EnerSys - Quarter Report: 2019 December (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended December 29, 2019
☐ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-32253
EnerSys
(Exact name of registrant as specified in its charter)
Delaware | 23-3058564 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
2366 Bernville Road
Reading, Pennsylvania 19605
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 610-208-1991
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, $0.01 par value per share | ENS | New York Stock Exchange | ||
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. ý Yes ¨ 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 ý No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large Accelerated Filer | ý | Accelerated filer | ¨ | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☐ | |||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). ☐ Yes ý No.
Common Stock outstanding at January 31, 2020: 42,308,899 shares
1
ENERSYS
INDEX – FORM 10-Q
Page | |||
Item 1. | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 4. | |||
Item 6. | |||
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PART I – | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
ENERSYS
Consolidated Condensed Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Data)
December 29, 2019 | March 31, 2019 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 272,510 | $ | 299,212 | ||||
Accounts receivable, net of allowance for doubtful accounts: December 29, 2019 - $13,887; March 31, 2019 - $10,813 | 578,440 | 624,136 | ||||||
Inventories, net | 557,513 | 503,869 | ||||||
Prepaid and other current assets | 113,982 | 109,431 | ||||||
Total current assets | 1,522,445 | 1,536,648 | ||||||
Property, plant, and equipment, net | 473,030 | 409,439 | ||||||
Goodwill | 679,051 | 656,399 | ||||||
Other intangible assets, net | 522,356 | 462,316 | ||||||
Deferred taxes | 56,368 | 40,466 | ||||||
Other assets | 88,181 | 12,925 | ||||||
Total assets | $ | 3,341,431 | $ | 3,118,193 | ||||
Liabilities and Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 36,727 | $ | 54,490 | ||||
Accounts payable | 278,821 | 292,449 | ||||||
Accrued expenses | 278,467 | 265,994 | ||||||
Total current liabilities | 594,015 | 612,933 | ||||||
Long-term debt, net of unamortized debt issuance costs | 1,088,254 | 971,756 | ||||||
Deferred taxes | 75,231 | 82,112 | ||||||
Other liabilities | 214,256 | 165,375 | ||||||
Total liabilities | 1,971,756 | 1,832,176 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 29, 2019 and at March 31, 2019 | — | — | ||||||
Common Stock, 0.01 par value per share, 135,000,000 shares authorized, 55,098,313 shares issued and 42,298,716 shares outstanding at December 29, 2019; 54,848,523 shares issued and 42,620,750 shares outstanding at March 31, 2019 | 551 | 548 | ||||||
Additional paid-in capital | 522,146 | 512,696 | ||||||
Treasury stock at cost, 12,799,597 shares held as of December 29, 2019 and 12,227,773 shares held as of March 31, 2019 | (564,877 | ) | (530,760 | ) | ||||
Retained earnings | 1,566,115 | 1,450,325 | ||||||
Contra equity - indemnification receivable | (6,607 | ) | (7,840 | ) | ||||
Accumulated other comprehensive loss | (151,233 | ) | (142,682 | ) | ||||
Total EnerSys stockholders’ equity | 1,366,095 | 1,282,287 | ||||||
Nonredeemable noncontrolling interests | 3,580 | 3,730 | ||||||
Total equity | 1,369,675 | 1,286,017 | ||||||
Total liabilities and equity | $ | 3,341,431 | $ | 3,118,193 | ||||
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ENERSYS
Consolidated Condensed Statements of Income (Unaudited)
(In Thousands, Except Share and Per Share Data)
Quarter ended | ||||||||
December 29, 2019 | December 30, 2018 | |||||||
Net sales | $ | 763,698 | $ | 680,022 | ||||
Cost of goods sold | 574,612 | 511,729 | ||||||
Inventory step up to fair value relating to acquisitions | 3,845 | 3,747 | ||||||
Gross profit | 185,241 | 164,546 | ||||||
Operating expenses | 132,740 | 112,046 | ||||||
Restructuring, exit and other charges | 9,417 | 5,392 | ||||||
Legal proceedings settlement income | — | (2,843 | ) | |||||
Operating earnings | 43,084 | 49,951 | ||||||
Interest expense | 11,089 | 7,082 | ||||||
Other (income) expense, net | (606 | ) | (55 | ) | ||||
Earnings before income taxes | 32,601 | 42,924 | ||||||
Income tax expense (benefit) | 5,296 | (5,690 | ) | |||||
Net earnings | 27,305 | 48,614 | ||||||
Net earnings attributable to noncontrolling interests | — | 197 | ||||||
Net earnings attributable to EnerSys stockholders | $ | 27,305 | $ | 48,417 | ||||
Net earnings per common share attributable to EnerSys stockholders: | ||||||||
Basic | $ | 0.65 | $ | 1.14 | ||||
Diluted | $ | 0.64 | $ | 1.12 | ||||
Dividends per common share | $ | 0.175 | $ | 0.175 | ||||
Weighted-average number of common shares outstanding: | ||||||||
Basic | 42,286,641 | 42,337,459 | ||||||
Diluted | 42,838,969 | 43,102,598 | ||||||
See accompanying notes.
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ENERSYS
Consolidated Condensed Statements of Income (Unaudited)
(In Thousands, Except Share and Per Share Data)
Nine Months Ended | ||||||||
December 29, 2019 | December 30, 2018 | |||||||
Net sales | $ | 2,306,065 | $ | 2,011,414 | ||||
Cost of goods sold | 1,718,150 | 1,516,381 | ||||||
Inventory step up to fair value relating to acquisitions and exit activities | 3,845 | 4,273 | ||||||
Gross profit | 584,070 | 490,760 | ||||||
Operating expenses | 395,869 | 307,864 | ||||||
Restructuring, exit and other charges | 18,071 | 8,252 | ||||||
Legal proceedings settlement income | — | (2,843 | ) | |||||
Operating earnings | 170,130 | 177,487 | ||||||
Interest expense | 32,084 | 20,011 | ||||||
Other (income) expense, net | (1,559 | ) | (1,052 | ) | ||||
Earnings before income taxes | 139,605 | 158,528 | ||||||
Income tax expense | 966 | 16,447 | ||||||
Net earnings | 138,639 | 142,081 | ||||||
Net earnings attributable to noncontrolling interests | — | 380 | ||||||
Net earnings attributable to EnerSys stockholders | $ | 138,639 | $ | 141,701 | ||||
Net earnings per common share attributable to EnerSys stockholders: | ||||||||
Basic | $ | 3.27 | $ | 3.36 | ||||
Diluted | $ | 3.23 | $ | 3.31 | ||||
Dividends per common share | $ | 0.525 | $ | 0.525 | ||||
Weighted-average number of common shares outstanding: | ||||||||
Basic | 42,445,006 | 42,161,163 | ||||||
Diluted | 42,888,495 | 42,816,762 | ||||||
See accompanying notes.
