Form 10-Q

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

¨ (Do not check if a smaller reporting company)

Smaller Reporting Company

10-Q 1 d10q.htm FORM 10-Q Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended October 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file no: 1-9389

C&D TECHNOLOGIES, INC.

Delaware

(State of incorporation)

13-3314599

(IRS employer identification no.)

1400 Union Meeting Road

Blue Bell, PA 19422

(Address of principal executive offices)

Telephone Number: (215) 619-2700

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

At October 31, 2010, 26,477,841 shares of common stock, $0.01 par value, of the registrant were outstanding.

C&D TECHNOLOGIES, INC.

AND SUBSIDIARIES

FORM 10-Q

INDEX


Part I	FINANCIAL INFORMATION

Item 1	Financial Statements (Unaudited)

	Consolidated Balance Sheets – October 31, 2010 and January 31, 2010	3

	Consolidated Statements of Operations – Three and Nine Months Ended October 31, 2010 and 2009	5

	Consolidated Statements of Cash Flows – Nine Months Ended October 31, 2010 and 2009	6

	Consolidated Statements of Comprehensive Loss – Three and Nine Months Ended October 31, 2010 and 2009	7

	Notes to Consolidated Financial Statements	8

Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	31

Item 3	Quantitative and Qualitative Disclosures about Market Risk	42

Item 4	Controls and Procedures	42

Part II	OTHER INFORMATION

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43

Item 6	Exhibits	44

SIGNATURES		45

EXHIBIT INDEX		46

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except par value)

(UNAUDITED)


	October 31, 2010		January 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	3,036	$	2,700
Restricted cash		50		57
Accounts receivable, less allowance for doubtful accounts of $919 and $1,114		63,168		55,183
Inventories		73,408		76,041
Prepaid taxes		531		425
Deferred taxes		53		50
Other current assets		9,025		1,092
Assets held for sale		500		500

Total current assets		149,771		136,048

Property, plant and equipment, net		87,674		90,001
Deferred income taxes		226		26
Intangible and other assets, net		12,700		15,435
Goodwill		—		59,964

TOTAL ASSETS	$	250,371	$	301,474


LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt	$	157,122	$	8,777
Accounts payable		36,521		46,380
Accrued liabilities		15,429		12,309
Deferred income taxes		—		750
Other current liabilities		9,446		4,565

Total current liabilities		218,518		72,781

Deferred income taxes		—		12,529
Long-term debt		8,368		133,106
Other liabilities		38,909		40,588

Total liabilities		265,795		259,004

The accompanying notes are an integral part of these statements.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS (continued)

(Dollars in thousands, except par value)

(UNAUDITED)


	October 31, 2010			January 31, 2010
Commitments and contingencies (see Note 11)

Equity:
Common stock, $.01 par value, 75,000,000 shares authorized; 29,459,197 and 29,228,213 shares issued and 26,477,841 and 26,302,775 outstanding at October 31, 2010 and January 31, 2010, respectively		295			292
Additional paid-in capital		97,580			97,033
Treasury stock, at cost, 2,981,356 and 2,925,438 shares at October 31, 2010 and January 31, 2010, respectively		(40,071	)		(40,091	)
Accumulated other comprehensive loss		(39,782	)		(43,656	)
(Accumulated losses)/retained earnings		(45,063	)		17,666

Total stockholders’ (deficit)/equity attributable to C&D Technologies, Inc.		(27,041	)		31,244
Noncontrolling interest		11,617			11,226

Total (deficit)/equity		(15,424	)		42,470

TOTAL LIABILITIES AND EQUITY	$	250,371		$	301,474

The accompanying notes are an integral part of these statements.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

(UNAUDITED)


	Three months ended October 31,						Nine months ended October 31,
	2010			2009			2010			2009
NET SALES	$	87,623		$	91,210		$	256,161		$	247,309
COST OF SALES		76,828			78,200			224,355			218,951

GROSS PROFIT		10,795			13,010			31,806			28,358

OPERATING EXPENSES:
Selling, general and administrative expenses		8,025			11,457			26,456			30,810
Research and development expenses		1,468			2,108			4,845			5,785
Goodwill impairment		—			—			59,978			—
Restructuring charges		1,828			—			1,828			—

OPERATING LOSS		(526	)		(555	)		(61,301	)		(8,237	)

Interest expense, net		4,266			3,069			11,813			8,909
Other expense (income), net		1,318			(23	)		2,728			(57	)

LOSS BEFORE INCOME TAXES		(6,110	)		(3,601	)		(75,842	)		(17,089	)
Income tax provision (benefit)		161			(120	)		(13,239	)		2,052

NET LOSS		(6,271	)		(3,481	)		(62,603	)		(19,141	)
Net income (loss) attributable to noncontrolling interests		174			(41	)		126			(327	)

NET LOSS ATTRIBUTABLE TO C&D TECHNOLOGIES, INC.	$	(6,445	)	$	(3,440	)	$	(62,729	)	$	(18,814	)


Loss per share:
Basic:	$	(0.24	)	$	(0.13	)	$	(2.38	)	$	(0.72	)

Diluted:	$	(0.25	)	$	(0.13	)	$	(2.38	)	$	(0.72	)

The accompanying notes are an integral part of these statements.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(UNAUDITED)


	Nine months ended October 31,
	2010			2009
Cash flows from operating activities:
Net loss	$	(62,603	)	$	(19,141	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Share-based compensation		625			949
Depreciation and amortization		7,694			8,694
Amortization of debt acquisition and discount costs		4,082			3,600
Annual retainer to Board of Directors paid by the issuance of common stock		—			24
Impairment of goodwill		59,978			—
Impairment of fixed assets		1,523			—
Deferred income taxes		(13,479	)		1,535
Changes in assets and liabilities:
Accounts receivable		(7,595	)		(856	)
Inventories		3,013			(9,631	)
Other current assets		(4,164	)		(780	)
Accounts payable		(7,444	)		(112	)
Accrued liabilities		2,517			11,536
Book overdraft		(2,370	)		2,387
Income taxes payable		405			1,205
Other current liabilities		5,462			491
Other liabilities		90			(2,437	)
Other long-term assets		(16	)		2,057
Other, net		(88	)		1,378

Net cash (used in) provided by continuing operating activities		(12,370	)		899
Net cash used in discontinued operating activities		(8	)		(1,656	)

Net cash (used in) provided by operating activities		(12,378	)		(757	)

Cash flows from investing activities:
Acquisition of property, plant and equipment		(5,501	)		(10,302	)
Proceeds from disposal of property, plant and equipment		—			18
Decrease in restricted cash		7			577

Net cash used in investing activities		(5,494	)		(9,707	)

Cash flows from financing activities:
Borrowings on line of credit facility		67,531			82,750
Repayments on line of credit facility		(67,011	)		(76,546	)
Repayment of debt		(119	)		(83	)
Proceeds from new borrowings		20,022			3,072
Proceeds from the issuance of treasury stock		14			—
Financing cost of long term debt		(2,275	)		—
Purchase of treasury stock		(71	)		(56	)

Net cash provided by financing activities		18,091			9,137

Effect of exchange rate changes on cash and cash equivalents		117			126

Increase (decrease) in cash and cash equivalents		336			(1,201	)
Cash and cash equivalents, beginning of period		2,700			3,121

Cash and cash equivalents, end of period	$	3,036		$	1,920

The accompanying notes are an integral part of these statements.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Dollars in thousands, except per share data)

(UNAUDITED)


	Three months ended October 31,						Nine months ended October 31,
	2010			2009			2010			2009
Net loss	$	(6,271	)	$	(3,481	)	$	(62,603	)	$	(19,141	)
Other comprehensive income, net of tax:
Net unrealized gain on derivative instruments		1,238			1,009			1,542			4,103
Adjustment to recognize pension liability and net periodic pension cost		590			269			1,770			808
Foreign currency translation adjustments		592			48			827			264

Total comprehensive loss		(3,851	)		(2,155	)		(58,464	)		(13,966	)

Comprehensive loss (income) attributable to noncontrolling interests		(349	)		34			(391	)		311

Total comprehensive loss attributable to C&D Technologies, Inc.	$	(4,200	)	$	(2,121	)	$	(58,855	)	$	(13,655	)

The accompanying notes are an integral part of these statements.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

1.	BASIS OF PRESENTATION

The accompanying interim unaudited condensed consolidated financial statements of C&D Technologies, Inc. (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the Company does not include all the information and notes required for complete financial statements. In the opinion of management, the interim condensed unaudited consolidated financial statements include all adjustments considered necessary for the fair statements of the financial position, results of operations and cash flows for the interim periods presented. The consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Fiscal Year Ended January 31, 2010 Annual Report on Form 10-K, filed on April 20, 2010 as updated by the Company’s Current Report on Form 8-K filed on October 20, 2010.

In the fourth quarter of fiscal year 2010, the Company revised the useful lives of certain machinery and equipment assets to more accurately reflect expected useful lives. These assets which were being depreciated over a term of 3 – 10 years are now being depreciated over a term of 3 – 15 years. As a result, for the three and nine months ended October 31, 2010 depreciation expense included as cost of sales was reduced by approximately $300 and $1,200, respectively. The net impact of this change in estimate for the three and nine months ended October 31, 2010 was a reduction of basic and fully diluted loss per share of approximately $0.01 and $0.05, respectively.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2.	LIQUIDITY AND GOING CONCERN

The Company has put provisions due on its convertible senior notes that may require it to pay the following principal payments: $52.0 million on November 1, 2011, with respect to the 2006 Notes, and $75.0 million on November 15, 2012, with respect to the 2005 Notes (see Note 7 – Debt). Furthermore, payments of principal on these Notes may be accelerated upon the occurrence of a “fundamental change” as defined in the indentures governing the 2005 Notes and 2006 Notes, which would require the Company to purchase the notes at 100% of their aggregate principal amount (plus any accrued but unpaid interest thereon) within approximately 55 business days of such occurrence. The Company believes that there is substantial risk that a fundamental change will occur in the near future. Refer to discussion of New York Stock Exchange (“NYSE”) continued listing requirements and related risk of delisting our common stock below.

Since our 30 day average market capitalization has fallen below $15 million, the NYSE suspended trading of our common stock on October 8, 2010. Absent suspension of trading being removed within a 60 day time period and/or relisting on a national automated exchange, such a development would constitute a fundamental change under the 2006 Notes, which could ultimately result in an event of default thereunder. The Company has appealed this determination before a committee of the board of directors of NYSE Regulation. An oral hearing regarding the appeal is currently scheduled with the NYSE on December 14, 2010.

If we are unable to list the stock on another national securities exchange, could negatively impact us by: (i) reducing the liquidity and market price of our common stock; (ii) reducing the number of investors willing to hold or acquire our common stock, which could negatively impact our ability to raise equity financing; (iii) limiting our ability to use a registration statement to offer and sell freely tradable securities, thereby preventing us from accessing the public capital markets; (iv) impairing our ability to provide equity incentives to our employees; and (v) resulting in a “fundamental change” as defined in the indentures governing the 2005 Notes and the 2006 Notes, which would give the holders of our 2005 Notes and our 2006 Notes the right to require us to repurchase their notes for an amount equal to the principal amount outstanding plus accrued but unpaid interest. We believe that there is a substantial risk that a fundamental change described in clause (v) will occur in the future and if we do not complete a restructuring prior to the time we are required to repurchase the 2005 Notes and 2006 Notes, we will not have enough cash on hand to comply with the governing indentures. If we are not able to complete the restructuring or obtain additional financing on a timely basis, we may be forced to declare bankruptcy.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

While a delisting of our common stock would not constitute a specific event of default under the documents governing our senior credit facilities, our lenders could claim that a delisting would trigger a default under the material adverse change covenant or the cross-default provisions under such documents.

In light of these recent developments and the Company’s liquidity risks, the Company reviewed strategic and financing alternatives available with assistance from legal and financial advisors. On September 14, 2010, the Company entered into a restructuring support agreement with certain holders of the 2005 Notes and 2006 Notes (see Note 3). The Company also continues to be engaged in active discussions with lenders under its Credit Facility regarding a restructuring of its capital structure. On October 21, 2010, the Company filed a Registration Statement on Form S-4 which, as amended on November 30, 2010, became effective on November 30, 2010 and filed a definitive Proxy Statement on November 30, 2010 providing notice of a special meeting of the stockholders to be held on December 13, 2010. The purpose of the special meeting is to vote on the proposals included in the Shareholder Exchange Consent as defined and more fully described in the Company’s definitive proxy statement filed with the Securities and Exchange Commission (the “SEC”) on November 30, 2010, including, without limitation, the approval of exchange offers of the Company’s Common Stock in exchange for any and all of the 2005 Notes and the 2006 Notes, respectively. The exchange offers provide an out-of-court method of restructuring the Company’s indebtedness to address imminent debt repayment obligations and liquidity issues. If the exchange offers are not consummated, as a result of any of the conditions thereto not being satisfied, the Company will be unable to repay its current indebtedness from cash on hand or other assets. Therefore, the Company is simultaneously soliciting holders of the Notes and the existing holders of Common Stock to approve a prepackaged plan of reorganization as an alternative to the exchange offer. There can be no assurance that the Company will be able to consummate either the exchange offers or the prepackaged plan. The Company may be unable to maintain adequate liquidity even upon acceptance of these plans and, as a result, the Company may be required to seek protection pursuant to a voluntary bankruptcy filing under Chapter 11.

