unit, an impairment loss
is indicated. The loss is calculated by comparing the fair value of the goodwill
to the book value of the goodwill. If the book value of the goodwill exceeds the
fair value of the goodwill, an impairment loss is recorded. Fair value of
goodwill is determined by subtracting the fair value of the identifiable assets
of a reporting unit from the fair value of the reporting unit.
Research and Development
Research and development costs are expensed as incurred. Research and
development costs consist of direct and indirect internal costs related to
specific projects. The cost of materials (whether from our normal inventory or
acquired specially for research and development activities) and equipment or
facilities that are acquired or constructed for research and development
activities and that have alternative future uses (in research and development
projects or otherwise) are capitalized as tangible assets when acquired or
constructed. The cost of such materials consumed in research and development
activities and the depreciation of such equipment or facilities used in those
activities are recorded as research and development costs.
Fiscal 2005 Compared to Fiscal 2004
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Three acquisitions occurred during fiscal year 2005. On May 27, 2004, we
acquired Celab, based in Hampshire, United Kingdom, a provider of power
conversion products, predominately sold into military, CATV and
telecommunications applications in Europe. On June 30, 2004, we acquired Datel,
a Mansfield, Massachusetts-based manufacturer of DC to DC converters, data
acquisition components and digital meters. On September 30, 2004, we acquired
the Power Systems division of Celestica, Inc., which we now operate as "CPS," a
Toronto, Ontario-based company. CPS develops DC to DC converters and AC to DC
power supplies which are sold on a direct basis to large computing and
communications OEMs. For reporting purposes, these three acquisitions are part
of the Power Electronics Division.
Net sales for fiscal year 2005 increased $89,914 or 28% to $414,738 from
$324,824 in fiscal year 2004. This increase resulted primarily from the
aforementioned acquisitions coupled with improved customer demand for products
of all three divisions. Sales of the Power Electronics Division increased
$72,466 or 185%, primarily due to net sales of $66,806 recorded by the entities
acquired during the year, coupled with higher sales by the legacy portion of the
Power Electronics Division, which increased by $5,660 or 14%, primarily due to
higher DC to DC converter sales. Sales by the Standby Power Division increased
$13,107 or 6%, primarily due to increased sales to the UPS market, partially
offset by continued weakness in the telecommunications market. Motive Power
divisional sales increased $4,341 or 8%, primarily due to higher battery and
charger sales.
Gross profit for fiscal year 2005 declined $10,021 or 13% to $66,658 from
$76,679 with margins decreasing from 23.6% to 16.1%. Gross profit in the Standby
Power and Motive Power divisions declined primarily as a result of non-cash
impairment charges at our Leola, Pennsylvania, and Huguenot, New York,
facilities totaling $9,602, and associated environmental clean-up charges at
these two facilities in the amount of $3,881, coupled with an increase in the
cost of lead of approximately $25,309. Additionally, there were rigging,
transportation and severance costs related to the transfer of production to our
Reynosa, Mexico, facility of approximately $1,426. Gross profit in the Power
Electronics Division increased primarily due to the results of the acquisitions
coupled with the favorable impact of increased sales by the legacy portion of
the Power Electronics Division.
Selling, general and administrative expenses for fiscal year 2005
increased $7,021 or 17%. This increase was primarily due to selling, general and
administrative expenses of $9,253 incurred by the current year acquisitions.
Excluding the acquired companies, selling, general and administrative expenses
decreased $2,232 primarily as a result of lower warranty costs of $3,738 and
lower commissions of $988, partially offset by Sarbanes-Oxley compliance costs
of $2,664.
21
Research and development expenses for fiscal year 2005 increased $9,563 or
100%. As a percentage of sales, research and development expenses increased from
2.9% during fiscal year 2004 to 4.6% during fiscal year 2005. The increase was
primarily the result of $8,473 of research and development expenses incurred by
our recent acquisitions, including acquired in-process research and development
expenses of $780 related to the acquired companies and intangible asset
impairment charges of $464. The impairment was related to certain intellectual
property of the Power Electronics Division resulting from a decline in financial
projections of certain products.