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ENERSYS
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
(In Thousands)
Quarter ended | Nine months ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Net earnings | $ | 27,305 | $ | 48,614 | $ | 138,639 | $ | 142,081 | ||||||||
Other comprehensive (loss) income: | ||||||||||||||||
Net unrealized (loss) gain on derivative instruments, net of tax | (3,409 | ) | 4,732 | (2,152 | ) | (442 | ) | |||||||||
Pension funded status adjustment, net of tax | 220 | 204 | 694 | 804 | ||||||||||||
Foreign currency translation adjustment | 28,167 | (15,777 | ) | (7,243 | ) | (102,090 | ) | |||||||||
Total other comprehensive gain (loss), net of tax | 24,978 | (10,841 | ) | (8,701 | ) | (101,728 | ) | |||||||||
Total comprehensive income | 52,283 | 37,773 | 129,938 | 40,353 | ||||||||||||
Comprehensive gain (loss) attributable to noncontrolling interests | 64 | 281 | (150 | ) | (258 | ) | ||||||||||
Comprehensive income attributable to EnerSys stockholders | $ | 52,219 | $ | 37,492 | $ | 130,088 | $ | 40,611 | ||||||||
See accompanying notes.
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Nine months ended | ||||||||
December 29, 2019 | December 30, 2018 | |||||||
Cash flows from operating activities | ||||||||
Net earnings | $ | 138,639 | $ | 142,081 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 65,788 | 42,511 | ||||||
Write-off of assets relating to exit activities and other | 10,024 | 4,498 | ||||||
Derivatives not designated in hedging relationships: | ||||||||
Net losses | 517 | 390 | ||||||
Cash settlements | (599 | ) | (865 | ) | ||||
Provision for doubtful accounts | 2,922 | 849 | ||||||
Deferred income taxes | (20,948 | ) | (222 | ) | ||||
Non-cash interest expense | 1,160 | 953 | ||||||
Stock-based compensation | 14,759 | 14,587 | ||||||
Gain on disposal of property, plant, and equipment | (112 | ) | (157 | ) | ||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable | 58,779 | 21,860 | ||||||
Inventories | (24,888 | ) | (36,440 | ) | ||||
Prepaid and other current assets | (6,977 | ) | (12,507 | ) | ||||
Other assets | 3,686 | (1,260 | ) | |||||
Accounts payable | (44,885 | ) | (649 | ) | ||||
Accrued expenses | (7,295 | ) | 14,306 | |||||
Other liabilities | (14,738 | ) | (23,511 | ) | ||||
Net cash provided by operating activities | 175,832 | 166,424 | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | (60,936 | ) | (52,672 | ) | ||||
Purchase of businesses | (176,548 | ) | (650,000 | ) | ||||
Insurance proceeds relating to property, plant and equipment | 403 | — | ||||||
Proceeds from disposal of property, plant, and equipment | 2,718 | 549 | ||||||
Net cash used in investing activities | (234,363 | ) | (702,123 | ) | ||||
Cash flows from financing activities | ||||||||
Net repayments on short-term debt | (17,632 | ) | (13,564 | ) | ||||
Proceeds from 2017 Revolver borrowings | 326,700 | 454,500 | ||||||
Proceeds from 2027 Notes | 300,000 | — | ||||||
Repayments of 2017 Revolver borrowings | (497,700 | ) | (246,000 | ) | ||||
Proceeds from 2017 Term Loan | — | 299,105 | ||||||
Repayments of 2017 Term Loan | (11,276 | ) | — | |||||
Debt issuance costs | (4,607 | ) | (1,235 | ) | ||||
Option proceeds | 505 | 9,044 | ||||||
Payment of taxes related to net share settlement of equity awards | (6,281 | ) | (3,384 | ) | ||||
Purchase of treasury stock | (34,561 | ) | (25,000 | ) | ||||
Dividends paid to stockholders | (22,299 | ) | (22,280 | ) | ||||
Other | 586 | 29 | ||||||
Net cash provided by financing activities | 33,435 | 451,215 | ||||||
Effect of exchange rate changes on cash and cash equivalents | (1,606 | ) | (40,476 | ) | ||||
Net decrease in cash and cash equivalents | (26,702 | ) | (124,960 | ) | ||||
Cash and cash equivalents at beginning of period | 299,212 | 522,118 | ||||||
Cash and cash equivalents at end of period | $ | 272,510 | $ | 397,158 | ||||
Supplemental disclosures: | ||||||||
Non-cash investing and financing activities: | ||||||||
Common stock issued as partial consideration for Alpha acquisition | $ | — | $ | 100,000 | ||||
See accompanying notes.
7
ENERSYS
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
(In Thousands, Except Share and Per Share Data)
1. Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included, unless otherwise disclosed. Operating results for the three months and nine months ended December 29, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.
The Consolidated Condensed Balance Sheet at March 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
The financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s 2019 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 29, 2019 (the “2019 Annual Report”).
EnerSys (the “Company,”) reports interim financial information for 13-week periods, except for the first quarter, which always begins on April 1, and the fourth quarter, which always ends on March 31. The four quarters in fiscal 2020 end on June 30, 2019, September 29, 2019, December 29, 2019, and March 31, 2020, respectively. The four quarters in fiscal 2019 ended on July 1, 2018, September 30, 2018, December 30, 2018, and March 31, 2019, respectively.
