10-Q 1 oct03form10q.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended October 31, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________________ to ____________________ Commission File No. 1-9389 C&D TECHNOLOGIES, INC. (Exact name of Registrant as specified in its charter) Delaware 13-3314599 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1400 Union Meeting Road Blue Bell, Pennsylvania 19422 (Address of principal executive office) (Zip Code) (215) 619-2700 (Registrant's telephone number, including area code) _________________N/A_________________ (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ Indicate by check mark whether the Registrant is an accelerated filer (as defined in rule 12b-2 of the Securities Exchange Act of 1934). YES X NO ___ Number of shares of the Registrant's Common Stock outstanding on November 28, 2003: 25,504,265 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION Page No. Item 1 - Financial Statements Consolidated Balance Sheets - October 31, 2003 and January 31, 2003................... 3 Consolidated Statements of Income - Three and Nine Months Ended October 31, 2003 and 2002......... 5 Consolidated Statements of Cash Flows - Nine Months Ended October 31, 2003 and 2002............. 6 Consolidated Statements of Comprehensive Income - Three and Nine Months Ended October 31, 2003 and 2002... 7 Notes to Consolidated Financial Statements............... 8 Report of Independent Auditors........................... 16 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations...... 17 Item 3 - Quantitative and Qualitative Disclosures About Market Risk.................................. 24 Item 4 - Controls and Procedures............................. 24 PART II. OTHER INFORMATION...................................... 25 SIGNATURES...................................................... 26 EXHIBIT INDEX................................................... 27 2 PART I. FINANCIAL INFORMATION Item 1 - Financial Statements C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except per share data) (UNAUDITED) October 31, January 31, 2003 2003 ---- ---- ASSETS Current assets: Cash and cash equivalents................... $ 7,248 $ 12,966 Accounts receivable, less allowance for doubtful accounts of $1,588 and $1,906, respectively........................... 52,167 44,890 Inventories................................. 44,861 47,905 Deferred income taxes....................... 8,035 8,234 Other current assets........................ 1,202 2,304 ------- ------- Total current assets............. 113,513 116,299 Property, plant and equipment, net................ 108,796 112,158 Intangible and other assets, net.................. 39,913 38,724 Goodwill.......................................... 116,450 114,975 ------- ------- Total assets..................... $378,672 $382,156 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term debt............................. $ 20,000 $ 14,062 Accounts payable............................ 21,430 21,841 Accrued liabilities......................... 23,787 18,961 Income taxes................................ 3,782 - Other current liabilities................... 8,520 7,659 ------- ------- Total current liabilities........ 77,519 62,523 Deferred income taxes ............................ 11,957 10,579 Long-term debt.................................... - 25,857 Other liabilities................................. 14,841 16,613 ------- ------- Total liabilities................ 104,317 115,572 The accompanying notes are an integral part of these statements. 3 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (continued) (Dollars in thousands, except per share data) (UNAUDITED) October 31, January 31, 2003 2003 ---- ---- Commitments and contingencies Minority interest................................. 8,134 8,310 Stockholders' equity: Common stock, $.01 par value, 75,000,000 shares authorized; 28,564,747 and 28,509,803 shares issued, respectively.. 286 285 Additional paid-in capital.................. 69,904 69,152 Treasury stock, at cost, 3,063,582 and 2,810,280 shares, respectively.......... (41,912) (38,409) Accumulated other comprehensive income...... 2,029 881 Retained earnings........................... 235,914 226,365 ------- ------- Total stockholders' equity....... 266,221 258,274 ------- ------- Total liabilities and stockholders' equity........... $378,672 $382,156 ======= ======= The accompanying notes are an integral part of these statements. 4 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share data) (UNAUDITED)
Three months ended Nine months ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net sales............................ $84,870 $87,637 $243,602 $255,991 Cost of sales........................ 65,214 66,829 187,876 196,335 ------ ------ ------- ------- Gross profit..................... 19,656 20,808 55,726 59,656 Selling, general and administrative expenses.......... 10,097 8,955 29,791 26,808 Research and development expenses......................... 2,358 2,461 7,104 7,355 ------ ------ ------- ------- Operating income................. 7,201 9,392 18,831 25,493 Interest expense, net................ 254 974 1,002 2,980 Other expense, net................... 365 258 947 368 ------ ------ ------- ------- Income before income taxes and minority interest............. 6,582 8,160 16,882 22,145 Provision for income taxes........... 2,435 2,953 6,246 8,127 ------ ------ ------- ------- Net income before minority interest...................... 4,147 5,207 10,636 14,018 Minority interest.................... (56) 79 31 62 ------ ------ ------- ------- Net income....................... $ 4,203 $ 5,128 $ 10,605 $ 13,956 ====== ====== ======= ======= Net income per share - basic......... $ .16 $ .20 $ .41 $ .54 ====== ====== ======= ======= Net income per share - diluted....... $ .16 $ .20 $ .41 $ .54 ====== ====== ======= ======= Dividends per share.................. $.01375 $ - $ .04125 $ .04125 ====== ====== ======= =======
The accompanying notes are an integral part of these statements. 5 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (UNAUDITED) Nine months ended October 31, 2003 2002 ---- ---- Cash flows provided (used) by operating activities: Net income........................................... $ 10,605 $ 13,956 Adjustments to reconcile net income to net cash provided by operating activities: Minority interest.............................. 31 62 Depreciation and amortization.................. 17,033 18,322 Deferred income taxes.......................... 1,577 480 Loss on disposal of assets..................... 59 386 Changes in: Accounts receivable...................... (5,896) (2,761) Inventories.............................. 3,332 11,613 Other current assets..................... (134) (225) Accounts payable......................... (106) 4,948 Accrued liabilities...................... 2,072 (808) Income taxes payable..................... 5,190 10,069 Other current liabilities................ 867 (427) Other liabilities........................ (1,771) (919) Other assets............................. 1,432 (3,892) Other, net..................................... (1,119) (2,629) ------- ------- Net cash provided by operating activities................ 