The Company’s cumulative losses, substantial indebtedness and likely future inability to comply with certain covenants in the agreements governing its indebtedness, including among others, covenants related to continued listing on a national automated stock exchange and future EBITDA requirements, in addition to its current liquidity situation, raise substantial doubt as to the Company’s ability to continue as a going concern for a period longer than twelve months from October 31, 2010. The Company’s ability to continue as a going concern depends on, among other factors, a return to profitable operations, a successful restructuring of the 2005 Notes and the 2006 Notes, and possible amendment of future EBITDA requirements under the Company’s Credit Facility. Until the possible completion of the financial and strategic alternatives process, the Company’s future remains uncertain, and there can be no assurance that its efforts in this regard will be successful.

On November 1, 2010, the Company announced that it has elected not to make the semi-annual interest payment due on the 2005 Notes on November 1, 2010. The decision was made in light of the Company’s October 21, 2010 announcement of its plan to implement a restructuring of its indebtedness (the “Restructuring”) pursuant to offers to separately exchange (the “Exchange Offer”) all of its outstanding 2005 Notes and 2006 Notes (together, the “Notes”) for up to 95% of the shares of the Company’s common stock, in the aggregate, which provides that if the Exchange Offer is consummated, all outstanding principal of, plus accrued unpaid interest on, properly tendered Notes will be included in the calculation of each holder’s pro rata share of the Company’s common stock to be issued to holders of Notes. See Note 3 for additional information regarding the Restructuring and Exchange Offer. A semi-annual interest payment on the 2006 Notes became due on November 15, 2010. The Company further elected not to pay interest due on the 2006 Notes. The consequences of failure to pay interest under the indenture governing the 2006 Notes are substantially the same as those under the indenture governing the 2005 Notes.

Under the terms of the Indenture dated as of November 21, 2005 (the “Indenture”) governing the 2005 Notes, the Company has a grace period of 30 days from the payment due date with respect to interest payments before an “event of default” under the Indenture occurs. There is no right to accelerate maturity of the 2005 Notes based on the non-payment unless interest remains unpaid upon expiration of the grace period. Upon the occurrence of an event of default, the trustee under the Indenture or holders of 25% or more of the 2005 Notes can declare the aggregate principal amount of the 2005 Notes, plus unpaid interest, immediately due and payable. Occurrence of an event of default or acceleration of the 2005 Notes under the Indenture will also give creditors with respect to other

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

funded debt of the Company outstanding the right to exercise certain remedies in accordance with the applicable agreement, including cross- acceleration. The 2006 Notes contain similar provisions. As a result of these provisions, the Company has classified both Notes as current liabilities as of October 31, 2010.

Due to the non-payment of interest on the 2005 and 2006 Notes, amounts borrowed under the Credit Facility and term loan tranche (See note 7) are likely to be in default. On November 30, 2010 the loan holder, Wells Fargo Bank, waived the default through December 31, 2010. As a result of this default, the Company has classified these loan amounts as current liabilities as of October 31, 2010.

The Company’s consolidated financial statements have been prepared assuming that it will continue as a going concern, which implies that it will continue to meet its obligations and continue operations for at least the next 12 months. Realization values may be substantially different from carrying values as shown, and the consolidated financial statements do not include any adjustments relating to the recoverability or classification of recorded asset amounts or the amount and classification of liabilities that might be necessary as a result of this uncertainty.

The Company’s liquidity is primarily determined by its availability under the Credit Facility, its unrestricted cash balances and cash flows from operations. If cash requirements exceed the cash provided by operating activities, then the Company would look to its unrestricted cash balances and the availability under its Credit Facility to satisfy those needs. Important factors and assumptions made by the Company when considering future liquidity include, but are not limited to, the volatility of lead prices, future demand from customers, continued sufficient availability of credit from trade vendors and the ability to re-finance or obtain debt in the future. To the extent unforeseen events occur or operating results are below forecast, the Company believes it can take certain actions to conserve cash, such as delay major capital investments, other discretionary spending reductions or pursue financing from other sources to preserve liquidity, if necessary. Despite these potential actions, if the Company is not able to satisfy its cash requirements in the near term from cash provided by operating activities, or through access to its Credit Facility, it may not have the minimum levels of cash necessary to operate the business on an ongoing basis.

The Company’s liquidity derived from the Credit Facility, as amended on April 9, 2010, is based on availability determined by a borrowing base. The Company may not be able to maintain adequate levels of eligible assets to support its required liquidity in the future. In addition, the Credit Facility requires the Company to meet a minimum fixed charge coverage ratio if the availability falls below $10,000, adjusted to $15,000 for the first year under the agreement as amended. The fixed charge coverage ratio for the last 12 consecutive fiscal month period shall be not less than 1.10:1.00. During the past year the Company would not have achieved the minimum fixed charge coverage ratio. The Company’s ability to meet these financial provisions may be affected by events beyond its control. There are also minimum EBITDA requirements, subject to an event of default, beginning with the Company’s quarter ending April 30, 2011. The Company does not currently anticipate satisfying this minimum EBITDA requirement at April 30, 2011. The rising prices of lead and other commodities and other circumstances have resulted in the Company obtaining amendments to the financial covenants in the past. Such amendments may not be available in the future, if required.

Current credit and capital market conditions combined with a history of operating losses and negative cash flows are likely to impact and/or restrict the Company’s ability to access capital markets in the near term, and any such access would likely be at an increased cost and under more restrictive terms and conditions. Further, such constraints may also affect agreements and payment terms with trade vendors. If unforeseen events occur or certain larger vendors require the Company to pay for purchases in advance or upon delivery, or on reduced trade terms, the Company may not be able to continue operating as a going concern.

The Company’s Credit Facility bank is currently meeting all of its lending obligations. The current Credit Facility, as amended on April 9, 2010, does not expire until June 6, 2013. As of October 31, 2010, $39,125 was funded (including $20,000 from the term loan tranche), and $5,417 was utilized for letters of credit. As provided under the Credit Facility, as amended on April 9, 2010, excess borrowing capacity is for future working capital needs and general corporate purposes.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

As discussed above, the Company’s 2005 Notes and 2006 Notes have initial maturities (put provisions) in November 2012 and November 2011, respectively. Only upon the occurrence of a fundamental change as defined in the indenture agreements, holders of the notes may require the Company to repurchase some or all of the notes prior to these dates.

Any breach of the covenants in the Credit Facility or the indentures governing the 2005 Notes and 2006 Notes could cause a default under the Credit Facility and other debt (including the 2005 and 2006 Notes), which would restrict the Company’s ability to borrow under the Credit Facility, thereby significantly impacting its liquidity. If the Company incurs an event of default under any of these debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to these debt instruments to be due and payable immediately. Assets and cash flows may not be sufficient to fully repay borrowings under these debt instruments if accelerated upon an event of default or, in the case of the 2005 Notes and 2006 Notes, following a fundamental change (as defined in the indentures governing the 2005 Notes and the 2006 Notes). Additionally, the 2005 Notes and 2006 Notes have initial maturities (put provisions) in November 2012 and November 2011, respectively. If, as or when required, the Company is unable to repay, refinance or restructure its indebtedness under, or amend the covenants contained in, it may result in an event of default under the Credit Facility and the lenders thereunder could institute foreclosure proceedings against the assets securing borrowings under the facility, which would have an material adverse impact on the Company.

3.	FINANCIAL RESTRUCTURING

Restructuring Support Agreement

On September 14, 2010, the Company entered into a restructuring support agreement (the “RSA”) with two convertible noteholders (the “Supporting Noteholders”) who together as of the date of the RSA held approximately 56% of the aggregate principal amount of the 2005 Notes and the 2006 Notes. The Supporting Noteholders have agreed to a proposed restructuring of the 2005 Notes and the 2006 Notes which will be effected through (i) an offer to exchange the outstanding 2005 Notes and 2006 Notes for up to 95% of the Company’s common stock (the “Exchange Offer”), or (ii) a prepackaged plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code (the “Prepackaged Plan”, together with the Exchange Offer, the “Restructuring”). The Company has agreed to solicit votes from the Company’s stockholders and the holders of the Notes to accept the Prepackaged Plan concurrently with the Exchange Offer.

The following is a summary of the material terms of the RSA.

•

Support of the Exchange Offer and Restructuring Plan:

•

Subject to the terms and conditions of the RSA, the Supporting Noteholders have each agreed to, among other things:

•

support and use its commercially reasonable best efforts to complete the proposed restructuring pursuant to the Exchange Offer or the Prepackaged Plan, by, among other things, tendering all of its holdings of 2005 Notes and 2006 Notes into the Exchange Offer and voting all of its holdings of Notes in favor of the Prepackaged Plan;

•

not, in any material respect, object to, delay, impede or take any other action to interfere with the acceptance or implementation of the Restructuring or propose, file, support or vote for any alternative exchange offer, restructuring, workout or plan of reorganization for the Company;

•

unless the Company commences a Chapter 11 case, not accelerate or support the acceleration of, or direct the trustee to accelerate or support the acceleration of, the 2005 Notes or the 2006 Notes under the terms of the indentures governing the 2005 Notes or the 2006 Notes for any default or event of default that has occurred or may occur thereunder; and

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

•

unless the Company commences a Chapter 11 case, use its commercially reasonable efforts to waive any event of default under the indentures governing the 2005 Notes or the 2006 Notes or rescind any acceleration of the 2005 Notes or the 2006 Notes.

•

Treatment of Noteholders and Existing Stockholders:

•

If the Company’s stockholders approve the Exchange Offer and the (i) Exchange Offer is consummated or (ii) the Prepackaged Plan is confirmed:

•

holders of the 2005 Notes and 2006 Notes will receive a number of shares of common stock representing up to 95% of the Company’s outstanding common stock after giving effect to the Restructuring; and

•

the existing holders of the Company’s common stock will retain at least 5% of the Company’s outstanding common stock after giving effect to the Restructuring.

•

If the Company’s stockholders do not approve the Exchange Offer, but the Prepackaged Plan is confirmed:

•

holders of the 2005 Notes and 2006 Notes will receive a number of shares of common stock representing approximately 97.5% of the Company’s outstanding common stock after giving effect to the Restructuring subject to dilution from issuances under the 2011 Management Incentive Plan described below; and

•

the existing holders of the Company’s common stock will receive 2.5% of the Company’s outstanding common stock and receive unregistered warrants to purchase an aggregate number of shares of common stock representing 5% of the company’s post-restructuring common stock on a fully diluted basis subject to dilution from issuances under the 2011 Management Incentive Plan described below; the warrants will have an aggregate exercise price calculated based on a total enterprise value of $250.0 million and be exercisable for a period of three years.

•

Stockholder Approval and Minimum Threshold Participation. The RSA provides that the consummation of the Exchange Offer will be conditioned upon, among other things, a majority of outstanding shares of common stock voting in favor of the terms of the Exchange Offer and holders of at least 95% (which may be reduced in certain circumstances) in aggregate principal amount of 2005 Notes and 2006 Notes tendering their notes into the Exchange Offer. The RSA requires that the Company, among other things, commence the Exchange Offer and use its commercially reasonable efforts to pursue and obtain the approval of stockholders of the Company for the Exchange Offer.

•

Board of Directors Matters: Pursuant to the terms of the RSA, upon consummation of the Restructuring, the Board of Directors of the Company will be reconstituted such that at such time there shall be seven directors; one of the seven directors shall be the Company’s chief executive officer and, of the remaining six directors, five shall be recommended by Supporting Noteholders and one shall be selected by and from the Company’s current Board of Directors. Our current board of directors expects that Kevin P. Dowd, the Chairman of the Company’s board of directors will not resign and will be the remaining member of the board of directors. The remaining member will appoint the other chief executive officer and the five other directors recommended by the supporting Noteholders to the board of directors. Thereafter, directors will be nominated for election by stockholders in accordance with the Company’s normal corporate governance procedures.

•

Investors’ Rights Agreement: Pursuant to the terms of the RSA, in the event the Exchange Offer is consummated, the Supporting Noteholders intend to enter into an investors’ rights agreement that will include customary rights regarding registration rights and access to information.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

•

Stockholders’ Rights Agreement: Pursuant to the terms of the RSA, in the event the Restructuring is implemented pursuant to the Prepackaged Plan, the Company and the holders of Company’s outstanding common stock after the Restructuring will enter into a stockholders agreement that will include customary rights regarding governance, transfers, preemption, tag along and drag along rights, threshold voting requirements and registration rights.

•

2011 Management Incentive Plan: Pursuant to the terms of the RSA, upon the consummation of the Restructuring, the Company will reserve up to 10% of the outstanding shares of the Company issuable upon exercise of options granted under a new stock incentive plan by the Board of Directors of the Company.