The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All intercompany transactions and balances have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). This update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. Effective April 1, 2019, the Company adopted the new standard under the modified retrospective approach, which resulted in no adjustment to the April 1, 2019 beginning Retained Earnings. There are optional practical expedients and policy elections made available to simplify the transition to the new standard. The Company has elected the following:
• | to adopt the optional transition method defined within ASU 2018-11 and not restate comparative prior periods but instead recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption; |
• | the package of three practical expedients addressing whether a contract contains a lease, lease classification and initial direct costs; |
• | to combine lease and non-lease components as a single component for all asset classes; |
• | to use a portfolio approach to determine the incremental borrowing rate; and |
• | to apply the short-term lease exception to leases that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise. |
Upon adoption, the Company recorded Right-of-use (“ROU”) assets and lease liabilities of approximately $84,878 and $87,248, respectively. In addition, capital lease assets and liabilities are now classified as finance lease right-of-use assets and liabilities. The difference between the operating lease assets and lease liabilities primarily relates to unamortized lease incentives and deferred rent recorded in accordance with the previous lease guidance.
Apart from the aforementioned changes, the adoption of this standard did not have a significant impact on the Company's operating results, financial position or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note 3, Leases for additional information.
In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)”: Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income
8
statement line as the hedged item. The Company adopted the standard effective April 1, 2019 and the adoption did not have any impact on the Company's operating results, financial position or cash flows.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220)”. The new standard will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statements users. However, because the amendment only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company adopted this standard effective April 1, 2019 with the election not to reclassify $478 of stranded tax effects, primarily related to the Company's pension plans, from accumulated other comprehensive income (“AOCI”) to retained earnings, as the amount was not material.
Accounting Pronouncements Issued But Not Adopted as of December 29, 2019
In June 2016, the FASB, issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)”: Measurement of Credit Losses on Financial Instruments, which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In contrast to current guidance, which considers current information and events and utilizes a probable threshold, (an “incurred loss” model), ASU 2016–13 mandates an “expected loss” model. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. In order to evaluate the impact of ASU No. 2016-13, the Company has formed a project team and initiated the process of assessing critical components of this new guidance and the potential impact that the guidance may have on its financial position, results of operations and cash flows.
In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740)”: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.
2. Revenue Recognition
The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” on April 1, 2018 using the modified retrospective transition method. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings.
The Company's revenues by reportable segments are presented in Note 17.
Service revenues related to the work performed for the Company’s customers by its maintenance technicians generally represent a separate and distinct performance obligation. Control for these services passes to the customer as the services are performed. Service revenues for the third quarter of fiscal 2020 and fiscal 2019 amounted to $78,907 and $37,472, respectively. Service revenues for the nine months of fiscal 2020 and fiscal 2019 amounted to $200,907 and $106,672, respectively.
A small portion of the Company's customer arrangements oblige the Company to create customized products for its customers that require the bundling of both products and services into a single performance obligation because the individual products and services that are required to fulfill the customer requirements do not meet the definition for a distinct performance obligation. These customized products generally have no alternative use to the Company and the terms and conditions of these arrangements give the Company the enforceable right to payment for performance completed to date, including a reasonable profit margin. For these arrangements, control transfers over time and the Company measures progress towards completion by selecting the input or output method that best depicts the transfer of control of the underlying goods and services to the customer for each respective arrangement. Methods used by the Company to measure progress toward completion include labor hours, costs incurred and units of production. Revenues recognized over time for the third quarter of fiscal 2020 and fiscal 2019 amounted to $35,306 and $19,421, respectively. Revenues recognized over time for the nine months of fiscal 2020 and fiscal 2019 amounted to $110,396 and $54,316, respectively.
On December 29, 2019, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $89,580, of which, the Company estimates that approximately $38,389 will be recognized as revenue in fiscal 2020, $37,940 in fiscal 2021, $13,126 in fiscal 2022, $17 in fiscal 2023 and $108 in fiscal 2024.
Any payments that are received from a customer in advance, prior to the satisfaction of a related performance obligation and billings in excess of revenue recognized, are deferred and treated as a contract liability. Advance payments and billings in excess of revenue recognized are classified as current or non-current based on the timing of when recognition of revenue is expected. As of December 29, 2019, the current and non-current portion of contract liabilities were $18,792 and $7,239, respectively. As of March 31, 2019, the current and non-current portion of contract liabilities were $15,162 and $6,360, respectively. Revenues recognized during the third quarter of fiscal 2020 and fiscal 2019, that were included in the contract liability at the beginning of the quarter, amounted to $5,494 and $1,950, respectively. Revenues
9
recognized during the nine months of fiscal 2020 and fiscal 2019, that were included in the contract liability at the beginning of the year, amounted to $13,901 and $2,695, respectively.
Amounts representing work completed and not billed to customers represent contract assets and were $42,624 and $38,778 as of December 29, 2019 and March 31, 2019, respectively.
The Company uses historic customer product return data as a basis of estimation for customer returns and records the reduction of sales at the time revenue is recognized. At December 29, 2019, the right of return asset related to the value of inventory anticipated to be returned from customers was $2,667 and refund liability representing amounts estimated to be refunded to customers was $5,243.
3. Leases
The Company leases manufacturing facilities, distribution centers, office space, vehicles and other equipment under non-cancellable leases with initial terms typically ranging from 1 to 17 years. At contract inception, the Company reviews the terms of the arrangement to determine if the contract is or contains a lease. Guidance in Topic 842 is used to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if it has the right to direct the use of the underlying asset. When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset. When determining if the Company has the right to obtain substantially all economic benefits from the asset, the Company considers the primary outputs of the identified asset throughout the period of use and determines if it receives greater than 90% of those benefits. When determining if it has the right to direct the use of an underlying asset, the Company considers if it has the right to direct how and for what purpose the asset is used throughout the period of use and if it controls the decision-making rights over the asset.
Lease terms may include options to extend or terminate the lease. The Company exercises its judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that the Company will exercise those options.
The Company has elected to include both lease and non-lease components in the determination of lease payments for all asset classes. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.
Both finance and operating leases are reflected as liabilities on the commencement date of the lease based on the present value of the lease payments to be made over the lease term. As most of the leases do not provide an implicit rate, the Company has exercised judgment in electing the incremental borrowing rate based on the information available when the lease commences to determine the present value of future payments. Right-of-use assets are valued at the initial measurement of the lease liability, plus any initial direct costs or rent prepayments and reduced by any lease incentives and any deferred lease payments.
Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense includes depreciation, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.
Short term leases with an initial term of 12 months or less are not presented on the balance sheet and expense is recognized as incurred.
The following table presents lease assets and liabilities and their balance sheet classification:
Classification | As of December 29, 2019 | |||||
Operating Leases: | ||||||
Right-of-use assets | Other assets | $ | 75,015 | |||
Operating lease current liabilities | Accrued expenses | 22,091 | ||||
Operating lease non-current liabilities | Other liabilities | 55,508 | ||||
Finance Leases: | ||||||
Right-of-use assets | Property, plant, and equipment, net | $ | 10,602 | |||
Finance lease current liabilities | Current portion of debt | 10,168 | ||||
Finance lease non-current liabilities | Non-current portion of debt | 463 | ||||
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The components of lease expense for the third quarter and nine months ended December 29, 2019 were as follows:
Classification | Quarter ended December 29, 2019 | Nine months ended December 29, 2019 | ||||||||
Operating Leases: | ||||||||||
Operating lease cost | Operating expenses | $ | 7,263 | $ | 21,818 | |||||
Variable lease cost | Operating expenses | 2,130 | 5,958 | |||||||
Short term lease cost | Operating expenses | 1,640 | 5,751 | |||||||
Finance Leases: | ||||||||||
Depreciation | Operating expenses | $ | 138 | $ | 419 | |||||
Interest expense | Interest expense | 8 | 30 | |||||||
Total | $ | 11,179 | $ | 33,976 | ||||||
The following table presents the weighted average lease term and discount rates for leases as of December 29, 2019:
Operating Leases: | ||
Weighted average remaining lease term (years) | 5 years | |
Weighted average discount rate | 5.33% | |
Finance Leases: | ||
Weighted average remaining lease term (years) | 3.7 years | |
Weighted average discount rate | 4.92% | |
The following table presents future payments due under leases reconciled to lease liabilities as of December 29, 2019:
Finance Leases | Operating Leases | |||||||
Three months ended March 31, 2020 | $ | 10,049 | $ | 7,187 | ||||
Year ended March 31, | ||||||||
2021 | 200 | 24,028 | ||||||
2022 | 203 | 18,820 | ||||||
2023 | 158 | 13,205 | ||||||
2024 | 107 | 8,448 | ||||||
Thereafter | 26 | 18,675 | ||||||
Total undiscounted lease payments | 10,743 | 90,363 | ||||||
Present value discount | 112 | 12,764 | ||||||
Lease liability | $ | 10,631 | $ | 77,599 | ||||
The following table presents supplemental disclosures of cash flow information related to leases for the third quarter and nine months ended December 29, 2019:
Quarter ended December 29, 2019 | Nine months ended December 29, 2019 | |||||||
Cash paid for amounts included in the measurement of lease liabilities: | ||||||||
Operating cash flows from finance leases | $ | 8 | $ | 30 | ||||
Operating cash flows from operating leases | 7,176 | 21,559 | ||||||
Financing cash flows from finance leases | 140 | 421 | ||||||
Supplemental non-cash information on lease liabilities arising from right-of-use assets: | ||||||||
Right-of-use assets obtained in exchange for new finance lease liabilities | $ | — | $ | — | ||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 2,876 | 7,822 | ||||||
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4. Acquisitions
Alpha
On December 7, 2018, the Company completed the acquisition of all of the issued and outstanding common stock of Alpha Technologies Services, Inc. (“ATS”) and Alpha Technologies Ltd. (“ATL”), resulting in ATS and ATL becoming wholly-owned subsidiaries of the Company (the “ Alpha share purchase”). Additionally, the Company acquired substantially all of the assets of Alpha Technologies Inc. and certain assets of Altair Advanced Industries, Inc. and other affiliates of ATS and ATL (all such sellers, together with ATS and ATL, “Alpha”), in each case in accordance with the terms and conditions of certain restructuring agreements (collectively, the “Alpha asset acquisition” and together with the Alpha share purchase, the “Alpha acquisition”). Based in Bellingham, Washington, Alpha is a global industry leader in comprehensive commercial-grade energy solutions for broadband, telecom, renewable, industrial and traffic customers around the world. The initial purchase consideration for the Alpha acquisition was $750,000, of which $650,000 was paid in cash and the balance was settled by issuing 1,177,630 shares of EnerSys common stock. These shares were issued out of the Company's treasury stock and were valued at $84.92 per share, which was based on the thirty-day volume weighted average stock price of the Company’s common stock at closing, in accordance with the purchase agreement. The 1,177,630 shares had a closing date fair value of $93,268, based upon the December 7, 2018 closing date spot rate of $79.20. The total purchase consideration, consisting of cash paid of $650,000, shares valued at $93,268 and an adjustment for working capital (due post - closing from seller of $766), was $742,502. The Company funded the cash portion of the Alpha acquisition with borrowings from the Amended Credit Facility as defined in Note 12. See Note 12 for additional information.
The Alpha acquisition expands the Company's footprint in broadband and telecom markets. The goodwill recognized in connection with this transaction reflects the benefits the Company expects to realize from being able to provide a one-stop, fully integrated power solutions offering to its customers, as well as the benefit of cost synergies from alignment of the Alpha group within its own organizational structure.
The results of operations of Alpha have been included in the Company’s Americas segment.
During the current quarter, the Company finalized the measurement of all provisional amounts recognized for the Alpha business combination. The final amounts recognized in connection with the Alpha business combination are in the table below. The purchase accounting adjustments resulted in a decrease to goodwill during the current quarter, by $1,390 as a result of finalizing deferred taxes.