33,172 48,175 ------- ------- Cash flows provided (used) by investing activities: Acquisition of business.............................. (11,984) - Acquisition of property, plant and equipment......... (2,792) (5,267) Proceeds from disposal of property, plant and equipment..................................... 64 648 ------- ------- Net cash used by investing activities.................... (14,712) (4,619) ------- ------- Cash flows provided (used) by financing activities: Repayment of debt.................................... (20,000) (34,611) Financing cost of long-term debt..................... (75) (118) Proceeds from issuance of common stock, net.......... 479 524 Purchase of treasury stock........................... (3,503) (8,393) Payment of common stock dividends.................... (1,056) (1,426) Payment of minority interest dividends............... (207) (94) ------- ------- Net cash used by financing activities.................... (24,362) (44,118) ------- ------- Effect of exchange rate changes on cash.................. 184 159 ------- ------- Decrease in cash and cash equivalents.................... (5,718) (403) Cash and cash equivalents at beginning of period............................................. 12,966 8,781 ------- ------- Cash and cash equivalents at end of period............... $ 7,248 $ 8,378 ======= ======= SCHEDULE OF NON CASH INVESTING AND FINANCIAL ACTIVITIES Acquired business: Estimated fair value of assets acquired............... $ 10,886 $ - Identifiable intangible assets........................ 3,898 - Cash paid............................................. (11,984) - ------- ------- Liabilities assumed................................... $ 2,800 - ======= ======= Decrease in property, plant, and equipment acquisitions in accounts payable............ $ (371) $ (917) ======= ======= Fair market value of treasury stock issued to pension plans................................. $ - $ 1,625 ======= ======= The accompanying notes are an integral part of these statements. 6 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) (UNAUDITED)
Three months ended Nine months ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net income............................................... $4,203 $5,128 $10,605 $13,956 Other comprehensive income (expense), net of tax: Net unrealized gain (loss) on derivative instruments... 108 (121) 229 (188) Foreign currency translation adjustments............... 1,629 92 919 2,988 ----- ----- ------ ------ Total comprehensive income............................... $5,940 $5,099 $11,753 $16,756 ===== ===== ====== ======
The accompanying notes are an integral part of these statements. 7 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands, except per share data) (UNAUDITED) 1. INTERIM STATEMENTS The accompanying interim consolidated financial statements of C&D Technologies, Inc. (together with its operating subsidiaries, the "Company") should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report to Stockholders for the fiscal year ended January 31, 2003. The January 31, 2003 amounts were derived from the Company's audited financial statements. The consolidated financial statements presented herein are unaudited but, in the opinion of management, include all necessary adjustments (which comprise only normal recurring items) required for a fair presentation of the consolidated financial position as of October 31, 2003 and the related consolidated statements of income and comprehensive income for the three and nine month periods ended October 31, 2003 and 2002 and the related consolidated statements of cash flows for the nine-month periods ended October 31, 2003 and 2002. However, interim results of operations may not be indicative of results for the full fiscal year. 2. NEW ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, except as stated below and for hedging relationships designated after June 30, 2003. In addition, except as stated below, all provisions of SFAS No. 149 should be applied prospectively. The provisions of SFAS No. 149 relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003 and should continue to be applied in accordance with their respective effective dates. In addition, paragraphs 7(a) and 23(a), which relate to forward purchases or sales of when-issued securities or other securities that do not yet exist, should be applied to both existing contracts and new contracts entered into after June 30, 2003. SFAS No. 149 had no significant impact at the point of adoption on the Company's consolidated statements of income or financial position. 8 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 3. INVENTORIES Inventories consisted of the following: October 31, January 31, 2003 2003 ---- ---- Raw materials............................ $17,560 $17,833 Work-in-progress......................... 9,593 10,379 Finished goods........................... 17,708 19,693 ------ ------ $44,861 $47,905 ====== ====== 4. INCOME TAXES A reconciliation of the provision for income taxes from the statutory rate to the effective rate is as follows: Nine months ended October 31, 2003 2002 ---- ---- U.S. statutory income tax....................... 35.0% 35.0% State tax, net of federal income tax benefit.... 1.2 1.7 Tax effect of foreign operations................ - (0.3) Other........................................... 0.8 0.3 ---- ---- 37.0% 36.7% ==== ==== 5. NET INCOME PER COMMON SHARE Net income per share - basic is based on the weighted average number of shares of Common Stock outstanding. Net income per share - diluted reflects the potential dilution that could occur if stock options were exercised. Weighted average common shares and common shares - diluted were as follows:
Three months ended Nine months ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Weighted average shares of common stock outstanding................................... 25,495,740 25,670,645 25,565,778 25,851,493 Assumed exercise of stock options, net of shares assumed reacquired............................ 261,032 128,409 157,729 218,644 ---------- ---------- ---------- ---------- Weighted average common shares - diluted.............................. 25,756,772 25,799,054 25,723,507 26,070,137 ========== ========== ========== ==========