Goodwill impairment charges of $74,233 were recorded in the Power
Electronics Division for the fiscal year ended January 31, 2005. No goodwill
impairment charges were recorded in the Standby Power Division. All of the
goodwill of the Motive Power Division was written off in fiscal year 2003. C&D
determined the fair value of its reporting units, using a combination of
financial projections and discounted cash flow techniques adjusted for risk
characteristics, also giving consideration to C&D's overall market
capitalization. (See Item 15. Exhibits and Financial Statement Schedules related
to the goodwill impairment charge.)
Operating (loss) income for fiscal year 2005 decreased $100,838 or 378% to
an operating loss of $74,160 from operating income of $26,678 in fiscal year
2004. This decrease was primarily the result of goodwill and intangible
impairment charges in the Power Electronics Division, lower operating income in
the Standby Power Division, coupled with a higher operating loss in the Motive
Power Division.
Below is a summary of key items affecting operating (loss) income for
fiscal year 2005:
Analysis of Change in Operating (Loss) Income
Fiscal Year 2005 vs. 2004
=============================================================================
Operating income - fiscal 2004 $ 26,678
Motive Power Division:
Operations 3,034
Lead - increased cost (4,569)
Reynosa rigging, transportation, severance (827)
Impairments and related environmental clean-up (4,595)
Standby Power Division:
Operations 9,158
Lead - increased cost (20,740)
Reynosa rigging, transportation, severance (599)
Impairments and related environmental clean-up (8,888)
Power Electronics Division:
Operations - Legacy 1,063
Operations - Acquisitions 822
Goodwill and intangible assets' impairment (74,697)
- -----------------------------------------------------------------------------
Operating (loss) income - fiscal 2005 $(74,160)
=============================================================================
Interest expense, net, increased $3,747 in fiscal year 2005, primarily due
to higher average debt balances outstanding during the period due to funds
borrowed to finance the Celab, Datel and CPS acquisitions.
There was an income tax benefit of $21,289 recorded in fiscal year 2005 as
a result of a net loss before income taxes, compared to income tax expense of
$8,795 in fiscal year 2004. The effective tax rate consists of statutory rates
adjusted for the tax impacts of foreign operations and other permanent items.
The effective tax rate for fiscal year 2005 reflects a benefit of 26.4% compared
to a provision of 37% in the prior year. The benefit recorded in fiscal year
2005 was adjusted from the statutory rate to reflect the tax effect of the
goodwill impairment, an increase to the valuation allowance relating to foreign
tax credits for the unremitted earnings of a controlled foreign subsidiary, and
the impact of non-deductible acquired in-process research and development assets
related to the Datel acquisition.
Minority interest reflects the 33% ownership interest in the joint venture
battery business located in Shanghai, China, that is not owned by C&D. The joint
venture incurred a net loss in fiscal year 2005 compared to net income in the
prior year.
As a result of all of the above, a net loss was recorded of $(59,493)
compared to net income of $14,891 in the prior year. On a per share basis, net
loss was $(2.35) compared to net income of $0.58 - basic and fully diluted for
fiscal years 2005 and 2004, respectively.
22
Fiscal 2004 Compared to Fiscal 2003
Effective February 1, 2004, we combined the former Dynasty and Powercom
divisions into the newly created Standby Power Division. The foregoing results
of operations reported using the former Dynasty and Powercom divisions have been
combined and reclassified under the Standby Power Division.
All comparisons are with the corresponding periods in the previous year,
unless otherwise stated.
Net sales for fiscal year 2004 decreased $10,921 or 3% to $324,824 from
$335,745 in fiscal year 2003. This decrease resulted from lower customer demand
for products of all divisions. Sales of the Power Electronics Division fell
$7,760, or 17%, mainly due to lower DC to DC converter sales. Power Electronics
had a solid fourth quarter, with revenue increasing across the division. This
division introduced over 30 new products in fiscal year 2004, accounting for
approximately 7% of the division's revenue. Motive Power divisional sales
dropped $1,487, or 3% due to lower sales of batteries and chargers. Standby
Power Division sales decreased $1,674, or less than 1%.