•

Termination of Restructuring Support Agreement:

Unless the Restructuring has been consummated, the RSA may be terminated by the Supporting Noteholders upon the occurrence of certain events, including but not limited to:

•

the Company’s failure to consummate the Exchange Offer and/or the Prepackaged Plan on or prior to February 28, 2011;

•

the Company’s failure to file the Prepackaged Plan in the event less than the required amount of the 2005 Notes and 2006 Notes are tendered in the Exchange Offer;

•

receipt of written notice from the Supporting Noteholders of their intent to terminate the RSA upon the occurrence of specified events that constitute a material adverse change and the Company’s failure to cure within an allowable grace period; and

•

a material alteration by the Company of the terms of the Restructuring that was not permitted under the terms of the RSA and the Company’s failure to cure such alteration within an allowable grace period.

Unless the Restructuring has been consummated, the RSA may be terminated by the Company upon the occurrence of certain events, including:

•

a breach by a Supporting Noteholder of any of the representations, warranties or covenants set forth in the RSA that would have a material adverse impact on the Company or the consummation of the Restructuring that remains uncured for an allowable grace period;

•

the issuance by any governmental authority or any ruling or order enjoining the consummation of a material portion of the Restructuring; and

•

upon a determination by the Board of Directors that such termination is in the best interests of the Company pursuant to the exercise of its fiduciary duties.

In the event the RSA is terminated, the Supporting Noteholders shall no longer be required to tender their beneficially owned 2005 Notes and 2006 Notes or vote for the Prepackaged Plan. The description of the RSA is qualified in all respects by the actual terms of the agreement, as filed with the Securities and Exchange Commission on September 14, 2010.

On October 21, 2010, the Company announced that as part of its restructuring plan it has commenced an offer to exchange all of its outstanding 5.25% Convertible Senior Notes due 2025 and 5.50% Convertible Senior Notes due 2026 (together the “Notes”) for up to 95% of shares of the Company’s common stock (the “Common Stock”). The consummation of the exchange offer is conditioned upon, among other things, at least 95% of the aggregate principal amount of the Notes being tendered and not withdrawn (the “Minimum Tender Condition”) and the holders of Common Stock approving the exchange offer and an amendment to the Company’s certificate of

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

incorporation authorizing (i) an increase in the number of shares of Common Stock and (ii) a forward stock split in ratios between 1:1 and 1.95:1, to be determined by the Board of Directors of the Company (together, the “Shareholder Exchange Consent”). If all of the Notes are exchanged, the participating noteholders will receive their pro rata share of up to 95% of the issued and outstanding Common Stock of the Company immediately following completion of the exchange offer, and the existing holders of Common Stock will retain at least 5% of the issued and outstanding Common Stock of the Company, in each case subject to dilution due to securities issued under the Company’s management incentive plans. In connection with the exchange offer, the Company filed with the U.S. Securities and Exchange Commission (the “SEC”) a registration statement on Form S-4 (the “Registration Statement”), a tender offer statement on Schedule TO and related documents and materials.

The exchange offer is an out-of-court method of restructuring the Company’s indebtedness to address imminent debt repayment obligations and liquidity issues. If the exchange offer is unsuccessful, as a result of a failure to satisfy the Minimum Tender Condition or otherwise, the Company will be unable to repay its current indebtedness from cash on hand or other assets. Therefore, the Company is simultaneously soliciting holders of the Notes and the existing holders of Common Stock to approve a prepackaged plan of reorganization as an alternative to the exchange offer. If the restructuring is accomplished through the prepackaged plan of reorganization, 100% of the Notes, plus all accrued and unpaid interest, will be cancelled, and holders of Notes will receive their pro rata share of either (i) 95% of the common stock of the Company issued under the prepackaged plan (the “New Common Stock”), if the Shareholder Exchange Consent is obtained or (ii) 97.5% of the New Common Stock, subject to dilution by any issuance made pursuant to certain shareholder warrants to purchase 5.0% of the Common Stock (the “Shareholder Warrants”), if the Shareholder Exchange Consent is not obtained.

If the restructuring is accomplished through the prepackaged plan of reorganization, 100% of the Common Stock will be cancelled, and holders of Common Stock will receive their pro rata share of either (i) 5% of the New Common Stock, if the Company’s stockholders approve the Shareholder Exchange Consent or (ii) (x) 2.5% of the New Common Stock and (y) Shareholder Warrants, if the Company’s stockholders do not approve the Shareholder Exchange Consent.

As of December 3, 2010, approximately 95.56% of the outstanding principal of its outstanding 5.25% Convertible Senior Notes due 2025 and 5.50% Convertible Senior Notes due 2026 (together the “Notes”) have been validly tendered and not validly withdrawn as of 5:00 PM Eastern Standard Time on December 2, 2010, in its outstanding exchange offers. Assuming that none of the Notes which have been validly tendered are validly withdrawn, the minimum tender condition of the exchange offers will be satisfied.

The Stockholder Meeting

The Company will hold a special meeting of its stockholders on December 13, 2010. At the special meeting, stockholders of the Company will be asked to consider and vote upon the proposals included in the Shareholder Exchange Consent, as more fully described in the Company’s definitive proxy statement filed with the Securities and Exchange Commission (the “SEC”) on November 30, 2010. Stockholders of record at the close of business on October 18, 2010 will be entitled to notice of and to vote at the meeting. Instructions for how to vote by proxy at the meeting, even if a stockholder is unable to attend the meeting, are included in the definitive proxy statement.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

The Restructuring

The exchange offers provide an out-of-court method of restructuring the Company’s indebtedness to address imminent debt repayment obligations and liquidity issues. If the exchange offers are not consummated, as a result of any of the conditions thereto not being satisfied, the Company will be unable to repay its current indebtedness from cash on hand or other assets. Therefore, the Company is simultaneously soliciting holders of the Notes and the existing holders of Common Stock to approve a prepackaged plan of reorganization as an alternative to the exchange offer. As noted above, if the restructuring is accomplished through the exchange offers, the holders of Notes will receive their pro rata share of up to 95% of the outstanding shares of Common Stock following the consummation of the exchange offers and the existing stockholders of the Company will hold at least 5%, and up to 9.75% of the outstanding shares of Common Stock following the consummation of the exchange offers. If the restructuring is accomplished through the prepackaged plan of reorganization, 100% of the Notes, plus all accrued and unpaid interest, will be cancelled, and holders of Notes will receive their pro rata share of either (i) 95% of the common stock of the Company issued under the prepackaged plan (the “New Common Stock”), if the Shareholder Exchange Consent is obtained or (ii) 97.5% of the New Common Stock, subject to dilution by any issuance made pursuant to certain shareholder warrants to purchase 5.0% of the Common Stock (the “Shareholder Warrants”), if the Shareholder Exchange Consent is not obtained.

The exchange offers are scheduled to expire at 11:59 PM, Eastern Standard Time, on December 13, 2010, and validly tendered Notes may be validly withdrawn at any time prior to the expiration time.

The exchange offers are subject to and described more fully in the Company’s effective Registration Statement on Form S-4 filed with the SEC on November 30, 2010.

The Prepackaged Plan of Reorganization

If the conditions to the exchange offers are not satisfied or if the Shareholder Exchange Consent is not obtained, but a sufficient number of holders and Notes and holders of a requisite principal amount of Notes vote to accept the prepackaged plan of reorganization, then the Company will pursue an in-court restructuring. If confirmed, the prepackaged plan of reorganization would have principally the same effect as if 100% of the holders of Notes had tendered their notes in the exchange offer. To confirm the prepackaged plan of reorganization without invoking the “cram-down” provisions of the Bankruptcy Code, holders of Notes representing at least two-thirds in amount and more than one-half in number of those who vote and holders of at least two-thirds in number of outstanding common Stock must vote to accept the plan.

Other current assets include $2,149 of costs related to the debt for equity exchange transaction discussed above. This amount represents costs that are capitalizable as equity transaction costs and, if the exchange is completed, will be included as part of the additional paid in capital adjustment as part of the exchange. Should the exchange transaction not be approved by the shareholders and the exchange is not completed, the $2,149 will be expensed.

4.	STOCK-BASED COMPENSATION

The Company granted 0 and 492,055 stock option awards during the three and nine months ended October 31, 2010, and 0 and 351,076 during the three and nine months ended October 31, 2009, respectively. The Company recorded $34 and $275 of stock compensation expense related to stock option awards in its unaudited consolidated statement of operations for the three and nine months ended October 31, 2010, respectively, and $155 and $529 during the three and nine months ended October 31, 2009, respectively. The impact on loss per share for the nine months ended October 31, 2010 and 2009 was $0.01 and $0.02, respectively.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

The Company granted 0 and 333,558 restricted stock awards and 0 and 333,558 performance shares to selected executives and other key employees under the Company’s 2007 Stock Incentive Plan during the three and nine months ended October 31, 2010. The Company granted 19,098 and 368,688 restricted stock awards and 0 and 164,758 performance shares to selected executives and other key employees under the Company’s 2007 Stock Incentive Plan during the three and nine months ended October 31, 2009, respectively. The restricted stock awards vest ratably over a period of one to four years and the expense is recognized over the related vesting period. The Company recorded $58 and $350 of compensation related to restricted stock awards in its unaudited consolidated statement of operations for the three and nine months ended October 31, 2010, respectively, and $177 and $420 during the three and nine months ended October 31, 2009, respectively. The performance shares vest at the end of the performance period upon the achievement of pre-established financial objectives. No compensation expense has been recorded for the performance related awards since the Company does not believe that it is probable the performance criteria established will be met.

The following table summarizes information about the stock options outstanding at October 31, 2010:


	OPTIONS OUTSTANDING					OPTIONS EXERCISABLE
Range of Exercise Prices	Number Outstanding		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price		Number Exercisable		Weighted- Average Remaining Contractual Life	Weighted- Average Exercise Price
$ 1.30 - $ 1.53		708,210	5.3 Years	$	1.41		0	5.3 Years	$	1.41
$ 2.10 - $ 2.10		5,000	6.5 Years	$	2.10		0	6.5 Years	$	2.10
$ 4.25 - $ 6.30		561,500	5.1 Years	$	5.56		83,000	6.0 Years	$	6.05
$ 6.81 - $ 9.12		423,037	5.2 Years	$	7.63		408,037	5.2 Years	$	7.63
$ 9.80 - $ 14.28		92,556	4.1 Years	$	10.97		92,556	4.1 Years	$	10.97
$ 16.02 - $ 22.18		235,644	2.5 years	$	18.54		235,644	2.5 Years	$	18.54
$ 26.76 - $ 35.00		83,980	0.4 Years	$	31.87		83,980	0.4 Years	$	31.87

		2,109,927	4.7 Years	$	7.31		903,217	4.0 Years	$	12.93

The estimated fair value of the options granted was calculated using the Black Scholes Merton option pricing model (“Black Scholes”). The Black Scholes model incorporates assumptions to value stock-based awards. The risk-free rate of interest for periods within the estimated life of the option is based on U.S. Government Securities Treasury Constant Maturities. Expected volatility is based on the historical volatility of the Company’s stock. The Company uses the shortcut method to determine the expected life assumption.

The fair value of stock options granted during the three and nine months ended October 31, 2010 and 2009 was estimated on the grant date using the Black-Scholes option pricing model with the following average assumptions.


	Three months ended October 31,		Nine months ended October 31,
	2010	2009	2010	2009
Risk-free interest rate	N/A	N/A	2.01%-2.63%	2.02%-2.19%
Dividend yield	N/A	N/A	0.00%	0.00%
Volatility factor	N/A	N/A	77.48%-86.62%	70.09%-74.88%
Expected lives	N/A	N/A	4.0 - 5.5 Years	5.25 - 5.5 Years

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

5.	NEW ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Guidance

On February 1, 2010, the Company adopted new accounting guidance on the accounting for transfers of financial assets. The new guidance seeks to improve financial reporting by providing a short-term solution to address inconsistencies in practice relating to the existing concepts, such as eliminating the exceptions for qualifying special-purpose entities from the consolidation guidance. The adoption did not have a significant impact on the Company’s financial statements.

On February 1, 2010, the Company adopted new accounting guidance on variable interest entities which seeks to improve financial reporting by requiring that entities perform an analysis to determine whether any variable interest or interests that they have give them a controlling financial interest in a variable interest entity. The adoption did not have a significant impact on the Company’s financial statements.

On February 1, 2010, the Company adopted new accounting guidance on fair value measurement disclosures which requires additional disclosures about recurring and nonrecurring fair value measurements including significant transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. The adoption did not have a significant impact on the Company’s financial statements.

6.	INVENTORIES

Inventories consisted of the following:


	October 31, 2010		January 31, 2010
Raw materials	$	19,287	$	22,035
Work-in-process		22,785		19,811
Finished goods		31,336		34,195

Total	$	73,408	$	76,041

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

DEBT

Debt consisted of the following:


	October 31, 2010		January 31, 2010
Credit Facility:
Revolving line of credit bearing interest at 4.75% at October 31, 2010: availability is determined by a borrowing base calculation*	$	19,125	$	18,605
Term loan tranche*		20,000		—
Convertible Senior Notes 2005; due 2025, bears interest at 5.25% net of unamortized discounts of $9,645 and $12,591, respectively*		65,355		62,409
Convertible Senior Notes 2006; due 2026, bears interest at 5.50%.*		52,000		52,000
China Line of Credit; Maximum commitment of 82 million RMB and 60 million RMB (with an effective interest rate of 5.18% and 5.73% as of October 31, 2010 and January 31, 2010, respectively)		8,844		8,644
Capital leases		166		225

Total debt		165,490		141,883
Less current portion		157,122		8,777

Total long-term portion	$	8,368	$	133,106

*	These notes have been classified as current liabilities as a result of the Company’s decision to forgo interest payments on the Notes on November 1, 2010 and November 15, 2010. See Note 2 for additional information.