9 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 6. CONTINGENT LIABILITIES Environmental: The Company is subject to extensive and evolving environmental laws and regulations regarding the clean-up and protection of the environment, worker health and safety and the protection of third parties. These laws and regulations include, but are not limited to: (i) requirements relating to the handling, storage, use and disposal of lead and other hazardous materials in manufacturing processes and solid wastes; (ii) record keeping and periodic reporting to governmental entities regarding the use and disposal of hazardous materials; (iii) monitoring and permitting of air emissions and water discharge; and (iv) monitoring worker exposure to hazardous substances in the workplace, and protecting workers from impermissible exposure to hazardous substances, including lead, used in our manufacturing process. Notwithstanding the Company's efforts to maintain compliance with applicable environmental requirements, if injury or damage to persons or the environment arises from hazardous substances used, generated or disposed of in the conduct of the Company's business (or that of a predecessor to the extent the Company is not indemnified therefor), the Company may be held liable for certain damages and for the costs of investigation and remediation, which could have a material adverse effect on the Company's business, financial condition, or results of operations. However, under the terms of the purchase agreement with Allied Corporation ("Allied") for the acquisition of the Company (the "Acquisition Agreement"), Allied was obligated to indemnify the Company for any liabilities of this type resulting from conditions existing at January 28, 1986 that were not disclosed by Allied to the Company in the schedules to the Acquisition Agreement. These obligations have since been assumed by Allied's successor in interest, Honeywell ("Honeywell"). The Company, along with numerous other parties, has been requested to provide information to the United States Environmental Protection Agency (the "EPA") in connection with investigations of the source and extent of contamination at three lead smelting facilities (the "Third Party Facilities") to which the Company had made scrap lead shipments for reclamation prior to the date of the acquisition. The Company and four other potentially responsible parties ("PRPs") agreed upon a cost sharing arrangement for the design and remediation phases of a project related to one of the Third Party Facilities, the former NL Industries 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 the Company. The Company also responded to requests for information from the EPA and the state environmental agency with regard to another Third Party Facility, the "Chicago Site," in October 1991. In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. The Company is currently in negotiations with the other PRPs at this site regarding its share of the allocated liability, which the Company expects to be de minimis. 10 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) The Company is also aware of the existence of contamination at its Huguenot, New York facility, which is expected to require expenditures for further investigation and remediation. The site is listed by the New York State Department of Environmental Conservation ("NYSDEC") on its registry of inactive hazardous waste disposal sites due to the presence of fluoride and other contaminants in amounts that exceed state groundwater standards, and the agency has issued a Record of Decision for the soil remediation portion of this site. A final remediation plan for the ground water portion has not yet been finalized with or approved by the State of New York. In February 2000, C&D filed suit against the prior owner of the site, Avnet, Inc., which is ultimately expected to bear some, as yet undetermined, share of the costs associated with remediation of contamination in place at the time the Company acquired the property. The parties are attempting to resolve the matter through mediation, failing which C&D intends to aggressively pursue all available legal remedies. Should the parties fail to reach a mediated settlement, and unless an alternative resolution can be achieved, NYSDEC may conduct the remediation and seek recovery from the parties The Company, together with Johnson Controls, Inc. ("JCI"), is conducting an assessment and remediation of contamination at its Dynasty Division facility in Milwaukee, Wisconsin. The majority of this project was completed as of October 2001. Under the purchase agreement with JCI, the Company is responsible for (i) one-half of the cost of the on-site assessment and remediation, with a maximum liability of $1,750, (ii) any environmental liabilities at the facility that are not remediated as part of the current project and (iii) environmental liabilities for 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 has retained all other environmental liabilities, including off-site assessment and remediation. In January 1999, the Company received notification from the EPA of alleged violations of permit effluent and pretreatment discharge limits at its plant in Attica, Indiana. The Company submitted a compliance plan to the EPA in April 2002. The Company engaged in negotiations with both the EPA and Department of Justice through March 2003 regarding a potential resolution of this matter. The government filed suit against the Company in March 2003 for alleged violations of the Clean Water Act. The complaint requests injunctive relief and civil penalties of up to the amounts provided by statute. The Company anticipates that the matter will result in a penalty assessment and compliance obligations. The Company will continue to seek a negotiated or mediated resolution, failing which it intends to vigorously defend the action. The Company accrues reserves for liabilities in the Company's consolidated financial statements and periodically reevaluates the reserved amounts for these liabilities in view of the most current information available in accordance with SFAS No. 5, "Accounting for Contingencies." As of October 31, 2003 accrued environmental reserves totaled $2,242, consisting of $1,940 in other current liabilities and $302 in other liabilities. Based on currently available information, management of the Company believes that appropriate reserves have been established with respect to the foregoing contingent liabilities and that they are not expected to have a material adverse effect on the Company's business, financial condition or results of operations. 11 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 7. OPERATIONS BY INDUSTRY SEGMENT The Company has the following four reportable business segments: The Dynasty Division manufactures and markets industrial batteries primarily for the uninterruptible power supply ("UPS"), telecommunications and cable markets. Major applications of these products include wireless and wireline telephone infrastructure, CATV signal powering, corporate data center powering and computer network back-up for use during a utility power outage. The Powercom Division manufactures and markets integrated reserve power systems and components for the standby power market, which includes telecommunications, UPS 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 Powercom Division also produces the individual components of these systems, including reserve batteries, power rectifiers, system monitors, power boards and chargers. The Power Electronics Division manufactures and markets custom, standard and modified-standard electronic power supply systems, including DC to DC converters, for large original equipment manufacturers ("OEMs") of telecommunications and networking equipment, as well as office and industrial equipment. 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. Summarized financial information related to the Company's business segments for the three and nine months ended October 31, 2003 and 2002 is shown below:
Power Motive Dynasty Powercom Electronics Power Division Division Division Division Consolidated -------- -------- ----------- -------- ------------ Three months ended October 31, 2003: Net sales................................ $29,165 $30,910 $ 9,450 $15,345 $ 84,870 Operating income (loss).................. $ 4,676 $ 3,119 $ 401 $ (995) $ 7,201 Three months ended October 31, 2002: Net sales................................ $23,460 $38,009 $12,265 $13,903 $ 87,637 Operating income (loss).................. $ 3,929 $ 6,340 $ 181 $(1,058) $ 9,392 Nine months ended October 31, 2003: Net sales................................ $78,767 $96,124 $28,528 $40,183 $243,602 Operating income (loss).................. $12,149 $11,454 $ (584) $(4,188) $ 18,831 Nine months ended October 31, 2002: Net sales................................ $67,570 $110,165 $37,601 $40,655 $255,991 Operating income (loss).................. $10,339 $ 17,650 $ 757 $(3,253) $ 25,493
12 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 8. DERIVATIVE INSTRUMENTS The following table includes all interest rate swaps as of October 31, 2003 and January 31, 2003. These interest rate swaps are designated as cash flow hedges and, therefore, changes in the fair value, net of tax, are recorded in accumulated other comprehensive income (loss). Fixed Variable Fair Fair Interest Interest Value Value Notional Origination Maturity Rate Rate At At Amount Date Date Paid Received 10/31/03 1/31/03 -------- ----------- -------- -------- -------- -------- ------- $20,000 02/05/01 03/01/03 5.24% LIBOR $ - $ (66) 20,000 04/11/01 04/11/06 5.56% LIBOR (1,515) (1,832) ------- ------- $(1,515) $(1,898) ======= ======= The Company does not invest in derivative securities for speculative purposes, but does enter into hedging arrangements in order to reduce its exposure to fluctuations in interest rates as well as to fluctuations in exchange rates. The Company applies hedge accounting in accordance with SFAS No. 133, whereby the Company designates each derivative as a hedge of (i) the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge); or (ii) the variability of anticipated cash flows of a forecasted transaction or the cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge). From time to time, however, the Company may enter into derivatives that economically hedge certain of its risks, even though hedge accounting is not allowed by SFAS No. 133 or is not applied by the Company. In these cases, there generally exists a natural hedging relationship in which changes in fair value of the derivative, which are recognized currently in earnings, act as an economic offset to changes in the fair value of the underlying hedged item(s). The Company did not apply hedge accounting to currency forward contracts with a combined fair value of $(1,256) and $(258) as of October 31, 2003 and January 31, 2003. Changes in the fair value of these currency forward contracts are recorded in other expense, net. 13 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 9. STOCK-BASED COMPENSATION PLANS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure - an amendment of FASB Statement No. 123." SFAS No. 148 provides alternative methods of transition for companies making a voluntary change to fair value-based accounting for stock-based employee compensation. The Company continues to account for its stock option plans under the intrinsic value recognition and measurement principles of Accounting Principle Board's Opinion No. 25, "Accounting for Stock Issued to Employees," and related Interpretations. Effective for interim periods beginning after December 15, 2002, SFAS No. 148 also requires disclosure of pro-forma results on a quarterly basis as if the Company had applied the fair value recognition provisions of SFAS No. 123. As the exercise price of all options granted under the Company's stock option plans was equal to the market price of the underlying common stock on the grant date, no stock-based employee compensation cost is recognized in net income. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to options granted under the stock option plans. For purposes of this pro-forma disclosure, the estimated value of the options is amortized ratably to expense over the options' vesting periods. Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.
Three months ended Nine months ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Net income - as reported................................ $4,203 $5,128 $10,605 $13,956 Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects............ 876 1,061 2,946 3,490 ----- ----- ----- ------ Net income - pro forma.................................. $3,327 $4,067 $7,659 $10,466 ===== ===== ===== ====== Net income per common share - basic - as reported....... 0.16 0.20 0.41 0.54 Net income per common share - basic - pro forma......... 0.13 0.16 0.30 0.40 Net income per common share - diluted - as reported..... 0.16 0.20 0.41 0.54 Net income per common share - diluted - pro forma....... 0.13 0.16 0.30 0.40 Weighted average fair value of options granted during the period............................. * 6.14 7.79 9.30
SFAS No. 123 requires the use of option pricing models that were not developed for use in valuing employee stock options. The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable. In addition, option-pricing models require the input of highly subjective assumptions, including the option's expected life and the price volatility of the underlying stock. Because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options. The value of options granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted average assumptions:
Three months ended Nine months ended October 31, October 31, 2003 2002 2003 2002 ---- ---- ---- ---- Risk free interest rate......................... * 4.42% 2.80% 4.42% Expected dividend yield......................... * 0.27% 0.34% 0.27% Expected volatility factor...................... * 0.477 0.537 0.477 Weighted average expected life.................. * 5.00 years 5.00 years 5.00 years
* There were no options granted during the third quarter of fiscal year 2004. 14 C&D TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) (Dollars in thousands, except per share data) (UNAUDITED) 10. WARRANTY The Company provides for estimated product warranty expenses when the related products are sold. Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties follows: Balance at February 1, 2003 .......................... $10,599 Current year provisions .............................. 