Accounts receivable | $ | 115,467 | ||
Inventories | 84,297 | |||
Other current assets | 6,822 | |||
Other intangible assets | 332,000 | |||
Property, plant and equipment | 20,987 | |||
Other assets | 9,005 | |||
Total assets acquired | $ | 568,578 | ||
Accounts payable | 35,803 | |||
Accrued liabilities | 41,918 | |||
Deferred income taxes | 54,941 | |||
Other liabilities | 12,642 | |||
Total liabilities assumed | $ | 145,304 | ||
Net assets acquired | $ | 423,274 | ||
Purchase price: | ||||
Cash paid for net assets acquired | $ | 650,000 | ||
Fair value of shares issued for net assets acquired | 93,268 | |||
Working capital adjustment | (766 | ) | ||
Total purchase consideration | 742,502 | |||
Less: Fair value of acquired identifiable assets and liabilities | 423,274 | |||
Goodwill | $ | 319,228 | ||
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The following table summarizes the fair value of Alpha's identifiable intangible assets and their respective lives:
Type | Life in Years | Fair Value | ||||||
Trademarks | Indefinite-lived | Indefinite | $ | 56,000 | ||||
Customer relationships | Finite-lived | 14 | 221,000 | |||||
Technology | Finite-lived | 10 | 55,000 | |||||
Total identifiable intangible assets | $ | 332,000 | ||||||
Goodwill deductible for tax purposes is $41,852.
The following unaudited summary information is presented on a consolidated pro forma basis as if the Alpha acquisition had occurred on April 1, 2017:
Quarter ended | Nine Months Ended | |||||||
December 30, 2018 | December 30, 2018 | |||||||
Net sales | $ | 800,118 | $ | 2,453,729 | ||||
Net earnings attributable to EnerSys stockholders | 47,343 | 163,327 | ||||||
Net earnings per share attributable to EnerSys stockholders - basic | 1.10 | 3.78 | ||||||
Net earnings per share attributable to EnerSys stockholders - assuming dilution | 1.08 | 3.72 | ||||||
The pro forma amounts include additional interest expense on the debt issued to finance the purchases, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and plant assets, and related tax effects. The pro forma results are not necessarily indicative of the combined results had the Alpha acquisition been completed on April 1, 2017, nor are they indicative of future combined results. The remeasurement of Alpha's deferred taxes due to the Tax Act are being excluded in arriving at these pro forma results.
Contra Equity - Indemnification Receivable
The Company recorded an unrecognized tax benefit and related indemnification receivable in connection with the Alpha acquisition. The indemnification receivable represents the Seller’s obligation to indemnify the Company for the outcome of potential contingent liabilities, including those associated with uncertain tax positions which have various statutes of limitations that are expected to expire by fiscal 2027. As of December 29, 2019 and March 31, 2019, the balance was $6,607 and $7,840, respectively. The expiration of certain statutes of limitations and the finalization of purchase accounting resulted in a net decrease in the indemnification receivable during the third quarter and nine months of fiscal 2020.
NorthStar
On September 30, 2019, the Company completed the acquisition of NorthStar, headquartered in Stockholm, Sweden, for $77,777 in cash consideration and the assumption of $107,018 in debt, which was funded using existing cash and credit facilities. NorthStar, through its direct and indirect subsidiaries, manufactures and distributes thin plate pure lead (TPPL) batteries and battery enclosures. The Company acquired tangible and intangible assets, including trademarks, technology, customer relationships and goodwill. Based on preliminary valuations performed, trademarks were valued at $13,937, technology at $13,689, customer relationships at $55,003, and goodwill was recorded at $23,242. The useful lives of technology were estimated at 10 years, customer relationships were estimated at 14 years and trademarks were estimated at 3 years. The Company is in the process of evaluating whether or not it will make a tax election which determines if the Company will have tax deductible goodwill.
The results of the NorthStar acquisition have been included in the Company’s results of operations from the date of acquisition. Pro forma earnings and earnings per share computations have not been presented as this acquisition is not considered material.
The North American and European results of operations of NorthStar have been included in the Company’s Americas segment and EMEA segment, respectively.
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Other Intangible Assets
Information regarding the Company’s other intangible assets are as follows:
Balance as of | ||||||||||||||||||||||||
December 29, 2019 | March 31, 2019 | |||||||||||||||||||||||
Gross Amount | Accumulated Amortization | Net Amount | Gross Amount | Accumulated Amortization | Net Amount | |||||||||||||||||||
Indefinite-lived intangible assets: | ||||||||||||||||||||||||
Trademarks | $ | 152,465 | $ | (953 | ) | $ | 151,512 | $ | 152,484 | $ | (953 | ) | $ | 151,531 | ||||||||||
Finite-lived intangible assets: | ||||||||||||||||||||||||
Customer relationships | 343,110 | (60,181 | ) | 282,929 | 286,664 | (42,704 | ) | 243,960 | ||||||||||||||||
Non-compete | 3,142 | (2,811 | ) | 331 | 3,025 | (2,807 | ) | 218 | ||||||||||||||||
Technology | 91,844 | (17,940 | ) | 73,904 | 77,779 | (12,229 | ) | 65,550 | ||||||||||||||||
Trademarks | 16,151 | (2,471 | ) | 13,680 | 2,003 | (1,236 | ) | 767 | ||||||||||||||||
Licenses | 1,196 | (1,196 | ) | — | 1,477 | (1,187 | ) | 290 | ||||||||||||||||
Total | $ | 607,908 | $ | (85,552 | ) | $ | 522,356 | $ | 523,432 | $ | (61,116 | ) | $ | 462,316 | ||||||||||
The Company’s amortization expense related to finite-lived intangible assets was $9,843 and $24,468, for the third quarter and nine months of fiscal 2020, respectively, compared to $3,105 and $7,220 for the third quarter and nine months of fiscal 2019, respectively. The expected amortization expense based on the finite-lived intangible assets as of December 29, 2019, is $10,055 for the remainder of fiscal 2020, $39,336 in fiscal 2021, $39,092 in fiscal 2022, $35,434 in fiscal 2023 and $29,668 in fiscal 2024.