Acquisition fees related to debt issuances are classified on the balance sheet as part of Other current assets and had a carrying amount of $2,951 at October 31, 2010 and Intangibles and other assets, net and had carrying amounts of $206 and $2,015 at October 31, 2010 and January 31, 2010, respectively. Based on the Company’s decision to classify the long-term debt as current, related debt issuance costs were also classified as current at October 31, 2010. If the Exchange Offer is approved by the Company’s stockholders, debt issuance costs of $973 will be written off in the fourth quarter of fiscal year 2011.

Credit Facility

At October 31, 2010, the Company has a $75,000 principal amount Credit Facility. The Credit Facility consists of (1) an approximately three-year senior revolving line of credit which does not expire until June 6, 2013 with a maximum borrowing capacity of $55,000, determined by a borrowing base calculation and (2) a $20,000 term loan as discussed further below. The availability under the revolving line of credit portion of the Credit Facility is determined by a borrowing base, is collateralized by a first lien on certain assets and bears interest at LIBOR plus 2.75% to 3.25% or Prime plus 1.25% to 1.75% with the rate premium based on the amount outstanding. As of October 31, 2010, $19,125 was funded under the revolving line of credit portion of the Credit Facility and $5,417 was utilized for letters of credit. As provided under the Credit Facility, excess borrowing capacity will be available for future working capital needs and general corporate purposes The Company paid $600 of acquisition fees in the current fiscal year related to amending the credit facility. These fees have been capitalized and are being amortized over the life of the line of credit.

In April 2010, the Company completed an Amendment to the Credit Facility agreement. The Amendment provided for the addition of a $20,000 term loan tranche that effectively increased the Credit Facility from $55,000 to $75,000. All obligations under the term loan tranche are secured by a first priority lien on all of the Company’s personal property, as well as that of certain of its subsidiaries, as the guarantor, along with certain of its real estate. Repayment of the indebtedness under the term loan tranche is subordinate to the repayment of indebtedness owed under the revolving credit line portion of the Credit Facility. The term loan tranche is payable on the earlier to occur of June 6, 2013 and the termination of the Credit Facility. The term loan tranche initially bears interest at the rate of

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

11.25 percent plus the greater of (i) LIBOR and (ii) 3 percent. The term loan tranche of the credit facility is subject to the same customary affirmative and negative covenants, as well as financial covenants, as stated in the Credit Facility agreement. In addition, for the one-year period following the Amendment, the Company has a requirement to maintain minimum excess availability under the Credit Agreement of $15,000. There are also minimum EBITDA requirements, subject to an event of default, beginning with the Company’s quarter ended April 30, 2011. The Company does not currently anticipate satisfying this minimum EBITDA requirement at April 30, 2011. The Credit Agreement, as amended by the Amendment, continues to require the Company to maintain a minimum fixed charge coverage ratio of 1.1:1.0 on a consolidated basis which becomes applicable only if the availability under the revolving credit line tranche falls below $10,000 which was adjusted to $15,000 for the first year under the Amendment. The Company paid $1,400 of acquisition fees related to this term loan tranche. These fees have been capitalized and are being amortized over the life of the line of credit.

As of October 31, 2010 and January 31, 2010, the Company was in compliance with its financial covenants. The Credit Facility includes a minimum fixed charge coverage ratio that is measured only when the excess availability as defined in the agreement is less than $10,000. The agreement restricts payments including dividends and Treasury Stock purchases to no more than $250 for Treasury Stock purchases in any one calendar year and $1,750 for dividends for any one calendar year subject to adjustments of up to $400 per year in the case of the conversion of debt to stock per the terms of the indenture governing the 2005 Notes. These restricted payments can only occur with prior notice to the lenders and provided that there is a minimum of $30,000 in excess availability for a period of thirty days prior to the dividend.

Due to the non-payment of interest on the 5.25% and 5.50% Notes, amounts borrowed under the Credit Facility and term loan tranche (See note 7) are likely to be in default. On November 30, 2010 the loan holder, Wells Fargo Bank, waived the default through December 31, 2010. As a result of this default, the Company has classified these loan amounts as current liabilities as of October 31, 2010.

The Credit Facility includes a material adverse change clause which defines an event of default as a material adverse change in the business, assets or prospects. Company lenders could claim a breach under the material adverse change covenant or the cross-default provisions under the Credit Facility under certain circumstances, including, for example, if holders of the 2005 Notes and 2006 Notes were to obtain the right to put their notes to us in the event that the common stock was no longer listed on any national securities exchange. A delisting event does not constitute a material adverse event under the terms of the Credit Facility. An interpretation of events as a material adverse change or any breach of the covenants in the Credit Facility or the indentures governing the 2005 Notes and 2006 Notes could cause a default under the Credit Facility and other debt (including the 2005 Notes and 2006 Notes), which would restrict the Company’s ability to borrow under the Credit Facility, thereby significantly impacting liquidity.

Convertible Senior Notes 2005

On November 21, 2005, the Company completed the private placement of $75,000 aggregate principal amount of 5.25% Convertible Senior Notes Due 2025 (“2005 Notes”) which raised proceeds of approximately $72,300, net of $2,700 in issuance costs. These costs are being amortized to interest expense over seven years based on the date that holders can exercise their first put option.

The 2005 Notes mature on November 1, 2025 and require semi-annual interest payments at 5.25% per annum on the principal amount outstanding. Prior to maturity the holders may convert their 2005 Notes into shares of the Company’s common stock under certain circumstances. The initial conversion rate is 118.0638 shares per $1,000 principal amount of 2005 Notes, which is equivalent to an initial conversion price of approximately $8.47 per share. At any time between November 1, 2010 and November 1, 2012, the Company may at its option redeem the 2005 Notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of 2005 Notes to be redeemed, plus any accrued and unpaid interest, including additional interest, if any, if in the previous 30 consecutive trading days ending on the trading day before the date of mailing of the redemption notice the closing sale price of the Common Stock exceeds 130% of the then effective conversion price of the 2005 Notes for at least 20 trading days. In addition, at any time after November 1, 2012, the Company may redeem the 2005 Notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of the 2005 Notes to be redeemed plus any accrued and unpaid interest, including additional interest, if any.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

A holder of 2005 Notes may require the Company to repurchase some or all of the holder’s 2005 Notes for cash upon the occurrence of a fundamental change as defined in the indenture and may put the 2005 Notes to the Company on each of November 1, 2012, 2015 and 2020 at a price equal to 100% of the principal amount of the 2005 Notes being repurchased, plus accrued interest, if any, in each case, within approximately 55 business days of such occurrence. If applicable, the Company will pay a make-whole premium on 2005 Notes converted in connection with any fundamental change that occurs prior to November 1, 2012. The amount of the make-whole premium, if any, will be based on the Company’s stock price and the effective date of the fundamental change. The indenture contains a detailed description of how the make-whole premium will be determined and a table showing the make-whole premium that would apply at various stock prices and fundamental change effective dates based on assumed interest and conversion rates. No make-whole premium will be paid if the price of the common stock on the effective date of the fundamental change is less than $7.00. Any make-whole premium will be payable in shares of common stock (or the consideration into which the Company’s common stock has been exchanged in the fundamental change) on the conversion date for the 2005 Notes converted in connection with the fundamental change. The Company believes that there is substantial risk that a fundamental change will occur in the near future (see Note 2) and if we do not complete the restructuring prior to the time that we are required to purchase the notes, we will not have the cash on hand to comply with the governing indentures. If we are not able to complete the restructuring or obtain additional financing on a timely basis, we may be forced to declare bankruptcy.

As described in Note 2, on November 1, 2010, the Company announced that it had elected not to make the semi-annual interest payment due on its 5.25% Convertible Senior Notes due 2025 (the “5.25% Notes”) on November 1, 2010. As a result, the Company has classified the 5.25% Notes in current liabilities as of October 31, 2010.

The 2005 Notes are accounted for in accordance with the guidance provided in the Financial Accounting Standards Boards Accounting Standards Codification (“ASC”) 470-20. ASC 470-20 requires an issuer to separately account for the liability and equity components in a manner that reflects the issuer’s nonconvertible borrowing rate resulting in higher non-cash expense which is amortized over the expected life of the instrument. The Company determined that the effective rate of the liability component was 12.5%.

Convertible Senior Notes 2006

On November 22, 2006, the Company completed the private placement of $54,500 aggregate principal amount of 5.50% Convertible Senior Notes Due 2026 (“2006 Notes”) which raised proceeds of approximately $51,700, net of $2,800 in issuance costs. These costs are being amortized to interest expense over five years.

The 2006 Notes mature on November 1, 2026 and require semi-annual payments at 5.50% per annum on the principal outstanding. Prior to maturity the holders may convert their 2006 Notes into shares of the Company’s common stock under certain circumstances. The initial conversion rate is 206.7183 shares per $1,000 principal amount of 2006 Notes, which is equivalent to an initial conversion price of approximately $4.84 per share. At any time on and after November 15, 2011, the Company may at its option redeem the 2006 Notes, in whole or in part, for cash, at a redemption price equal to 100% of the principal amount of 2006 Notes to be redeemed, plus any accrued and unpaid interest, including additional interest.

A holder of 2006 Notes may require the Company to repurchase some or all of the holder’s 2006 Notes for cash upon the occurrence of a fundamental change as defined in the indenture and may put the 2006 Notes to the Company on each of November 1, 2011, 2016 and 2021 at a price equal to 100% of the principal amount of the 2006 Notes being repurchased, plus accrued interest, if any, in each case, within approximately 55 business days of such occurrence. If applicable, the Company will pay a make-whole premium on the 2006 Notes converted in connection with any fundamental change that occurs prior to November 15, 2011. The amount of the make-whole premium, if any, will be based on the Company’s stock price and the effective date of the fundamental change. The indenture contains a detailed description of how the make-whole premium will be determined and a table showing

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

the make-whole premium that would apply at various stock prices and fundamental change effective dates based on assumed interest and conversion rates. No make-whole premium will be paid if the price of the Common Stock on the effective date of the fundamental change is less than $4.30. Any make-whole premium will be payable in shares of Common Stock (or the consideration into which the Company’s Common Stock has been exchanged in the fundamental change) on the conversion date for the 2006 Notes converted in connection with the fundamental change. The Company believes that there is substantial risk that a fundamental change will occur in the near future (see Note 2) and if we do not complete the restructuring prior to the time that we are required to purchase the notes, we will not have the cash on hand to comply with the governing indentures. If we are not able to complete the restructuring or obtain additional financing on a timely basis, we may be forced to declare bankruptcy.

As described in Note 2, on November 15, 2010, the Company announced that it had elected not to make the semi-annual interest payment due on its 5.50% Convertible Senior Notes due 2026 on November 15, 2010. As a result, the Company has classified the 5.5% Note in current liabilities as of October 31, 2010.

ASC 470-20 does not apply to the 2006 Notes since this note does not provide the Company with the option of settlement upon conversion in cash for all or part of the notes. As a result, this note is carried at face value and interest is recorded based on the stated rate of 5.50%.

China Line of Credit

On January 18, 2007, as amended in May 2009, the Company entered into a 12 month renewable non-revolving line of credit facility in China. Under the terms of the China Line of Credit, the Company may borrow up to 60 million RMB (approximately $8,790 US Dollars at January 31, 2010) with an interest rate of 5.73%. This credit line was established to provide the plant in China the flexibility needed to finalize the construction of its new manufacturing facility, which was completed in March 2007 and to fund working capital requirements. As of January 31, 2010, $8,644 was funded under this facility. This credit facility matured in May 2010.