3,909 Expenditures ......................................... (6,682) ------ Balance at October 31, 2003 .......................... $ 7,826 ====== 11. ACQUISITION On September 25, 2003, the Company and its wholly owned Mexican subsidiary, C&D Technologies Reynosa, S. de R.L. de C.V., acquired from Matsushita Battery Industrial Corporation of America, and its Mexican subsidiary, Matsushita Battery Industrial de Mexico, S.A. de C.V., a 240,000 square foot facility in Reynosa, Mexico and the equipment in that facility historically used for the manufacture of large, valve regulated lead acid batteries ("VRLA Batteries") for standby power applications. In addition, the Company has entered into a worldwide technology license agreement with Matsushita Battery Industrial Co. Ltd. of Japan for selected patents and know-how relating to the manufacturing technology for the aforementioned products. The cost of this acquisition, including the technology agreement, was approximately $14,000, plus additional acquisition related costs. The Company intends to use the facility for the manufacture of batteries. The results of operations of this business are included in the Company's consolidated financial statements from the date of acquisition. The Company funded the foregoing transaction with the Company's working capital funds, and its existing credit agreement. Additionally, $2,800 of the cost of the technology agreement is due in October 2004. The preliminary allocation of the purchase price resulted in identifiable intangible assets of $3,898, which are being amortized on a straight-line basis over ten years. For reporting purposes, this acquisition is included in the Powercom Division. Pro forma amounts are not presented as the acquisition did not have any material effect on the Company's results of operations or financial condition due to the insignificant level of operations during the nine months ended September 30, 2003 at the Reynosa facility. 12. Goodwill: The Company follows SFAS No. 142, "Goodwill and Other Intangible Assets," which requires that goodwill be subject to an impairment test in the fourth quarter of each year, or earlier if indicators of potential impairment exist, using a fair-value-based approach. During the nine months ended October 31, 2003, no goodwill was acquired. Goodwill by operating segment was adjusted as follows: Power Dynasty Powercom Electronics Total Goodwill, January 31, 2003..... $58,131 $1,383 $55,461 $114,975 Effect of exchange rates on goodwill................. 71 - 1,404 1,475 ------ ----- ------ ------- Goodwill, October 31, 2003..... $58,202 $1,383 $56,865 $116,450 ====== ===== ====== ======= 15 REPORT OF INDEPENDENT AUDITORS To the Board of Directors and Stockholders of C&D Technologies, Inc.: We have reviewed the accompanying consolidated balance sheet of C&D Technologies, Inc. and its subsidiaries (the "Company") as of October 31, 2003, and the related consolidated statements of income and comprehensive income for each of the three-month and nine-month periods ended October 31, 2003 and 2002, and the consolidated statements of cash flows for the nine-month periods ended October 31, 2003 and 2002. These interim financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the accompanying consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America. We previously audited in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheet as of January 31, 2003, and the related consolidated statements of income, stockholders' equity, cash flows, and comprehensive income for the year then ended (not presented herein), and in our report dated March 14, 2003 we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying consolidated balance sheet information as of January 31, 2003, is fairly stated in all material respects in relation to the consolidated balance sheet from which it has been derived. /s/ PricewaterhouseCoopers LLP ------------------------------ PricewaterhouseCoopers LLP Philadelphia, PA November 20, 2003 16 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Within the following discussion, unless otherwise stated, "quarter" and "nine-month period", refer to the third quarter of fiscal 2004 and the nine months ended October 31, 2003. All comparisons are with the corresponding periods in the prior year, unless otherwise stated. Net sales for the third quarter of fiscal 2004 decreased $2,767 or 3% to $84,870 from $87,637 in the third quarter of fiscal 2003. This decrease resulted from lower sales in the Powercom and Power Electronics divisions, partially offset by higher sales in the Dynasty and Motive Power divisions. Sales by the Powercom Division declined $7,099 during the quarter, or 19%, primarily due to a decline in sales to the telecommunications market. Power Electronics divisional sales decreased $2,815 in the three months ended October 31, 2003, or 23%, with most of the reduction in DC to DC converters and custom power supplies. Sales of the Dynasty Division increased $5,705 during the quarter, or 24%, primarily due to continued increased demand for sealed products in the North American UPS market. Dynasty UPS sales increased by $3,613. Sales in the Motive Power Division increased $1,442 or 10% in the three months ended October 31, 2003. This increase was primarily due to an increase in battery sales during the quarter. Sales for the nine-month period decreased $12,389 or 5% to $243,602 from $255,991 in the nine months ended October 31, 2002. This decrease resulted from lower sales in the Powercom, Power Electronics and Motive Power divisions, partially offset by higher sales in the Dynasty Division. Sales by the Powercom Division fell $14,041 or 13% during the nine-month period, primarily due to a decline in sales to the telecommunications market. Power Electronics divisional sales declined $9,073 or 24%, primarily due to a decline in DC to DC converter sales. Sales of the Motive Power Division fell $472 or 1%. Dynasty Division sales increased by $11,197 or 17%, primarily due to an increase in sales to the UPS market. Gross profit for the third quarter of fiscal 2004 decreased $1,152 or 6% to $19,656 from $20,808 in the third quarter of the prior year, resulting in a decrease in gross margin from 23.7% to 23.2%. Contributing to this decline was approximately $1,500 in higher lead costs. Gross profit declined in the Powercom Division due to lower sales volumes, coupled with higher material costs (primarily lead) as a percentage of sales. Gross profit increased in the Dynasty, Power Electronics and Motive Power divisions. The increases in the Dynasty and Motive Power divisions were primarily the result of higher sales volumes, partially offset by higher material costs (primarily lead) as a percentage of sales. Additionally, in the comparable quarter of the prior year, we experienced plant operational difficulties in the Motive Power Division, which have since been corrected. Gross profit increased in the Power Electronics Division on lower sales as a result of favorable product mix and an improved cost position due to the recently completed move of considerable production from Nogales, Mexico to Guangzhou, China. Gross profit for the nine months ended October 31, 2003 declined $3,930 or 7% to $55,726 from $59,656, resulting in a decrease in gross margin from 23.3% to 22.9%. Contributing to this decline was approximately $1,500 (primarily in the third quarter) in higher lead costs. Gross profit declined in the Powercom, Power Electronics and Motive Power divisions primarily as a result of lower sales volumes, coupled with higher material costs (primarily lead) in the Powercom and Motive Power divisions as a percentage of sales. Material costs in the Power Electronics Division decreased as a percentage of sales due to product mix. Gross profit in the Dynasty Division increased, primarily as a result of higher sales volumes, partially offset by higher material costs (primarily lead) as a percentage of sales. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Selling, general and administrative expenses for the third quarter of fiscal 2004 increased $1,142 or 13%. This increase was primarily due to higher payroll-related costs of $631 and warranty expense of $456, primarily related to our Dynasty Division. For the nine-month period, selling, general and administrative expenses increased $2,983 or 11%. This increase was primarily the result of higher warranty expense of $1,401 (primarily related to our Dynasty Division), higher payroll-related costs of $1,277, as well as an increase in legal costs and other outside services. These increases were partially offset by lower variable selling costs associated with the decreased sales volumes. Research and development expenses in the third quarter of fiscal 2004 decreased $103 or 4%, primarily due to reduced spending in the Power Electronics and Dynasty divisions, partially offset by higher spending in the Powercom and Motive Power divisions. As a percentage of sales, research and development expenses were 2.8% in the third quarter of fiscal 2004 and the third quarter of fiscal 2003. For the nine-month period, research and development expenses decreased $251 or 3%. This decrease was also a result of reduced spending in the Power Electronics and Dynasty divisions, partially offset by higher spending in the Powercom and Motive Power divisions. As a percentage of sales, research and development expenses were 2.9% in each of the nine-month periods ended October 31, 2003 and 2002. Operating income for the third quarter of fiscal 2004 decreased $2,191 or 23% to $7,201 from $9,392 in the comparable quarter of the prior fiscal year. This decrease was the result of lower operating income generated by the Powercom Division in the three months ended October 31, 2003, partially offset by higher operating income in the Dynasty and Power Electronics divisions during the quarter, and a lower operating loss in the Motive Power Division during the three-month period. Operating income for the nine-month period decreased $6,622 or 26% to $18,831 from $25,493 in the comparable period of the prior fiscal year. This decrease was the result of lower operating income generated by the Powercom Division during the nine months ended October 31, 2003, an operating loss in the Power Electronics Division during the nine-month period compared with operating income during the comparable period of the prior year, a higher operating loss in the Motive Power Division in the nine months ended October 31, 2003, partially offset by higher operating income in the Dynasty Division during the nine months ended October 31, 2003. Interest expense, net, decreased $720 for the quarter and $1,978 for the nine-month period, primarily due to lower average debt balances outstanding, coupled with lower effective interest rates. Income tax expense decreased $518 for the quarter and $1,881 for the nine-month period as the result of lower income before income taxes, partially offset by a higher effective tax rate. The effective tax rate consists of statutory rates adjusted for the tax impact of foreign operations. The effective tax rate was 37.0% for both the quarter and the nine-month period as compared to 36.2% and 36.7% in the comparable periods of the prior fiscal year. Minority interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China that is not owned by C&D. During the quarter, the Shanghai joint venture generated a net loss as opposed to net income in the comparable period of the prior fiscal year. For the nine-month period, the joint venture had lower net income compared to the same period of the prior fiscal year. For both those periods, net income was negatively affected by higher warranty expense, partially offset by higher sales. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) As a result of the above, for the third quarter of fiscal 2004, net income decreased $925 or 18% to $4,203 or $0.16 per share - basic and $0.16 per share- diluted. For the nine-month period, net income decreased $3,351 or 24% to $10,605 or $0.41 per share - basic and $0.41 per share - diluted. Future Outlook We continue to focus on cost effective operations. Additionally, we were encouraged by the modest sequential improvement in aggregate sales over the second quarter, particularly as a result of stronger UPS sales in the Dynasty Division. The Power Electronics Division had its first operating profit since the quarter ended October 31, 2002 driven by previously implemented cost reduction initiatives, and modification to sales channels. Although the Motive Power business continues to fall short of profit expectations, sales were up and operating losses down during the quarter compared with last year's third quarter and sequentially, compared with the second quarter of this year. Total Company backlog on October 31, 2003 was approximately $52,000, up from the July 31, 2003 backlog of approximately $47,000. As a result of the acquisition of the Reynosa, Mexico manufacturing facility, we are analyzing cost rationalization opportunities across the company. All of the above result in our expectation that we will generate a fourth quarter (which has historically been our weakest quarter) earnings per share, comparable to the third quarter's 16 cents per share. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) Liquidity and Capital Resources Net cash provided by operating activities decreased $15,003 or 31% to $33,172 for the nine-month period ended October 31, 2003 compared to $48,175 in the same period of the prior year. This decrease in net cash provided by operating activities was primarily due to: (i) a smaller decrease in inventory in the nine months ended October 31, 2003 versus the nine months ended October 31, 2002; (ii) an increase in accounts payable in the first nine months of fiscal 2004 versus a decrease in the first nine months of fiscal 2003; (iii) a smaller increase in income taxes payable in the nine-month period ended October 31, 2003 versus the comparable period of the prior fiscal year; (iv) lower net income in the nine months ended October 31, 2003 versus the nine months ended October 31, 2002; and (v) a larger increase in accounts receivable in the first nine months of fiscal 2004 versus the first nine months of fiscal 2003. These changes, resulting in lower net cash provided by operating activities, were partially offset by an decrease in other long-term assets in the first nine months of fiscal 2004 versus an increase in the first nine months of fiscal 2003 and an increase in accrued liabilities in the nine-month period of the current fiscal year versus a decrease during the comparable period of the prior fiscal year. Net cash used by investing activities increased $10,093 or 219% to $14,712 in the first nine months of fiscal 2004 compared to $4,619 in the first nine months of fiscal 2003 primarily due to a use of cash in the amount of $11,984 for the acquisition of the Reynosa, Mexico facility. Capital spending, which was $5,267 during the nine-month period ended October 31, 2002 declined to $2,792 during the nine-month period ended October 31, 2003. Net cash used by financing activities decreased $19,756 or 45% to $24,362 in the nine months ended October 