Gross profit for fiscal year 2004 decreased $2,020 or 3% to $76,679 from
$78,699 in the prior year. Gross margin increased slightly from 23.4% in fiscal
year 2003 to 23.6% in fiscal year 2004. Gross profit declined in the Standby
Power Division, primarily as a result of startup costs of approximately $1,300
at our new Reynosa, Mexico, facility and higher lead costs, partially offset by
a favorable year-end LIFO inventory adjustment of $1,557. Gross profit in the
Motive Power Division increased on lower sales, primarily due to the improvement
in plant operational effectiveness in fiscal year 2004, partially offset by
higher lead costs. Gross profit in the Power Electronics Division increased on
lower sales primarily due to the re-organization charges of $1,263 recorded in
the fourth quarter of fiscal year 2003 related to the closure of our Shannon,
Ireland, facility and the benefits of relocating certain Mexican manufacturing
activities to our Guangzhou, China, facility, which has lower manufacturing
costs.
Selling, general and administrative expenses for fiscal year 2004
increased $5,812 or 17%. This increase was primarily due to $2,897 of higher
warranty costs, higher payroll related costs of $1,932 and the prior year gain
of $1,610 recognized on the sale of our Conshohocken, Pennsylvania, facility,
partially offset by lower variable selling costs of $803 associated with the
decreased sales volumes.
Research and development expenses for fiscal year 2004 increased $33 or
less than 1%. As a percentage of sales, research and development expenses
increased from 2.8% of sales in fiscal year 2003 to 2.9% of sales in fiscal year
2004.
Goodwill impairment charges of $489 were recorded in the Motive Power
Division for the fiscal year ended January 31, 2003, resulting in the complete
write-off of the Motive Power Division's goodwill.
Operating income decreased $7,376 or 22% to $26,678 from $34,054 in the
prior year. This decrease was the result of lower operating income generated by
the Standby Power Division, partially offset by a lower operating loss in the
Motive Power Division and operating income in the Power Electronics Division in
fiscal year 2004 compared to an operating loss in fiscal year 2003.
Interest expense, net, decreased $2,532 in fiscal year 2004 compared to
the prior year, primarily due to lower average debt balances outstanding during
the year, coupled with a lower effective interest rate.
Income tax expense for fiscal year 2004 decreased $619 from fiscal year
2003, primarily as the result of lower income before income taxes, partially
offset by an increase in our effective tax rate. The effective tax rate consists
of statutory rates adjusted for the tax impacts of foreign operations. The
effective tax rate for fiscal year 2004 increased to 37.0% from 32.7% in the
prior year, primarily as a result of the favorable resolution of state tax
audits in the fourth quarter of fiscal year 2003.
Minority interest of $83 in fiscal year 2004 reflects the 33% ownership
interest in the joint venture battery business located in Shanghai, China, that
is not owned by C&D. The decrease in minority interest was due to lower
profitability of the Shanghai joint venture.
As a result of the above, for fiscal year 2004, net income decreased
$4,401 or 23% to $14,891 or $0.58 per share - basic and $0.58 per share -
diluted.
23
Future Outlook
During fiscal year 2005, we completed the transition of our Motive Power
V-Line(R) and former Standby Power HD products (now replaced by the MSE and
msEndur(TM) product lines) to our Reynosa, Mexico, facility.
Our results of operations continue to be negatively affected by higher raw
material pricing, and we anticipate that high lead pricing will continue to
adversely affect our profitability in the near term. Higher lead prices
negatively affected operating results in fiscal year 2005 by approximately
$25,309 compared to the prior year. In fiscal year 2005, to mitigate rising lead
costs, we increased prices where competitive situations allowed and reviewed
incoming business on an order-by-order basis and selectively declined business
where the price/cost relationship was not in proper balance. Currently, we are
hedged on approximately 10% of our first half fiscal year 2006 lead
requirements, and we continue to monitor the lead market for favorable buying
opportunities.
The Chinese government previously notified our joint venture that it will
be required to relocate the Shanghai facility and has paid our joint venture
approximately $15,547 as partial payment, which we intend to apply towards
construction of a new facility in the Pudong Development Zone. Our joint venture
is prepared to break ground in the third quarter of fiscal year 2006 and
anticipates production will begin in the fourth quarter of fiscal year 2007.
Upon return of the existing property to the Chinese government, it will pay the
joint venture an additional $1,727.