In May 2010, the Company obtained a new line of credit loan with a borrowing capacity of up to 82 million RMB (approximately $12,292 US Dollars at October 31, 2010) from a local Chinese bank (the “Chinese LOC”), of which 59 million RMB (approximately $8,844 US Dollars at October 31, 2010) was funded as of October 31, 2010. The Chinese LOC replaces the previous China line of credit, discussed above, which matured in May 2010. The outstanding borrowings under the Chinese LOC of 59 million RMB as of October 31, 2010 have scheduled maturities of 3,730 RMB (approximately $559 US Dollars at October 31, 2010) due in one year, 11,180 RMB (approximately $1,676 US Dollars at October 31, 2010) due in year two, 18,640 RMB (approximately $2,794 US Dollars at October 31, 2010) due in year three, 10,000 RMB (approximately $1,499 US Dollars at October 31, 2010) due in year four and 15,450 RMB (approximately $2,316 US Dollars at October 31, 2010) due in year five. The Chinese LOC bears interest at a variable rate based on the applicable rate from the People’s Bank of China less a 10% discount, which was 5.18% as of October 31, 2010. This loan is secured by our Chinese manufacturing facility located in Shanghai, China. The incremental borrowings of approximately 23 million RMB (approximately $3,448 Dollars at October 31, 2010) as of October 31, 2010, when and if funded in the future, are expected to be used to support capital investments in China. The Company paid 1,500 RMB (approximately $225US Dollars at October 31, 2010) of acquisition fees related to this Chinese LOC. These fees have been capitalized and are being amortized over the life of the line of credit.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

8.	STATEMENT OF CHANGES IN EQUITY


					Additional									Other								Total
	Common Stock				Paid-In			Treasury Stock						Comprehensive			Retained			Noncontrolling		Stockholders’
	Shares		Amount		Capital			Shares			Amount			Income /(Loss)			Earnings			Interest		Equity
BALANCE AT JANUARY 31, 2010		29,228,213	$	292	$	97,033			(2,925,438	)	$	(40,091	)	$	(43,656	)	$	17,666		$	11,226	$	42,470

Total comprehensive loss:
Net (loss) income																		(62,729	)		126		(62,603	)
Foreign currency translation adjustment															562						265		827
Unrealized gain on derivative instruments															1,542								1,542
Pension liability adjustment															1,770								1,770

Total comprehensive income (loss):															3,874			(62,729	)		391		(58,464	)


Other changes in equity:
Share based compensation expense						625																	625
Deferred compensation plan									(70,653	)		(71	)										(71	)
Issuance of common stock						(78	)		14,735			91											13

Stock awards issued/exercised		230,984		3																			3

BALANCE AT OCTOBER 31, 2010		29,459,197	$	295	$	97,580			(2,981,356	)	$	(40,071	)	$	(39,782	)	$	(45,063	)	$	11,617	$	(15,424	)

9.	INCOME TAXES


	Nine months ended October 31,
	2010			2009
(Benefit) provision for income taxes	$	(13,239	)	$	2,052
Effective income tax rate		17.5	%		(12.0	%)

Effective tax rates were 17.5% and (12.0%) for the nine months ended October 31, 2010 and 2009, respectively. Tax benefit for the nine months ended October 31, 2010 is due to the impact of writing off the deferred tax liabilities associated with Goodwill (refer to Note 17 – Goodwill and Asset Impairments). During the second quarter of the current fiscal year, the Company recorded a charge to impair all goodwill. As a result of the impairment charge, the Company no longer has a deferred tax liability related to an indefinite lived intangible. As such, in the nine month period ended October 31, 2010, the Company recorded a benefit in the amount of $14,245 for the reversal of this deferred tax liability. The gross amount of the goodwill impairment in the nine months ended October 31, 2010 was $59,978, the associated tax benefit was $14,245, resulting in a net impact of $45,733. Additionally, the Company has tax expense in certain profitable foreign subsidiaries and no tax benefit recognized in certain jurisdictions where the Company incurred a loss. There was no significant impact to the tax expense related to uncertain tax positions or the interest on uncertain tax positions.

Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows use of the discrete method when, in certain situations, the actual interim period effective tax rate may be used if it provides a better estimate of income tax expense. Due to the Company’s losses in the US, the full valuation allowance in the US, and the existence of a deferred tax liability related to an indefinite lived intangible, it is the Company’s position that the discrete method provides a more accurate estimate of income tax expense for domestic taxes and therefore domestic income tax expense for the current quarter has been presented using that method. Taxes on international earnings continue to be calculated using an estimate of the effective tax rate for the full year.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

10.

EARNINGS PER SHARE

Basic earnings per common share was computed using net loss and the weighted average number of common shares outstanding during the period. Diluted earnings per common share was computed using net loss and the weighted average number of common shares outstanding plus potentially dilutive common shares outstanding during the period. Potentially dilutive common shares include the assumed exercise of stock options and assumed vesting of restricted stock awards using the treasury stock method, as well as the assumed conversion of debt using the if-converted method.

The following table sets forth the computation of basic and diluted losses per common share:


	Three months ended October 31,						Nine months ended October 31,
	2010			2009			2010			2009
Numerator:
Numerator for basic losses per common share	$	(6,445	)	$	(3,440	)	$	(62,729	)	$	(18,814	)
Effect of dilutive securities:
Income related to deferred compensation plan		(123	)		(19	)		—			(96	)

Numerator for diluted losses per common share	$	(6,568	)	$	(3,459	)	$	(62,729	)	$	(18,910	)


Denominator:
Denominator for basic earnings per common share- weighted average common shares		26,479,280			26,302,775			26,411,003			26,298,007

Effect of dilutive securities:
Shares issuable under deferred compensation arrangements		168,484			112,566			0			96,032

Dilutive potential common shares		168,484			112,566			—			96,032
Denominator for diluted earnings per common share- adjusted weighted average common shares and assumed conversions		26,647,764			26,415,341			26,411,003			26,394,039

Basic losses per common share	$	(0.24	)	$	(0.13	)	$	(2.38	)	$	(0.72	)

Diluted losses from common share	$	(0.25	)	$	(0.13	)	$	(2.38	)	$	(0.72	)

The Company excluded dilutive securities of 19,604,137 issuable in connection with convertible bonds from the diluted income per share calculation for the three and nine months ended October 31, 2010 and 2009, respectively, because their effect would be anti-dilutive. The above computation also excludes all anti-dilutive options, restricted stock awards and shares issuable under deferred compensation arrangements, which amounted to 2,596,791 and 2,583,086 shares for the three and nine months ended October 31, 2010, respectively, and 2,239,782 and 2,231,980 shares for the three and nine months ended October 31, 2009, respectively.

11.

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 the manufacturing process.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

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 therefore), the Company may be held liable for certain damages, the costs of investigation and remediation, and fines and penalties, 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 (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”).

C&D is participating in the investigation of contamination at several lead smelting facilities (“Third Party Facilities”) to which C&D allegedly made scrap lead shipments for reclamation prior to the date of the acquisition.

Pursuant to a 1996 Site Participation Agreement, as later amended in 2000, the Company and several other potentially responsible parties (“PRP”s) agreed upon a cost sharing allocation for performance of remedial activities required by the United States Environmental Protection Agency (“EPA”) Administrative Order Consent Decree entered for the design and remediation phases at the former NL Industries, Inc. (“NL”) site in Pedricktown, New Jersey, Third Party Facility. In April 2002, one of the original 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, resulting in a pro rata increase in the cost participation of the other PRPs, including the Company, for which the Company’s allocated share rose from 5.25% to 7.79%.

In August 2002, the Company was notified of its involvement as a PRP at the NL Atlanta, Northside Drive Superfund site. NL and Norfolk Southern Railway Company have been conducting a removal action on the site, preliminary to remediation. The Company, along with other PRPs, continues to negotiate with NL at this site regarding the Company’s share of the allocated liability.

The Company has terminated operations at its Huguenot, New York, facility, and has completed facility decontamination and disposal of chemicals and hazardous wastes remaining at the facility following termination of operations in accordance with applicable regulatory requirements. The Company is also aware of the existence of soil and groundwater contamination at the Huguenot, New York, facility, which is expected to require expenditures for further investigation and remediation. The Company is currently investigating the presence of lead contamination in soils at and adjacent to the facility. Additionally, 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 and underlying a lagoon used by the former owner of this site, Avnet, Inc., for disposal of wastewater. Contamination is present at concentrations that exceed state groundwater standards. In 2002, the NYSDEC issued a Record of Decision (“ROD”) for the soil remediation portion of the site. Further, the Company has recently conducted additional sampling pursuant to a soils investigation plan approved by NYSDEC and, based on the results thereof, has proposed and received approval of a remedial action plan for lead in soils which shall be implemented as part of the remedial activities required by the ROD. A ROD for the ground water portion has not yet been issued by the NYSDEC. In 2005, the NYSDEC also requested that the parties engage in a Feasibility Study, which the parties have conducted in accordance with a NYSDEC approved work plan. In February 2000, the Company filed suit against Avnet, Inc., and in December 2006, the parties executed a settlement agreement which provides for a cost sharing arrangement with Avnet bearing a majority of the future costs associated with the investigation and remediation of the lagoon-related contamination.

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

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

(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 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, the Company entered into an agreement with JCI to continue to share responsibility as set forth in the original purchase agreement. The Company continues to share with JCI the allocation of costs for assessment and remediation of certain off-site chlorinated volatile organic compounds in groundwater.

In February 2005, the Company received a request from the EPA to conduct exploratory testing to determine if the historical municipal landfill located on the Company’s Attica, Indiana, property is the source of elevated levels of trichloroethylene detected in two city wells downgradient of the Company’s property. In 2009, EPA determined that the impact to the two city wells was from sources unrelated to the Company’s property. The EPA also advised that it believes the former landfill is subject to remediation under the Resource Conservation and Recovery Act (“RCRA”) corrective action program. The Company conducted testing in accordance with an investigation work plan and submitted the test results to the EPA. The EPA thereafter notified the Company that they also wanted the Company to embark upon a more comprehensive RCRA investigation to determine whether there have been any releases of other hazardous waste constituents from its Attica facility and, if so, to determine what corrective measure may be appropriate. In January 2007, the Company agreed to an Administrative Order on Consent with EPA to investigate, and remediate if necessary, site conditions at the facility. The Company has timely complied with all required investigative and remedial actions required by EPA.

The Company has conducted site investigations at its Conyers, Georgia facility, and has detected chlorinated solvents in groundwater and lead in soil both onsite and offsite. The Company has recently initiated further assessment of groundwater conditions, temporarily suspending remediation of the chlorinated solvents which had been initiated in accordance with a Corrective Action Plan approved by the Georgia Department of Natural Resources in January 2007. A modified Corrective Action Plan will be submitted upon completion of the assessment. Additionally, the Company is conducting remediation of lead impacted soils identified in the site investigations. In September 2005, an adjoining landowner filed suit against the Company alleging, among other things, that it was allowing lead contaminated stormwater runoff to leave its property and contaminate the adjoining property. In November 2008, the parties entered into a final settlement agreement, pursuant to which the Company agreed to assess and remediate any contamination on the adjoining property due the Company’s operations as required by the Georgia Department of Natural Resources and with the concurrence of the adjoining landowner.

The Company accrues for environmental liabilities in its consolidated financial statements and periodically reevaluates the reserved amounts for these liabilities in view of the most current information available in accordance with accounting guidance for contingencies. As of October 31, 2010, accrued environmental reserves totaled $1,957 consisting of $1,327 in other current liabilities and $630 in other liabilities. Based on currently available information, 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 its business, financial condition or results of operations.

Purchase Commitments

Periodically the Company enters into purchase commitments pertaining to the purchase of certain raw materials with various suppliers. The Company has entered into various lead commitments contracts some expiring within a few months while others continue into December 2011. The estimated commitments are approximately $63,000 in the twelve months ended October 31, 2011 and $10,000 in the twelve months ended October 31, 2012.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

12.

FINANCIAL INSTRUMENTS

The estimated fair values of the Company’s financial instruments at October 31, 2010 and January 31, 2010 were as follows:


	October 31, 2010				January 31, 2010
	Carrying Amount		Fair Value		Carrying Amount			Fair Value
Cash and cash equivalents	$	3,036	$	3,036	$	2,700		$	2,700
Investments held for deferred compensation plan		354		354		321			321
Debt		165,324		133,839		141,658			107,282
Commodity hedges		777		777		(643	)		(643	)

The following methods and assumptions were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents – the carrying amount approximates fair value because of the short term maturity of these instruments.

The fair value of accounts receivable, accounts payable and accrued liabilities consistently approximate the carrying value due to the short term maturity of these instruments and are excluded from the table above.

Investments held for deferred compensation plan – this asset is carried at quoted market values and, as a result, the fair value is equivalent to the carrying amount.

Debt – the fair value of the Notes was determined using available market prices at the balance sheet date. The carrying value of the Company’s remaining long-term debt, including the current portion, approximates fair value based on the incremental borrowing rates currently available to the Company for loans with similar terms and maturity.

Commodity hedges – the fair value was determined using available market prices at the balance sheet date of commodity hedge contracts with similar characteristics and maturity dates.

13.

DERIVATIVE INSTRUMENTS

Accounting standards related to derivative instruments require that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and to measure those instruments at fair value. Additionally, the fair value adjustments will affect either stockholders’ equity as accumulated other comprehensive (loss) income or net (loss) income depending on whether the derivative instrument qualifies as a hedge for accounting purposes and, if so, the nature of the hedging activity.

To qualify for hedge accounting, the instruments must be effective in reducing the risk exposure that they are designed to hedge. For instruments that are associated with the hedge of an anticipated transaction, hedge effectiveness criteria also require that it be probable that the underlying transaction will occur. Instruments that meet established accounting criteria are formally designated as hedges at the inception of the contract. These criteria demonstrate that the derivative is expected to be highly effective at offsetting changes in fair value of the underlying exposure both at inception of the hedging relationship and on an ongoing basis. The assessment for effectiveness is documented at hedge inception and reviewed throughout the designated hedge period.

In the ordinary course of business, the Company may enter into a variety of contractual agreements, such as derivative financial instruments, primarily to manage and to hedge its exposure to currency exchange rate and interest rate risk. All derivatives are recognized on the balance sheet at fair value and are reported in either other current assets or accrued liabilities. For derivative instruments that are designated and qualify as cash flow hedges, the gain on the derivative is reported as a component of other comprehensive income (“OCI”) and reclassified from accumulated other comprehensive income (“AOCI”) into earnings when the hedged transaction affects earnings. If any derivatives are not designated as hedges, the gain or loss on the derivative would be recognized in current earnings.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

The Company has entered into lead hedge contracts to manage risk of the cost of lead. The agreements are with major financial institutions with maturities generally less than one year. These market instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying commodity hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the hedge transaction affects earnings.