31, 2003 compared to $44,118 in the nine months ended October 31, 2002. This decrease was primarily due to a smaller decrease in long-term debt, coupled with lower expenditures for the purchase of treasury stock. On November 20, 2003 the Company refinanced its existing five-year credit facility, which was due to expire on March 1, 2004. The refinancing was arranged by Bank of America and includes nine other lenders. The new agreement is a $100,000 revolving credit facility, which has a termination date of November 20, 2006. The interest rates are determined by the Company's leverage ratio and are available at LIBOR plus 1.00% to LIBOR plus 2.00% or Prime, to Prime plus .50%. Based on the Company's current leverage, the loans under the revolving credit facility are priced at LIBOR plus 1.00%. The agreement requires the Company to pay a fee of .25% to .50% per annum on any unused portion of the revolver. The revolving credit facility includes a letter of credit facility not to exceed $15,000 and swingline loans not to exceed $10,000. The credit agreement contains restrictive covenants that require the Company to maintain minimum ratios such as fixed charge coverage and leverage ratios as well as minimum consolidated net worth. These covenants permit the Company to pay dividends so long as there are no defaults under these credit agreements. We were in compliance with our loan agreement covenants at October 31, 2003. The availability under this agreement is expected to be sufficient to meet our ongoing cash needs for working capital requirements, debt service, capital expenditures and possible strategic acquisitions. Capital expenditures during fiscal 2003 were incurred to fund a continuing series of cost reduction programs, normal maintenance and regulatory compliance. Fiscal 2004 capital expenditures are expected to be less than $5,000 for similar purposes. We intend to continue making prudent purchases of our Company stock and selectively pursuing complementary accretive acquisitions. Strategic acquisition opportunities will be expected to enhance C&D's long-term competitive position and may require external financing. We cannot assure, however, that we will close on any such acquisitions. The local Chinese government has notified our Shanghai C&D Battery Co. Ltd, that it will be required to relocate its Shanghai plant to permit the Pudong authorities to develop the region into a cultural center. Negotiations are ongoing regarding the specific location, timing and cost responsibilities related to the relocation of the Shanghai plant. A location in the vicinity of our existing plant has been selected for the relocation of the plant; however, this location may not be suitable. We are reviewing our options for other properties. This relocation is not expected to have a material adverse effect on our financial condition or results of operations. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) NEW ACCOUNTING PRONOUNCEMENTS See footnote number 2. FORWARD-LOOKING STATEMENTS Statements and information contained in this Quarterly Report on Form 10-Q 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," "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 Quarterly Report on Form 10-Q, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. The factors that could cause actual results to differ materially from anticipated results expressed or implied in any forward-looking statement include those referenced in our other filings with the Securities and Exchange Commission, those referenced with the forward-looking statement, including factors discussed in this Quarterly Report on Form 10-Q, as well as the following factors: 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 or business combinations of competitors) or a decline in industry sales or cancelled or delayed orders due to economic weakness or changes in economic conditions, either in the United States and other countries in which we conduct business could affect our results of operations. o Terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to our operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse effect on our business. o Our results of operations could be adversely affected by conditions in the domestic and global economies or the markets in which we conduct business, such as telecommunications, UPS, CATV, switchgear and control and material handling. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) o Our ability to grow earnings could be affected by increases in the costs of raw materials, particularly lead, the primary constituent of our battery products, or other product parts or components. We may not be able to fully offset the effects of higher costs of raw material through price increases or productivity improvements. A significant increase in the price of one or more raw materials, parts or components could have a material adverse effect on our operations. o Our ability to meet customer demand depends, in part, on our ability to obtain timely and adequate supply and delivery of raw materials, including lead, which is the primary constituent of our battery products or other parts and 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), parts or components, could have a material adverse effect on our operations. o Our growth objectives are largely dependent on our ability to renew our pipeline of new products and to bring these products to market. This ability may be adversely affected by difficulties or delays in product development, such as the inability to: introduce viable new products; successfully complete research and development projects or integrate purchased or licensed technology; obtain adequate intellectual property protection; or gain market acceptance of the new products. Our growth could also be affected by new competitive products and technologies. o As part of our strategy for growth, we have made and may continue to make acquisitions, and in the future, may make divestitures and form strategic alliances. There can be no assurance that these will be completed or beneficial to us. o We have undertaken and may continue to undertake productivity initiatives, including reorganizations to improve performance or generate cost savings. In addition, we may from time to time relocate or consolidate one or more of C&D's operations. There can be no assurance that any planned performance improvements or cost savings from such activities will be realized or that delays or other interruptions in production or delivery of products will not occur as the result of any relocation or consolidation. Further, there can be no assurance that any of these initiatives will be completed or beneficial to C&D. o Our facilities are subject to a broad array of environmental laws and regulations. The costs of complying with complex environmental laws and regulations, as well as participation in voluntary programs, are significant and will continue to be so for the foreseeable future. We are also subject to potentially significant fines and penalties for non-compliance with applicable laws and regulations. Our accruals for such costs and liabilities may not be adequate since the estimates on which the accruals are based depend on a number of factors including, but not limited to, the nature of the problem, the complexity of the issues, the nature of the remedy, the outcome of discussions with regulatory agencies and/or the government and, as applicable, other PRPs at multiparty sites, the number and financial viability of other PRPs and risks associated with litigation. 