5. Inventories
Inventories, net consist of:
December 29, 2019 | March 31, 2019 | |||||||
Raw materials | $ | 140,533 | $ | 138,718 | ||||
Work-in-process | 101,414 | 129,736 | ||||||
Finished goods | 315,566 | 235,415 | ||||||
Total | $ | 557,513 | $ | 503,869 | ||||
6. Fair Value of Financial Instruments
Recurring Fair Value Measurements
The following tables represent the financial assets and (liabilities) measured at fair value on a recurring basis as of December 29, 2019 and March 31, 2019, and the basis for that measurement:
Total Fair Value Measurement December 29, 2019 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Lead forward contracts | $ | (3,729 | ) | $ | — | $ | (3,729 | ) | $ | — | ||||||
Foreign currency forward contracts | (219 | ) | — | (219 | ) | — | ||||||||||
Total derivatives | $ | (3,948 | ) | $ | — | $ | (3,948 | ) | $ | — | ||||||
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Total Fair Value Measurement March 31, 2019 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Lead forward contracts | $ | (902 | ) | $ | — | $ | (902 | ) | $ | — | ||||||
Foreign currency forward contracts | (249 | ) | — | (249 | ) | — | ||||||||||
Total derivatives | $ | (1,151 | ) | $ | — | $ | (1,151 | ) | $ | — | ||||||
The fair values of lead forward contracts are calculated using observable prices for lead as quoted on the London Metal Exchange (“LME”) and, therefore, were classified as Level 2 within the fair value hierarchy, as described in Note 1, Summary of Significant Accounting Policies to the Company's consolidated financial statements included in its 2019 Annual Report.
The fair values for foreign currency forward contracts are based upon current quoted market prices and are classified as Level 2 based on the nature of the underlying market in which these derivatives are traded.
Financial Instruments
The fair values of the Company’s cash and cash equivalents approximate carrying value due to their short maturities.
The fair value of the Company’s short-term debt and borrowings under the Amended Credit Facility (as defined in Note 12), approximate their respective carrying value, as they are variable rate debt and the terms are comparable to market terms as of the balance sheet dates and are classified as Level 2.
During the current quarter, the Company issued its 4.375% Senior Notes due 2027 (the “2027 Notes”), with an original face value of $300,000. The Company's 5.00% Senior Notes due 2023 (the “2023 Notes”), with an original face value of $300,000, were issued in April 2015. The fair value of the 2027 Notes and 2023 Notes, (collectively, the “Senior Notes”) represent the trading values based upon quoted market prices and are classified as Level 2. The 2027 Notes were trading at approximately 99% on December 29, 2019. The 2023 Notes were trading at approximately 103% and 99% of face value on December 29, 2019 and March 31, 2019, respectively.
The carrying amounts and estimated fair values of the Company’s derivatives and Senior Notes at December 29, 2019 and March 31, 2019 were as follows:
December 29, 2019 | March 31, 2019 | |||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||
Financial assets: | ||||||||||||||||
Derivatives (1) | $ | — | $ | — | $ | — | $ | — | ||||||||
Financial liabilities: | ||||||||||||||||
Senior Notes (2) | $ | 600,000 | $ | 606,000 | $ | 300,000 | $ | 297,000 | ||||||||
Derivatives (1) | 3,948 | 3,948 | 1,151 | 1,151 | ||||||||||||
(1) | Represents lead and foreign currency forward contracts (see Note 7 for asset and liability positions of the lead and foreign currency forward contracts at December 29, 2019 and March 31, 2019). |
(2) | The fair value amount of the Senior Notes at December 29, 2019 and March 31, 2019 represent the trading value of the instruments. |
7. Derivative Financial Instruments
The Company utilizes derivative instruments to reduce its exposure to fluctuations in commodity prices and foreign exchange rates under established procedures and controls. The Company does not enter into derivative contracts for speculative purposes. The Company’s agreements are with creditworthy financial institutions and the Company anticipates performance by counterparties to these contracts and therefore no material loss is expected.
Derivatives in Cash Flow Hedging Relationships
Lead Forward Contracts
The Company enters into lead forward contracts to fix the price for a portion of its lead purchases. Management considers the lead forward contracts to be effective against changes in the cash flows of the underlying lead purchases. The vast majority of such contracts are for a period not extending beyond one year. At December 29, 2019 and March 31, 2019, the Company has hedged the price to purchase approximately 61.0 million pounds and 42.0 million pounds of lead, respectively, for a total purchase price of $57,084 and $39,218, respectively.
15
Foreign Currency Forward Contracts
The Company uses foreign currency forward contracts and options to hedge a portion of the Company’s foreign currency exposures for lead, as well as other foreign currency exposures so that gains and losses on these contracts offset changes in the underlying foreign currency denominated exposures. The vast majority of such contracts are for a period not extending beyond one year. As of December 29, 2019 and March 31, 2019, the Company had entered into a total of $41,379 and $42,318, respectively, of such contracts.
In the coming twelve months, the Company anticipates that $2,864 of pretax loss relating to lead and foreign currency forward contracts will be reclassified from AOCI as part of cost of goods sold. This amount represents the current net unrealized impact of hedging lead and foreign exchange rates, which will change as market rates change in the future, and will ultimately be realized in the Consolidated Condensed Statements of Income as an offset to the corresponding actual changes in lead costs to be realized in connection with the variable lead cost and foreign exchange rates being hedged.
Derivatives not Designated in Hedging Relationships
Foreign Currency Forward Contracts
The Company also enters into foreign currency forward contracts to economically hedge foreign currency fluctuations on intercompany loans and foreign currency denominated receivables and payables. These are not designated as hedging instruments and changes in fair value of these instruments are recorded directly in the Consolidated Condensed Statements of Income. As of December 29, 2019 and March 31, 2019, the notional amount of these contracts was $22,233 and $22,201, respectively.