Hedge accounting is discontinued when it is determined that a derivative instrument is not highly effective as a hedge. Hedge accounting is also discontinued when: (1) the derivative instrument expires, is sold, terminated or exercised; or is no longer designated as a hedge instrument because it is unlikely that a forecasted transaction will occur; (2) a hedged firm commitment no longer meets the definition of a firm commitment; or (3) management determines that designation of the derivative as a hedging instrument is no longer appropriate.

When hedge accounting is discontinued, the derivative instrument will be either terminated, continue to be carried on the balance sheet at fair value, or redesignated as the hedging instrument, if the relationship meets all applicable hedging criteria. Any asset or liability that was previously recorded as a result of recognizing the value of a firm commitment will be removed from the balance sheet and recognized as a gain or loss in current period earnings. Any gains or losses that were accumulated in other comprehensive loss from hedging a forecasted transaction will be recognized immediately in current period earnings, if it is probable that the forecasted transaction will not occur.

The Company had raw material commodity arrangements for 1,943 metric tons of base metals at October 31, 2010 and 3,103 metric tons at January 31, 2010.

The following table provides the fair value of the Company’s derivative contracts which include raw material commodity contracts.


	October 31, 2010		January 31, 2010		Balance Sheet Location
Derivatives designated as hedging instruments:

Commodity Hedges	$	777	$	—	Other current assets
Commodity Hedges		—		643	Other current liabilities

Total fair value	$	777	$	643

The Company estimates that $1,057 of net derivative gains in AOCI as of October 31, 2010 will be reclassified into earnings in the next twelve months.


Derivatives in Cash Flow Hedging Relationships:						Amount of Gain (Loss)
Derivatives in Cash Flow Hedging Relationships:	Amount of Gain (Loss) Recognized in OCI					Reclassified from AOCI into Income						Location of Gain (Loss) Reclassified from
	2010		2009			2010			2009			AOCI into Income
Three months ended October 31,
Commodity Hedges	$	714	$	(270	)	$	(523	)	$	(593	)	Cost of Sales


Nine months ended October 31,
Commodity Hedges	$	819	$	(102	)	$	(722	)	$	(2,336	)	Cost of Sales

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

14.

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:


	Nine months ended October 31,
	2010			2009
Balance at beginning of period	$	6,481		$	8,069
Current year provisions		3,259			4,237
Expenditures		(3,183	)		(6,115	)

Balance at end of period	$	6,557		$	6,191

As of October 31, 2010, accrued warranty obligations of $6,557 include $2,570 in current liabilities and $3,987 in other liabilities. As of January 31, 2010 accrued warranty obligations of $6,481 included $2,511 in current liabilities and $3,970 in other liabilities.

Certain warranty costs associated with the discontinued operations were not assumed by the buyer and are included in the table above. Expenditures include $8 and $1,656 related to discontinued operations in the first nine months of fiscal 2011 and 2010, respectively.

15.

PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

The components of net periodic benefit cost consisted of the following for the interim periods:


	Pension Benefits						Postretirement Benefits
	Three months ended October 31,						Three months ended October 31,
	2010			2009			2010			2009
Components of net periodic benefit cost:
Service cost	$	346		$	259		$	18		$	15
Interest cost		1,167			1,131			29			31
Expected return on plan assets		(1,029	)		(904	)		—			—
Amortization of prior service costs		—			—			(198	)		(201	)
Recognized actuarial loss		792			692			1			(1	)

Net periodic benefit cost	$	1,276		$	1,178		$	(150	)	$	(156	)


	Pension Benefits						Postretirement Benefits
	Nine months ended October 31,						Nine months ended October 31,
	2010			2009			2010			2009
Components of net periodic benefit cost:
Service cost	$	1,039		$	775		$	53		$	44
Interest cost		3,501			3,394			86			94
Expected return on plan assets		(3,086	)		(2,711	)		—			—
Amortization of prior service costs		—			—			(593	)		(603	)
Recognized actuarial loss		2,376			2,077			3			(1	)

Net periodic benefit cost	$	3,830		$	3,535		$	(451	)	$	(466	)

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

The Company made $3,087 of contributions to the plan in the nine months ended October, 31, 2010. The Company expects to make additional contributions of approximately $810 to its plan during fiscal year 2011. The Company also expects to make contributions totaling approximately $160 to the Company sponsored postretirement benefit plan during fiscal year 2011.

16.

RESTRUCTURING

On February 4, 2009, the Company announced plans to reduce labor costs by reducing its workforce by approximately 90 employees. The Company recorded severance accruals in the fourth quarter of fiscal year 2009 of $1,334 in its consolidated statement of operations as Selling, general and administrative expenses as a result of these reductions.

On September 14, 2010, the Company announced plans to close its Leola, Pennsylvania manufacturing facility and transfer production to other existing facilities. When complete, the closure plan will result in the elimination of approximately 85 positions. Closure costs incurred during the quarter ended October 31, 2010 include $305 in severance costs and $1,523 in fixed asset impairment charges. Additional closure costs of approximately $500 related to move costs and additional severance are expected to be recorded over the next nine to twelve months.

A reconciliation of the liability and related activity during the nine months ended October 31, 2010, is shown below.


	Balance at January 31, 2010		Provision Additions		Expenditures		Balance at October 31, 2010
Severance	$	76	$	305	$	59	$	322
Fixed asset impairment		—		1,523		1,523		—

Total	$	76	$	1,828	$	1,582	$	322

17.

FAIR VALUE MEASUREMENT

Assets and liabilities subject to fair value measurements primarily consist of the Company’s derivative contracts and investments related to the deferred compensation plan. The Company utilizes the market approach to measure fair value for the Company’s financial assets and liabilities. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The accounting guidance includes a fair value hierarchy that is intended to increase consistency and comparability in fair value measurements and related disclosures. The fair value hierarchy is based on inputs to valuation techniques that are used to measure fair value that are either observable or unobservable. Observable inputs reflect assumptions market participants would use in pricing an asset or liability based on market data obtained from independent sources while unobservable inputs reflect a reporting entity’s pricing based upon their own market assumptions. The fair value hierarchy consists of the following three levels:


Level 1		Inputs are quoted prices in active markets for identical assets or liabilities.

Level 2		Inputs are quoted prices for similar assets or liabilities in an active market, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable and market-corroborated inputs which are derived principally from or corroborated by observable market data.

Level 3		Inputs are derived from valuation techniques in which one or more significant inputs or value drivers are unobservable.

C&D TECHNOLOGIES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

(UNAUDITED)

The following table represents the Company’s assets and liabilities measured at fair value on a recurring basis as of October 31, 2010 and 2009 and the basis for those measurements:


	Total		Level 1		Level 2		Level 3
2010
Investments held in large mutual funds	$	354	$	354	$	—	$	—
Commodity hedge asset		777		—		777		—

2009
Investments held in large mutual funds	$	376	$	376	$	—	$	—
Commodity hedge asset		591		—		591		—

18.

GOODWILL AND ASSET IMPAIRMENTS

Goodwill represents the excess of the cost over the fair value of net assets acquired in business combinations. Goodwill is not amortized and is subject to impairment tests. Goodwill is tested for impairment on an annual basis or upon the occurrence of certain circumstances or events. Indicators of potential impairment might include a decline of quoted market prices of the Company’s stock in active markets and/or continuing operating losses. The Company 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 the Company’s overall market capitalization. The fair 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 impairment loss is calculated by comparing the implied fair value of the goodwill to the book value of the goodwill. If the book value of the goodwill exceeds the implied fair value of the goodwill, an impairment loss is recorded.

The Company’s implied fair value of goodwill is dependent upon significant judgments and estimates of future discounted cash flows and other factors. The Company’s estimates of future cash flows include assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. Estimated future cash flows are adjusted by an appropriate discount rate at the date of evaluation. The financial and credit market volatility directly impacts the fair value measurement through the weighted average cost of capital that the Company uses to determine the discount rate and through the stock price that is used to determine market capitalization. Therefore, changes in the stock price may also affect the amount of impairment recorded. Market capitalization is determined by multiplying the shares outstanding on the assessment date by the average market price of the Company’s common stock over a 30-day period before assessment date. The Company uses this 30-day duration to consider inherent market fluctuations that may affect any individual closing price. Market capitalization subsequent to the assessment date is also considered.

The Company performs the annual goodwill test in the fourth quarter of the fiscal year for its one reporting unit. Given the recent decrease in market capitalization and continuing operating losses, the Company tested for impairment on July 31, 2010. As a result, the Company first completed an assessment of its long-lived assets within the various asset groupings and determined there were no impairments.

The Company assessed the carrying value of its goodwill by using the two-step, fair-value based test, at July 31, 2010, in accordance with accounting guidance for goodwill and other intangible assets. The first step compared the fair value of the reporting unit to its carrying amount, including goodwill. As the carrying amount of the reporting unit exceeded its fair value, the second step was performed. The second step was performed and determined that the implied fair value of goodwill was in excess of the book value of goodwill, and in connection with this second step, the Company recorded a non-cash pre-tax impairment charge of $59,978 representing the full value of goodwill as of October 31, 2010. As discussed in Note 8, Income Taxes, as a result of the impairment charge the Company no longer has a deferred tax liability related to an indefinite lived intangible. As such, for the nine months ended October 31, 2010, the Company recorded an income tax benefit in the amount of $14,245 for the reversal of this deferred tax liability. As a result the goodwill impairment recorded, net of tax benefits for the nine months ended October 31, 2010 was $45,733.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

Item 2.

FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements we make. This report contains forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as “believe,” “expect,” “intend,” “estimate,” “anticipate,” “will,” “guidance,” “forecast,” “plan,” “outlook” and similar expressions which are predictions of or indicate future events or trends and discussions which do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and that we may not be able to realize. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

By their nature, forward-looking statements involve risk and uncertainties that could cause our actual results to differ materially from anticipated results. Examples of forward-looking statements include, but are not limited to:

•

projections of revenues, cost of raw materials, income or loss, earnings or loss per share, capital expenditures, growth prospects, dividends, the effect of currency translations, capital structure and other financial items;

•

statements of plans, strategies and objectives made by our management or board of directors, including the introduction of new products, cost savings initiatives or estimates or predictions of actions by customers, suppliers, competitors or regulating authorities;

•

statements of future economic performance; and

•

statements regarding the ability to obtain amendments under our debt agreements or to obtain additional funding in the future.

The Company’s actual results could differ materially from those anticipated in forward-looking statements as a result of a variety of factors, including those discussed in “Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2010, which should be read in conjunction with our Quarterly Report on Form 10-Q for our first and second quarters, ended April 30, 2010 and July 31, 2010 respectively. We caution you not to place undue reliance on these forward-looking statements. Further, factors that could cause actual results to differ materially from forward-looking statements include, but are not limited to, the following general factors:

•

our ability to remain a going concern, for which substantial doubt exists;

•

our ability to maintain and generate liquidity to meet our operating needs, as well as our ability to fund and implement business strategies, acquisitions and restructuring plans;

•

the fact that lead, a major constituent in most of our products, experiences significant fluctuations in market price and is a hazardous material that may give rise to costly environmental and safety claims;

•

our ability to keep our common stock listed on a national securities exchange;

•

our substantial debt and debt service requirements, which may restrict our operational and financial flexibility, as well as impose significant interest and financing costs;

•

restrictive loan covenants may impact our ability to operate our business and pursue business strategies;

•

the litigation proceedings to which we are subject, the results of which could have a material adverse effect on us and our business;

•

our exposure to fluctuations in interest rates on our variable debt;

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

(Dollars in thousands, except per share data)

•

the realization of the tax benefits of our net operating loss carry forwards, which is dependent upon future taxable income and which may also be subject to limitation as a result of possible changes in ownership of the Company;

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

•

our ability to successfully pass along increased material costs to our customers;

•

failure of our customers to renew supply agreements;

•

competitiveness of the battery markets in North America, Europe and Asia;

•

the substantial management time and financial and other resources needed for the consolidation and rationalization of acquired entities;

•

political, economic and social changes, or acts of terrorism or war;

•

successful collective bargaining with our unionized workforce;

•

risks involved in our foreign operations such as disruption of markets, changes in import and export laws, currency restrictions, currency exchange rate fluctuations and possible terrorist attacks against the United States interests;

•

we may have additional impairment charges;

•

our ability to acquire goods and services and/or fulfill labor needs at budgeted costs;

•

economic conditions or market changes in certain market sectors in which we conduct business;

•

uncertainty in financial markets;

•

our success or timing of new product development;

•

impact of any changes in our management;

•

changes in our product mix;

•

success of productivity initiatives, including rationalizations, relocations or consolidations;

•

costs of our compliance with environmental laws and regulations and resulting liabilities; and

•

our ability to protect our proprietary intellectual property and technology.