Liquidity and Capital Resources
Net cash provided by operating activities decreased $10,767 or 26% to
$30,191 for the fiscal year ended January 31, 2005, compared to $40,958 in the
prior fiscal year. The decrease in net cash provided by operating activity was
primarily due to: (i) a net loss in fiscal year 2005 compared to net income in
fiscal year 2004; (ii) a decrease from a net deferred tax liability to a net
deferred tax asset in fiscal year 2005 compared to an increase in net deferred
tax liabilities in fiscal year 2004; and (iii) a net reduction to current taxes
payable due to the tax benefit recorded for federal and state tax purposes
compared to an increase to taxes payable in the prior period. These changes,
resulting in lower net cash provided by operating activities, were partially
offset by: (i) non-cash charges for impairments to goodwill, intangible assets
and fixed assets, and increases to depreciation and amortization in fiscal year
2005; (ii) decreases in accounts and other notes receivable; and (iii) increases
to accounts payable and other liabilities in fiscal year 2005 compared to
decreases in fiscal year 2004.
Net cash used by investing activities increased $108,961 or 696% to
$124,609 in the fiscal year 2005 as compared to $15,648 in the prior fiscal
year, primarily due to the acquisitions of Celab, Datel and CPS in the current
fiscal year. This increase was partially offset by the receipt of approximately
$15,547 from the Chinese government as partial payment for the Shanghai joint
venture's existing battery facility. We intend to use these funds for the future
construction of a new battery manufacturing facility in Shanghai, China.
We had net cash provided by financing activities of $108,889 in fiscal
year 2005 as compared to net cash used by financing activities of $26,247 in the
prior fiscal year. Current year financing activities included $110,176 from new
borrowings, primarily used to finance the acquisitions of Celab, Datel and CPS.
This was partially offset by $3,023 used to acquire treasury stock. Prior year
net cash used by financing activities included $20,000 for the reduction of debt
and $5,770 for the purchase of treasury stock.
On June 30, 2004, we entered into an amended and restated revolving credit
agreement ("Credit Agreement" or "Facility"), with a maturity date of June 30,
2009. The financing was arranged by Banc of America Securities LLC. Under the
Credit Agreement, the amount of the Facility was increased to $175,000 from
$100,000 with the option, under certain conditions, to increase the Facility to
$200,000. The Facility was increased to $200,000 on August 3, 2004, at our
request. The Credit Agreement included lender approval of the Datel and CPS
acquisitions.
The Credit Agreement includes a $50,000 sub limit for loans in certain
foreign currencies. The interest rates are determined by our leverage ratio and
are available at LIBOR plus 1.00% to LIBOR plus 2.25% or Prime, to Prime plus
..75%. The initial loans were priced at LIBOR plus 2.25% or Prime plus .75%. The
rates may be adjusted based on the leverage ratio calculated after the
conclusion of each quarter. The Credit Agreement requires that we pay a fee of
..25% to .50% per annum on any unused portion of the Facility, based on the
leverage ratio. The Credit Agreement includes a letter of credit facility not to
exceed $25,000 and swingline loans not to exceed $10,000. The Credit Agreement
contains restrictive covenants that require us to maintain minimum ratios such
as fixed charge coverage and leverage ratios as well as minimum consolidated net
worth. These covenants permit us to pay dividends so long as there are no
defaults under the Credit Agreement.
24
C&D was not in compliance with its leverage ratio covenant at January 31,
2005. We obtained a waiver of this violation on February 28, 2005. We entered
into the second amendment to the Credit Agreement to modify this ratio through
the remaining term of the agreement. The second amendment requires C&D to pledge
certain assets as collateral on a going forward basis. The interest rates
determined by our leverage ratio were also changed as a result of this second
amendment. The rates available to C&D are now LIBOR plus 1% to LIBOR plus 2.75%
or Prime to Prime plus 1.25%. The second amendment also modifies other
provisions of the Credit Agreement such that it permits C&D to exclude the write
down of up to $85,000 of goodwill from the minimum net worth covenant
calculation, to exclude up to $2,500 in severance costs in fiscal year 2006 as
well as to exclude all future non-cash stock option or restricted stock expense
from certain covenant calculations. Further, the second amendment requires C&D
to maintain minimum levels of trailing earnings before interest, taxes,
depreciation and amortization as calculated quarterly through fiscal year 2006.
On April 29, 2005, we entered into the third amendment to the Credit Agreement
to correct and revise the definitional term "Consolidated EBITDA."
The avail