Presented below in tabular form is information on the location and amounts of derivative fair values in the Consolidated Condensed Balance Sheets and derivative gains and losses in the Consolidated Condensed Statements of Income:
Fair Value of Derivative Instruments
December 29, 2019 and March 31, 2019
Derivatives and Hedging Activities Designated as Cash Flow Hedges | Derivatives and Hedging Activities Not Designated as Hedging Instruments | |||||||||||||||
December 29, 2019 | March 31, 2019 | December 29, 2019 | March 31, 2019 | |||||||||||||
Accrued expenses: | ||||||||||||||||
Lead forward contracts | $ | 3,729 | $ | 902 | $ | — | $ | — | ||||||||
Foreign currency forward contracts | 59 | 8 | 160 | 241 | ||||||||||||
Total liabilities | $ | 3,788 | $ | 910 | $ | 160 | $ | 241 | ||||||||
The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 29, 2019
Derivatives Designated as Cash Flow Hedges | Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | |||||||
Lead forward contracts | $ | (5,267 | ) | Cost of goods sold | $ | (1,034 | ) | |||
Foreign currency forward contracts | (767 | ) | Cost of goods sold | (536 | ) | |||||
Total | $ | (6,034 | ) | $ | (1,570 | ) | ||||
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Pretax Gain (Loss) | |||
Foreign currency forward contracts | Other (income) expense, net | $ | 179 | ||
Total | $ | 179 | |||
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The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 30, 2018
Derivatives Designated as Cash Flow Hedges | Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | |||||||
Lead forward contracts | $ | (501 | ) | Cost of goods sold | $ | (6,892 | ) | |||
Foreign currency forward contracts | 583 | Cost of goods sold | 789 | |||||||
Total | $ | 82 | $ | (6,103 | ) | |||||
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivatives | Pretax Gain (Loss) | |||
Foreign currency forward contracts | Other (income) expense, net | $ | 232 | ||
Total | $ | 232 | |||
The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 29, 2019
Derivatives Designated as Cash Flow Hedges | Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | |||||||
Lead forward contracts | $ | (771 | ) | Cost of goods sold | $ | 1,698 | ||||
Foreign currency forward contracts | (1,162 | ) | Cost of goods sold | (816 | ) | |||||
Total | $ | (1,933 | ) | $ | 882 | |||||
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Pretax Gain (Loss) | |||
Foreign currency forward contracts | Other (income) expense, net | $ | (517 | ) | |
Total | $ | (517 | ) | ||
The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 30, 2018
Derivatives Designated as Cash Flow Hedges | Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion) | Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion) | |||||||
Lead forward contracts | $ | (11,510 | ) | Cost of goods sold | $ | (9,611 | ) | |||
Foreign currency forward contracts | 1,303 | Cost of goods sold | (14 | ) | ||||||
Total | $ | (10,207 | ) | $ | (9,625 | ) | ||||
Derivatives Not Designated as Hedging Instruments | Location of Gain (Loss) Recognized in Income on Derivative | Pretax Gain (Loss) | |||
Foreign currency forward contracts | Other (income) expense, net | $ | (390 | ) | |
Total | $ | (390 | ) | ||
17
8. Income Taxes
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarter of fiscal 2020 and 2019 was based on the estimated effective tax rates applicable for the full years ending March 31, 2020 and March 31, 2019, respectively, after giving effect to items specifically related to the interim periods. The Company’s effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which the Company operates, change in tax laws and the amount of the Company's consolidated income before taxes.
On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures are effective January 1, 2020. Certain provisions of the TRAF were enacted during the second quarter of fiscal 2020. Significant changes in the tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The transitional provisions of the TRAF allow companies to elect tax basis adjustments to fair value, which is used for tax depreciation and amortization purposes resulting in a deduction over the transitional period. The Company recorded a deferred tax asset of $21,000 during the second quarter of fiscal 2020, related to the amortizable goodwill, subject to final negotiations with the Swiss federal and cantonal tax authority.
The consolidated effective income tax rates for the third quarter of fiscal 2020 and 2019 were 16.2% and (13.3)%, respectively and for the nine months of fiscal 2020 and 2019 were 0.7% and 10.4%, respectively. The rate increase in the third quarter of fiscal 2020 compared to the comparable prior year quarter is primarily due to changes in mix of earnings among tax jurisdictions and items related to the Tax Cuts and Jobs Act (“Tax Act”), including a $13,483 benefit in fiscal 2019. The rate decrease in the nine months of fiscal 2020 compared to the comparable prior year period is primarily due to changes in mix of earnings among tax jurisdictions, Swiss tax reform and items related to the Tax Act in fiscal 2019.
Foreign income as a percentage of worldwide income is estimated to be 76% for fiscal 2020 compared to 74% for fiscal 2019. The foreign effective income tax rates for the nine months of fiscal 2020 and 2019 were (3.9)% and 11.8%, respectively. The rate decrease compared to the prior year period is primarily due to Swiss tax reform and changes in the mix of earnings among tax jurisdictions. Income from the Company's Swiss subsidiary comprised a substantial portion of the Company's overall foreign mix of income and was taxed at an effective income tax rate of approximately 6% in both the current and prior year quarter of fiscal 2020 and fiscal 2019.
9. Warranty
The Company provides for estimated product warranty expenses when the related products are sold, with related liabilities included within accrued expenses and other liabilities. As warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, costs of claims may ultimately differ from amounts provided. An analysis of changes in the liability for product warranties is as follows:
Quarter ended | Nine months ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Balance at beginning of period | $ | 54,936 | $ | 47,733 | $ | 54,568 | $ | 50,602 | ||||||||
Current period provisions | 7,234 | 5,603 | 21,228 | 16,620 | ||||||||||||
Costs incurred | (7,764 | ) | (6,272 | ) | (20,939 | ) | (18,573 | ) | ||||||||
Warranty reserves of acquired businesses | 4,967 | 7,535 | 4,967 | 7,535 | ||||||||||||
Foreign currency translation adjustment | 1,946 | (240 | ) | 1,495 | (1,825 | ) | ||||||||||
Balance at end of period | $ | 61,319 | $ | 54,359 | $ | 61,319 | $ | 54,359 | ||||||||
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10. Commitments, Contingencies and Litigation
Litigation and Other Legal Matters
In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of environmental, anticompetition, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. In the ordinary course of business, the Company and its subsidiaries are also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies, the Company and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities.
European Competition Investigations
Certain of the Company’s European subsidiaries had received subpoenas and requests for documents and, in some cases, interviews from, and have had on-site inspections conducted by, the competition authorities of Belgium, Germany and the Netherlands relating to conduct and anticompetitive practices of certain industrial battery participants.
The Company settled the Belgian regulatory proceeding in February 2016 by acknowledging certain anticompetitive practices and conduct and agreeing to pay a fine of $1,962, which was paid in March 2016. During the third quarter of fiscal 2019, the Company also paid $2,402 towards certain aspects related to this matter, which are under appeal. As of December 29, 2019 and March 31, 2019, the Company did not have a reserve balance for these matters.