Results of Operations

Three Months Ended October 31, 2010 compared to Three Months Ended October 31, 2009

Within the following discussion, unless otherwise stated, “quarter” and “three-month” period” refer to the third quarter of our fiscal year 2011, ended October 31, 2010. All comparisons are with the corresponding period in the prior fiscal year, unless otherwise stated.

Net sales in the third quarter of fiscal year 2011 decreased $3,587 or 3.9% to $87,623 from $91,210 in the third quarter of fiscal year 2010. This decrease was primarily due to lower sales volume in the United States offset by higher lead pricing as well higher volumes in Europe and Asia. Average London Metal Exchange (“LME”) lead prices increased from an average of $0.72 per pound in the third quarter of fiscal year 2010 to $1.00 per pound in the third quarter of fiscal year 2011. The increase in lead prices and growth of the Company’s Asian business was offset by continued pressures on volumes as a result of the general economic environment, principally in the Company’s North American UPS markets.

Gross profit in the third quarter of fiscal year 2011 decreased $2,215 or 17.0% to $10,795 from $13,010 in the third quarter of fiscal year 2010. Margins as a percent of sales decreased from 14.3% in the third quarter of fiscal year 2010 to 12.3% in the third quarter of fiscal year 2011. Gross margin has decreased from over the prior year’s comparable quarter primarily due to lower sales volumes, higher lead costs which were not fully recovered due to pricing lags and a shift in product mix resulting in lower margin product sales. The Company continued to maintain discipline with respect to pricing to its customers, thereby favorably impacting margins in the face of decreased volumes in North America.; however, as a result of the pricing lags, was not able to fully recover the higher lead costs.

Selling, general and administrative expenses in the third quarter of fiscal year 2011 decreased $3,432 or 30.0% to $8,025 from $11,457. The decrease is primarily due to cost savings initiatives, warranty management and the impact of lower North America sales volumes. As a percentage of sales, selling, general and administrative expenses decreased to 9.2% in fiscal 2011 compared to 12.6% in the third quarter of fiscal 2010.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Research and development expenses in the third quarter of fiscal year 2011 decreased $640 or 30.4% to $1,468 from $2,108. As a percentage of sales, research and development expenses decreased from 2.3% in the third quarter of fiscal year 2010 to 1.7% in the third quarter of fiscal year 2011 due to both current fiscal year reimbursements of certain expenditures under government development programs and higher expenditures in the prior year to support investment in new technologies and China growth initiatives.

On September 14, 2010, the Company announced plans to close its Leola, Pennsylvania manufacturing facility and transfer production to other existing facilities. When complete, the closure plan will result in the elimination of approximately 85 positions. Restructuring charges incurred during the quarter ended October 31, 2010 include $305 in severance costs and $1,523 in fixed asset impairment charges.

Operating loss in the third quarter of fiscal year 2011 was $526 compared to $555 in the third quarter of fiscal year 2010. This change is mainly due to the restructuring charges for the announced closure of the Leola plant, decreases in gross profit compared to the third quarter of fiscal 2010, offset by the reduction in selling, general and administrative and research and development expenses, as discussed above.

Analysis of Change in Operating Income for the third quarter of fiscal year 2011 vs. fiscal year 2010.


Fiscal Year 2011 vs. 2010
Operating Loss Three months ended October 31, 2009	$	(555	)
Lead, net		(2,206	)
Price / Volume / Mix		48
Warranty		1,176
Pension		(98	)
Restructuring costs related to Leola		(1,828	)
Decrease in research and development costs		640
Decrease in selling, general & administrative costs		2,256
Other		41

Operating Loss Three months ended October 31, 2010	$	(526	)

Interest expense, net, in the third quarter of fiscal year 2011 increased $1,197 or 39.0% to $4,266 from $3,069 in the third quarter of fiscal year 2010, primarily due to higher average debt balances, the addition of the term loan tranche of $20,000 and significantly higher average interest rates in the third quarter of fiscal 2011 (primarily due to the term loan tranche) as compared to the third quarter for fiscal 2010. Also, interest expense includes $1,012 and $896 in fiscal years 2011 and 2010, respectively, for non-cash amortization of debt discount on the 2005 Notes (see Note 6).

Other expense was $1,318 in the third quarter of fiscal year 2011 compared to other income of $23 in the third quarter of fiscal year 2010. The change was primarily due to non-capitalizable expenses of $1,256 related to the debt for equity exchange discussed in Note 3.

Income tax expense of $161 was recorded in the third quarter of fiscal year 2011, compared to an income tax benefit of $120 in the third quarter of fiscal year 2010. Tax expense in the third quarter of fiscal year 2010 was primarily due to foreign taxes on profits which were not offset by losses for which no tax benefit is recognized

Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate may be used if it provides a better estimate of income tax expense. Due to the Company’s losses in the US and the full valuation allowance in the US, it is the Company’s position that the discrete method provides a more accurate estimate of income tax expense for domestic taxes and therefore domestic income tax expense for the current quarter has been presented using that method. Taxes on international earnings continue to be calculated using an estimate of the effective tax rate for the full year

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Noncontrolling interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by the Company. Net income attributable to Noncontrolling interest was $174 in fiscal year 2011 compared to a net loss of $41 in fiscal year 2010, reflecting improved performance and growth of our Asian operations.

As a result of the above, net loss attributable to C&D Technologies, Inc. of $6,445 was recorded in the third quarter of fiscal year 2011 as compared to $3,440 in the comparable period in the prior year. Basic losses per share were $0.24 and $0.13 and diluted losses per share were $0.25 and $0.13 in the third quarter of fiscal year 2011 and 2010, respectively.

Comprehensive loss attributable to C&D Technologies, Inc. increased by $2,079 in the third quarter of fiscal year 2011 to $4,200 from $2,121 in the third quarter of fiscal year 2010. This increase was due primarily to the increase in net loss attributable to C&D from $3,440 in the third quarter of fiscal 2010 to $6,445 in the third quarter of fiscal year 2011 partially offset by an unrealized gain on derivative instruments of $1,238 in the third quarter of fiscal year 2011 compared to $1,009 in third quarter of fiscal year 2010, an increase in pension adjustments to $590 in fiscal year 2011 compared to $269 in fiscal year 2010 and an increase in foreign currency translation adjustments to $592 in fiscal year 2011 from $48 in fiscal year 2010.

Nine Months Ended October 31, 2010, compared to Nine months Ended October 31, 2009

Net sales for the nine months ended October 31, 2010 increased $8,852 or 3.6% to $256,161 from $247,309 in the nine months ended October 31, 2009. This increase was primarily due to contractual price increases resulting from increases in the trailing price of lead compared to the same period in the prior fiscal year. Average London Metal Exchange (“LME”) prices increased from an average of $0.75 per pound in the nine months ended October 31, 2009 to $0.94 per pound in the nine months ended October 31, 2010. The increase in lead prices and growth of the Company’s Asia business was partially offset by continued pressures on volumes as a result of the general economic environment, principally in its North American UPS markets.

Gross profit for the nine months ended October 31, 2010 increased $3,448, or 12.2%, to $31,806 from $28,358 in the nine months ended October 31, 2009. Gross margins increased to 12.4% from 11.5% in prior year. Gross margin has improved over the prior year primarily due to cost reductions initiatives and increased pricing focus and discipline. In the prior fiscal year, lead prices increased at a rapid rate, impeding the Company’s ability to recover such price increases from its customers in a timely manner. The Company’s ability to increase price is often determined contractually. In the current nine month period, lead prices were overall less volatile as compared to the same period in the prior fiscal year, resulting in improved lead price recovery. Further, the Company experienced a temporary employee disruption at its Shanghai, China facility for a period of approximately three weeks during the second quarter of fiscal year 2011, which negatively impacted gross profit.

Selling, general and administrative expenses for the nine months ended October 31, 2010, decreased $4,354 or 14.1% to $26,456 from $30,810. The decrease is primarily due to lower warranty costs of $978 and reduced spending on other selling, general and administrative expenses of $3,376. As a percentage of sales, selling, general and administrative expenses were 10.3% and 12.4% in the nine months ended October 31, 2010 and 2009, respectively.

Research and development expenses for the nine months ended October 31, 2010 decreased $940 or 16.3% to $4,845 from $5,785 in the nine months ended October 31, 2009. As a percentage of sales, research and development expenses decreased from 2.3% in the nine months ended October 31, 2009 to 1.9% in the nine months ended October 31, 2010 due to both current fiscal year reimbursements of certain expenditures under government development programs and partially offset by higher expenditures to support investment in new technologies and China growth initiatives in the prior year.

Goodwill impairment charges were $59,978 for the nine months ended October 31, 2010, as compared to zero for the nine months ended October 31, 2009. The Company performs the annual goodwill impairment test in the fourth quarter of the fiscal year for its one reporting unit. Given decreases in market capitalization and continuing operating losses, the Company tested for impairment on an interim basis of July 31, 2010.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

The Company assessed the carrying value of its goodwill by using the two-step, fair-value based test, at July 31, 2010, in accordance with accounting guidance for goodwill and other intangible assets. The first step compared the fair value of its reporting unit to its carrying amount, including goodwill. As the carrying amount of the reporting unit exceeded its fair value, the second step was performed. The second step was performed and determined that the implied fair value of goodwill was in excess of the book value of goodwill, and in connection with this second step, the Company recorded a non-cash pre-tax goodwill impairment charge of $59,978 representing the full value of goodwill in the second quarter of fiscal 2011. Also, as discussed below, as a result of the impairment charge the Company no longer has a deferred tax liability related to an indefinite lived intangible. As such, for the nine months ended October 31, 2010, we recorded an income tax benefit in the amount of $14,245 for the reversal of this deferred tax liability.

On September 14, 2010, the Company announced plans to close its Leola, Pennsylvania manufacturing facility and transfer production to other existing facilities. When complete, the closure plan will result in the elimination of approximately 85 positions. Restructuring charges incurred during the quarter ended October 31, 2010 include $305 in severance costs and $1,523 in fixed asset impairment charges. Additional closure costs of approximately $500 related to move costs and additional severance are expected to be recorded over the next nine to twelve months.

Operating loss for the nine months ended October 31, 2010 was $61,301 compared to $8,237 in the nine months ended October 31, 2009. The increased loss is primarily due to the goodwill impairment, the restructuring charges for the announced closure of the Leola plant partially offset by increased gross profits that resulted from pricing actions, cost reduction initiatives, lower selling, general and administrative costs and lower research and development expenses, as discussed above.

Analysis of Change in Operating Loss for the nine months ended October 31, 2010 vs. the nine months ended October 31, 2009


Fiscal Year 2011 vs. 2010
Operating Loss Nine months ended October 31, 2009	$	(8,237	)
Lead, net		(19,213	)
Price / Volume / Mix		23,878
Goodwill impairment		(59,978	)
Warranty		978
Pension		(295	)
Restructuring costs related to Leola		(1,828	)
Decrease in research and development costs		940
Decrease in selling, general & administrative costs		3,376
Other		(922	)

Operating Loss Nine months ended October 31, 2010	$	(61,301	)

Interest expense, net, for the nine months ended October 31, 2010, increased $2,904 or 32.6% to $11,813 from $8,909 in the nine months ended October 31, 2009, primarily due to higher average debt balances and higher average interest rates in fiscal 2011 compared fiscal 2010 (primarily due to the term loan tranche). Also, interest expense includes $2,946 and $2,607 in fiscal years 2011 and 2010, respectively, for non-cash amortization of debt discount on the 2005 Notes (see Note 6).

Other expense was $2,728 for the nine months ended October 31, 2010 compared to other income of $57 for the nine months ended October 31, 2009. The change was primarily due to recording of approximately $900 to increase our environmental reserves related to previously closed and/or disposed facilities, non-capitalizable expenses of $1,256 related to the debt for equity exchange discussed in Note 3 and a foreign exchange gain of $58 in the current fiscal year compared to $154 in the prior fiscal year.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Income tax benefit of $13,239 was recorded the nine months ended October 31, 2010, compared to income tax expense of $2,052 the nine months ended October 31, 2009. Tax expense for the nine months ended October 31, 2009 was primarily due to non-cash deferred tax expenses related to the amortization of intangible assets and foreign taxes on profits which were not offset by losses for which no tax benefit is recognized. Tax benefit for the nine months ended October 31, 2010 is primarily a result of the goodwill impairment charge discussed above, whereby the Company no longer has a deferred tax liability related to an indefinite lived intangible. As such, for the nine months ended October 31, 2010, the Company recorded an income tax benefit in the amount of $14,245 for the reversal of this deferred tax liability, offset by foreign tax expense on profits which were not offset by losses.

Generally, accounting standards require companies to provide for income taxes each quarter based on their estimate of the effective tax rate for the full year. The authoritative guidance for accounting for income taxes allows the use of the discrete method when, in certain situations, the actual interim period effective tax rate may be used if it provides a better estimate of income tax expense. Due to the Company’s losses in the US, the full valuation allowance in the US, and the existence of a deferred tax liability related to an indefinite lived intangible, it is its position that the discrete method provides a more accurate estimate of income tax expense for domestic taxes and therefore domestic income tax expense for the current quarter has been presented using that method. Taxes on international earnings continue to be calculated using an estimate of the effective tax rate for the full year.