22 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollars in thousands, except per share data) 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 risks, 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. 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: products liability, contract, employment-related, labor relations, personal or property damage or stockholder claims and claims arising from any injury or damage to persons, property or the environment from hazardous substances used, generated or disposed of in the conduct of our business (or that of a predecessor, to the extent we are not indemnified for those liabilities). o Our performance depends on our ability to attract and retain qualified personnel. We cannot assure that we will be able to continue to attract or retain qualified personnel. o Our bank loan agreement permits dividends to be paid on our Common Stock so long as there is no default under that agreement. Subject to that restriction and the provisions of Delaware law, our Board of Directors currently intends to continue paying dividends. We cannot assure that we will continue to do so since future dividends will depend on our earnings, financial condition and other factors. o Our overall profitability may not meet expectations if our products, customers or geographic mix are substantially different than anticipated. Our profit margins vary among products, customers and geographic markets. Consequently, if our mix of any of these is substantially different from what is anticipated in any particular period, our earnings could be lower than anticipated. o In spite of having a disaster recovery plan in place, infrastructure failures could have a material adverse effect on our business. We are highly dependent on our systems infrastructure in order to achieve our business objectives. If we experience a problem that impairs our infrastructure, such as a power outage, computer virus, intentional disruption of information technology systems by a third party, manufacturing failure or telephone system failure, the resulting disruptions could impede C&D's ability to book or process orders, manufacture and ship in a timely manner or otherwise carry on our business in the ordinary course. Any such events could cause C&D to lose significant customers or revenue and could require C&D to incur significant expense to eliminate these problems and address related security concerns. The foregoing list of important factors is not all-inclusive, or necessarily in order of importance. 23 Item 3. Quantitative and Qualitative Disclosure About Market Risk We are exposed to various market risks. The primary financial risks include fluctuations in interest rates and changes in currency exchange rates. We manage these risks by using derivative instruments. We do not invest in derivative securities for speculative purposes, but do enter into hedging arrangements in order to reduce our exposure to fluctuations in interest rates as well as to fluctuations in exchange rates. Our financial instruments subject to interest rate risk consist of debt instruments and interest rate swap contracts. The debt instruments are subject to variable rate interest, and therefore the market value is not sensitive to interest rate movements. Interest rate swap contracts are used to manage our exposure to fluctuations in interest rates on our underlying variable rate debt instruments (see footnote number 8). Additional disclosure regarding our various market risks are set forth in our fiscal 2003 Form 10-K filed with the Securities and Exchange Commission. Item 4. Controls and Procedures Disclosure Controls and Procedures: C&D's management, with the participation of C&D's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of C&D's disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based on such evaluation, C&D's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, C&D's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by C&D in the reports that it files or submits under the Exchange Act. Internal Control over Financial Reporting: There have not been any changes in C&D's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, C&D's internal control over financial reporting. 24 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits 10.1 Amended and Restated Credit Agreement dated as of November 20, 2003 among C&D Technologies, Inc. as the borrower, the Subsidiaries of the Borrower identified herein as the Guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank as Co-Agent, and the other Lenders Party Hereto arranged by Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager (filed herewith). 15. Letter from PricewaterhouseCoopers LLP, independent accountants for C&D, regarding unaudited interim financial information (filed herewith). 31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 31.2 Certification of the Vice President Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). 32.2 Certification of the Vice President Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith). (b) Reports on Form 8-K 1. On August 28, 2003, C&D furnished a report on Form 8-K, Item 12 relating to its August 28,2003 Press Release. 2. On September 9, 2003, C&D filed a report on Form 8-K, Item 5 relating to its September 9, 2003 Press Release. 3. On September 25, 2003, C&D filed a report on Form 8-K, Item 5 relating to its September 25, 2003 Press Release. 4. On October 10, 2003, C&D filed a report on Form 8-K, Item 2 relating to its acquisition of a 240,000 square foot facility in Reynosa, Mexico. 25 SIGNATURES ------------------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. C&D TECHNOLOGIES, INC. December 12, 2003 BY: /s/ Wade H. Roberts, Jr. ---------------------------------- Wade H. Roberts, Jr. President, Chief Executive Officer and Director (Principal Executive Officer) December 12, 2003 BY: /s/ Stephen E. Markert, Jr. ---------------------------------- Stephen E. Markert, Jr. Vice President Finance (Principal Financial and Accounting Officer) 26 EXHIBIT INDEX 10.1 Amended and Restated Credit Agreement dated as of November 20, 2003 among C&D Technologies, Inc. as the borrower, the Subsidiaries of the Borrower identified herein as the Guarantors, Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer, JP Morgan Chase Bank as Co-Agent, and the other Lenders Party Hereto arranged by Banc of America Securities LLC, as Sole Lead Arranger and Sole Book Manager. 15. Letter from PricewaterhouseCoopers LLP, independent accountants for C&D, regarding unaudited interim financial information. 31.1 Certification of the President and Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Vice President Finance pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the President and Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of the Vice President Finance pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 27