Noncontrolling interest reflects the 33% ownership interest in the joint venture battery business located in Shanghai, China, that is not owned by the Company. In the nine months ended October 31, 2010, the joint venture had a net income attributable to noncontrolling interest of $126 compared to a net loss of $327 in the nine months ended October 31, 2009. The improvement is reflected by increasing revenue and related improved performance of the Company’s China operations, despite the negative impact of temporary employee disruptions experienced in June 2010.

As a result of the above, net loss attributable to C&D of $62,729 was recorded compared to $18,814 in the prior year. Basic and diluted losses per share were $2.38 and $0.72 in the first nine months of fiscal year 2011 and 2010, respectively.

Comprehensive loss attributable to C&D Technologies, Inc. increased by $45,200 in the first nine months of fiscal year 2011 to $58,855 for the nine months ended October 31, 2010 from $13,655 in the nine months ended October 31, 2009. This increase was primarily due to the net loss attributable to C&D Technologies of $62,729 in the nine months ended October 31, 2010 as compared to $18,814 in the comparable period at the previous fiscal year, an unrealized gain on derivative instruments of $1,542 in the first nine months of fiscal year 2011 compared to $4,103 in first nine months of fiscal year 2010 partially offset by an increase in the pension liability adjustment to $1,770 in fiscal year 2011 from $808 in fiscal year 2010 and an increase in foreign currency translation adjustments to $827 in fiscal year 2011 from $264 in fiscal year 2010.

Liquidity and Capital Resources

Net cash used in operating activities was $12,378 for the nine months ended October 31, 2010, as compared to $757 in the comparable period of the prior fiscal year. This is primarily the result of a significant increase in cash used to pay down accounts payable of $7,444 compared to $112 in the prior year, an increase in accounts receivable of $7,595 compared to $856 in the prior year, an increase in accrued liabilities of $2,517 compared to $11,536 in the prior year and a decrease in the book overdraft to $2,370 compared to an increase of $2,387 in the prior year. These changes were partially offset by a decrease of inventory of $3,013 in the current fiscal year compared to an increase in inventory of $9,631 in the prior fiscal year and an increase in other current liabilities of $5,462 compared to $491 in the prior fiscal year. Other current liabilities have increased primarily due to receipt of an advance payment (deferred revenue) of approximately $4,500 for a large order in China. While the net loss increased significantly to $62,603 from $19,141, this increase was primarily the result of non-cash charges for goodwill impairments, net of taxes, of $45,733 and fixed asset impairment charges of $1,523. Excluding those non-cash charges, the net loss would have been approximately $3,800 lower in the nine months ended October 31,

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

2010 compared to the comparable period in the prior year. The reduction in accounts payable and accrued liabilities for the nine months ended October 31, 2010 was attributable principally to the trade credit tightening the Company has experienced. The increase in accounts receivable is principally the result of customer mix and growth in Asia where terms are often longer. The reduction in inventory since January 31, 2010 primarily reflects operational improvements.

Net cash used in investing activities was $5,494 in the first nine months of fiscal year 2011 as compared to $9,707 in the first nine months of fiscal year 2010. In fiscal year 2011, the Company had purchases of property, plant and equipment of $5,501 compared with $10,302 in the prior year. Capital expenditures have been principally in support of its cost reduction activities and new product development. Fiscal 2011 capital expenditures have been impacted by the Company’s management of liquidity. In addition, there was a reduction in restricted cash of $7 related to commodity hedging activities in the first nine months of fiscal 2011 compared to $577 in the prior fiscal year.

Net cash provided by financing activities increased $8,954 to $18,091 for the nine months ended October 31, 2010, as compared to $9,137 in the comparable period of the prior fiscal year. Proceeds from net borrowings under the Company’s Credit Facility, offset by debt acquisition costs, were the primary sources of cash provided by financing activities in fiscal year 2011. The primary purpose of the increased borrowings in the current fiscal year was to fund the cash used in operations and to fund capital expenditures.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Company entered into a restructuring support agreement with certain holders of the 2005 Notes and 2006 Notes (see Note 3 to our financial statements included in Item 1 of this Quarterly Report on Form 10-Q). The Company also continues to be engaged in active discussions with lenders under its Credit Facility regarding a restructuring of its capital structure. On October 21, 2010, the Company filed a Registration Statement on Form S-4 which, as amended on November 30, 2010, has been declared effective and the Company filed a definitive Proxy Statement on November 30, 2010 providing notice of a special meeting of the stockholders to be held on December 13, 2010. The purpose of the special meeting is to vote on proposals included in the Shareholder Exchange Consent as more fully described in the Company’s definitive proxy statement filed with the SEC on November 30, 2010, including, without limitation, the approval of exchange offers of the Company’s Common Stock in exchange for any and all of the 2005 Notes and the 2006 Notes, respectively. The exchange offers provide an out-of-court method of restructuring the Company’s indebtedness to address imminent debt repayment obligations and liquidity issues. If the exchange offers are not consummated, as a result of any of the conditions thereto not being satisfied, the Company will be unable to repay its current indebtedness from cash on hand or other assets. Therefore, the Company is simultaneously soliciting holders of the Notes and the existing holders of Common Stock to approve a prepackaged plan of reorganization as an alternative to the exchange offer. There can be no assurance that the Company will be able to consummate either the Shareholder Exchange Consent or the prepackaged plan or at all. The Company may be unable to maintain adequate liquidity even upon acceptance of these plans and, as a result, the Company may be required to seek protection pursuant to a voluntary bankruptcy filing under Chapter 11.

The Company’s cumulative losses, substantial indebtedness and likely future inability to comply with certain covenants in the agreements governing its indebtedness, including among others, covenants related to continued listing on a national automated stock exchange and future EBITDA requirements, in addition to its current liquidity situation, raise substantial doubt as to the Company’s ability to continue as a going concern for a period longer than twelve months from January 31, 2010. The Company’s ability to continue as a going concern depends on, among other factors, a return to profitable operations, a successful restructuring of the 2005 Notes and the 2006 Notes, and possible amendment of future EBITDA requirements under the Company’s Credit Facility. Until the possible completion of the financial and strategic alternatives process, the Company’s future remains uncertain, and there can be no assurance that its efforts in this regard will be successful.

On November 1, 2010, the Company announced that it has elected not to make the semi-annual interest payment due on its 2005 Notes on November 1, 2010. The decision was made in light of the Company’s October 21, 2010 announcement of its plan to implement a restructuring of its indebtedness (the “Restructuring”) pursuant to offers to separately exchange (the “Exchange Offer”) all of its outstanding 2005 Notes and 2006 Notes for up to 95% of the shares of the Company’s common stock, in the aggregate, which provides that if the Exchange Offer is consummated, all outstanding principal of, plus accrued unpaid interest on, properly tendered Notes will be included in the calculation of each holder’s pro rata share of the Company’s common stock to be issued to holders of Notes. See Note 3 of our financial statements included in this Quarterly Report on Form 10-Q for additional information regarding the Restructuring and Exchange Offer.

A semi-annual interest payment on the 2006 Notes became due on November 15, 2010. The Company further elected not to pay interest due on the 2006 Notes. The consequences of failure to pay interest under the indenture governing the 2006 Notes are substantially the same as those under the indenture governing the 2005 Notes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Due to the non-payment of interest on the 2005 and 2006 Notes, amounts borrowed under the Credit Facility and term loan tranche (See note 7 of our financial statements included in this Quarterly Report on Form 10-Q) are likely to be in default. On November 30, 2010 the loan holder, Wells Fargo Bank, waived the default through December 31, 2010. As a result of this default, the Company has classified these loan amounts as current liabilities as of October 31, 2010.

The Company’s credit facility bank is currently meeting all of their lending obligations. The current Credit Facility does not expire until June 6, 2013. As of October 31, 2010, the maximum availability calculated under the borrowing base was approximately $62,571 (net of the fixed charge ratio adjustment amount discussed above), of which $39,125 was funded (including $20,000 from the term loan tranche), and $5,417 was utilized for letters of credit. As provided under the Credit Facility, excess borrowing capacity is for future working capital needs and general corporate purposes.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Contractual Obligations and Commercial Commitments

The following tables summarize the Company’s contractual obligations and commercial commitments as of October 31, 2010:


	Payments Due by Period
Contractual Obligations:	Total		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
Debt*	$	174,969	$	166,684	$	4,470	$	3,815	$	—
Interest payable on notes*		15,936		14,293		917		726		—
Operating leases		7,377		1,357		2,412		2,004		1,604
Projected – lead purchases**		73,000		63,000		10,000		—		—
Equipment		260		260		—		—		—
Capital Leases		166		83		65		18		—


Total contractual cash obligations	$	271,708	$	245,677	$	17,864	$	6,563	$	1,604

These amounts assume that the convertible notes will mature in one year or less (see Note 7 - Debt), assume the Credit Facility including the term loan tranche, at October 31, 2010, will be paid in one year or less, include interest on the Credit Facility and convertible notes for one year and calculated at the same rate and outstanding balance at October 31, 2010, and assume the China debt at October 31, 2010 will be paid through fiscal year 2015, with interest calculated at the rate existing at October 31, 2010.

**	Amounts are based on the cash price of lead at October 31, 2010 which was $1.11.


	Amount of Commitment Expiration per Period
Other Commercial Commitments	Total Amount Committed		Less than 1 year		1 - 3 years		4 - 5 years		After 5 years
Standby letters of credit	$	5,417	$	5,355	$	62	$	—	$	—

Total commercial commitments	$	5,417	$	5,355	$	62	$	—	$	—

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (continued)

(Dollars in thousands, except per share data)

Item 3. Quantitative and Qualitative Disclosure about Market Risk

The Company is exposed to various market risks. The primary financial risks include fluctuations in interest rates, certain raw material commodity prices, and changes in currency exchange rates. The Company manages these risks through normal operating and financing activities and when appropriate through the use of derivative instruments. It does not invest in derivative instruments for speculative purposes, but enters into hedging arrangements in order to reduce its exposure to fluctuations in interest rates, the price of lead, as well as to fluctuations in exchange rates.

On occasion, the Company has entered into non-deliverable forward contracts with certain financial counterparties to hedge its exposure to the fluctuations in the price of lead, the primary raw material component used by the Company. The Company employs hedge accounting in the treatment of these contracts. Changes in the value of the contracts are marked to market each month and the gains and losses are recorded in other comprehensive loss until they are released to the income statement through cost of goods sold in the same period as is the hedged item (lead).

Additional disclosure regarding various market risks are set forth in Part I, Item 1A – “Risk Factors” of the Company’s Fiscal Year 2010 Annual Report on Form 10-K, filed with the SEC on April 20, 2010, which should be read in conjunction with the Company’s Quarterly Reports on Form 10-Q for the periods ended April 30, 2010 and July 31, 2010 and this Quarterly Report on Form 10-Q.

Item 4. Controls and Procedures:

Management, with the participation of its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s 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, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by it in the reports that it files or submits under the Exchange Act and include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding timely disclosures.

Internal Control over Financial Reporting:

There have not been any changes in the Company’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, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities:


Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Publicly Announced Plans or Programs		Maximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
August 1 – August 31, 2010		—	$	—		—		1,000,000
September 1 – September 30, 2010		—	$	—		—		1,000,000
October 1 – October 31, 2010		—	$	—		—		1,000,000

Total		—				—

Restrictions on Dividends and Treasury Stock Purchases:

Our Credit Facility limits restricted payments including dividends and Treasury Stock purchases to no more than $250,000 for Treasury Stock in any one calendar year and $1,750,000 for dividends for any one calendar year subject to adjustments of up to $400,000 per year in the case of the conversion of debt to stock per the terms of our convertible offerings. These restricted payments can only occur with prior notice to the lenders and provided that there is a minimum of $30,000,000 in excess availability for a period of thirty days prior to the dividend. The Company may declare and pay a dividend provided these conditions are met and there does not exist an event of default. No dividends have been declared during the first nine months of fiscal year 2011.

Item 3. Defaults upon Senior Securities

On November 1, 2010, the Company did not remit the interest payment of $1,968,750 to holders of the 5.25 % Convertible Senior Notes 2005 due 2025. The payment was not made within the 30 day cure period and, as a result, the Company is in default for the amount of the interest payment due.

Item 6. Exhibits.

Incorporated by Reference

Exhibit
Number

Exhibit Description

Form

Date

Exhibit
Number

Filed
Herewith

10.1

Dealer Manager Agreement, dated October 20, 2010, by and between C&D Technologies, Inc. and Macquarie Capital (USA) Inc.

8-K

October 21, 2010

10.1

12.1

Computation of Ratio of Earnings to Fixed Charges

31.1

Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2

Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1

Certification of the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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 10, 2010		By: /s/ Jeffrey A. Graves
		Jeffrey A. Graves
		President, Chief Executive Officer and Director (Principal Executive Officer)

December 10, 2010
		By: /s/ Ian J. Harvie
		Ian J. Harvie
		Senior Vice President Finance and Chief Financial Officer (Principal Financial and Accounting Officer)

EXHIBIT INDEX


10.1		Dealer Manager Agreement, dated October 20, 2010, by and between C&D Technologies, Inc. and Macquarie Capital (USA) Inc.

12.1		Computation of Ratio of Earnings to Fixed Charges

31.1		Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of the Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of the President and Chief Executive Officer and Senior Vice President and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002