In June 2017, the Company settled a portion of its previously disclosed proceeding involving the German competition authority relating to conduct involving the Company's motive power battery business and agreed to pay a fine of $14,811, which was paid in July 2017. As of December 29, 2019 and March 31, 2019, the Company did not have a reserve balance relating to this matter. Also, in March 2019, the Company settled the remaining portion of its previously disclosed proceeding involving the German competition authority relating to conduct involving the Company’s reserve power battery business and agreed to pay a fine of $7,258, which was paid in April 2019. As of December 29, 2019 and March 31, 2019, the Company had a reserve balance of $0 and $7,258, respectively.
The foregoing estimate of losses is based upon currently available information for these proceedings. However, the precise scope, timing and time period at issue, as well as the final outcome of the investigations or customer claims, remain uncertain. Accordingly, the Company’s estimate may change from time to time, and actual losses could vary.
Environmental Issues
As a result of its operations, the Company is subject to various federal, state, and local, as well as international environmental laws and regulations and is exposed to the costs and risks of registering, handling, processing, storing, transporting, and disposing of hazardous substances, especially lead and acid. The Company’s operations are also subject to federal, state, local and international occupational safety and health regulations, including laws and regulations relating to exposure to lead in the workplace.
The Company is responsible for certain cleanup obligations at the former Yuasa battery facility in Sumter, South Carolina, that predates its ownership of this facility. This manufacturing facility was closed in 2001 and the Company established a reserve for this facility, which was $1,060 and $1,081 as of December 29, 2019 and March 31, 2019, respectively. Based on current information, the Company’s management believes this reserve is adequate to satisfy the Company’s environmental liabilities at this facility. This facility is separate from the Company’s current metal fabrication facility in Sumter.
Lead and Foreign Currency Forward Contracts
To stabilize its lead costs and reduce volatility from currency movements, the Company enters into contracts with financial institutions. The vast majority of such contracts are for a period not extending beyond one year. Please refer to Note 7 - Derivative Financial Instruments for more details.
19
11. Restructuring, Exit and Other Charges
Restructuring Plans
During fiscal 2018, the Company announced restructuring programs to improve efficiencies primarily related to supply chain and general operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $7,500, primarily from cash charges for employee severance-related payments and other charges. The Company estimates that these actions will result in the reduction of approximately 80 employees upon completion. During fiscal 2018, the Company recorded non-cash restructuring charges of $69 and cash charges of $2,260 and an additional $3,104 during fiscal 2019. The Company incurred $1,350 in costs against the accrual in fiscal 2018 and an additional $2,844 in fiscal 2019. During the nine months of fiscal 2020, the Company recorded restructuring charges of $711 and incurred $594 in costs against the accrual. As of December 29, 2019, the reserve balance associated with these actions is $1,173. The Company expects to be committed to an additional $1,300 in restructuring charges related to this action, which it expects to complete in fiscal 2021.
During fiscal 2019, the Company announced restructuring programs to improve efficiencies of its operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $2,500, from charges primarily for employee severance-related payments to approximately 35 employees. During fiscal 2019, the Company recorded restructuring charges of $347 and incurred $83 in costs against the accrual. During the nine months of fiscal 2020, the Company recorded restructuring charges of $507 and incurred $687 in costs against the accrual. As of December 29, 2019, the reserve balance associated with these actions is $78. The Company expects to complete these actions in fiscal 2021.
During fiscal 2019, the Company announced restructuring programs to improve efficiencies of its operations in the Americas. The Company estimates that the total charges for these actions will amount to approximately $4,100, from cash and non-cash charges primarily for employee severance-related payments to approximately 85 employees. During fiscal 2019, the Company recorded cash restructuring charges of $1,970, non-cash charges of $2,095 and incurred $1,480 in costs against the accrual. During the nine months of fiscal 2020, the Company incurred $479 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $11. The Company expects to complete these actions in fiscal 2020.
During fiscal 2019, the Company announced a restructuring program to improve efficiencies of its operations in Asia and to convert its India operations from mainly reserve power production to motive power production. The Company estimates that the total charges for these actions will amount to approximately $4,400, from cash charges primarily for employee severance-related payments to approximately 160 employees and non-cash charges related to the write-off of fixed assets. During fiscal 2019, the Company recorded cash restructuring charges of $2,772 and non-cash charges of $771 and incurred $1,683 in costs against the accrual. During the nine months of fiscal 2020, the Company recorded restructuring charges of $714, non-cash charges of $130 and incurred $1,847 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $3. The Company expects to complete this action in fiscal 2020.
During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $5,500, from cash charges primarily for employee severance-related payments to approximately 25 employees. During the nine months of fiscal 2020, the Company recorded restructuring charges of $4,843 and incurred $1,487 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $3,321. The Company expects to complete this action in fiscal 2021.
During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in the Americas. The Company estimates that the total charges for these actions will amount to approximately $2,900, from cash charges primarily for employee severance-related payments to approximately 50 employees. During the nine months of fiscal 2020, the Company recorded restructuring charges of $2,451 and incurred $1,720 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $731. The Company expects to complete this action in fiscal 2020.
During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in Asia. The Company estimates that the total charges for these actions will amount to approximately $600, from cash charges primarily for employee severance-related payments to approximately 30 employees. During the nine months of fiscal 2020, the Company recorded cash restructuring charges of $250, non-cash charges of $55 and incurred $250 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $0. The Company expects to complete this action in fiscal 2020.
A roll-forward of the restructuring reserve is as follows:
Employee Severance | Other | Total | ||||||||||
Balance as of March 31, 2019 | $ | 2,356 | $ | 596 | $ | 2,952 | ||||||
Accrued | 9,236 | 240 | 9,476 | |||||||||
Costs incurred | (6,234 | ) | (830 | ) | (7,064 | ) | ||||||
Foreign currency impact | (44 | ) | (3 | ) | (47 | ) | ||||||
Balance as of December 29, 2019 | $ | 5,314 | $ | 3 | $ | 5,317 | ||||||
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Exit Charges
During fiscal 2019, the Company committed to a plan to close its facility in Targovishte, Bulgaria, which produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. Of the estimated total charges of $30,000 for all these actions, the Company had recorded charges amounting to $20,242 in fiscal 2019, relating to severance and inventory and fixed asset write-offs. The Company recorded an additional $3,576 relating to cash and non-cash charges during the nine months of fiscal 2020.
In keeping with its strategy of exiting the manufacture of batteries for diesel-electric submarines, during the second quarter of fiscal 2020, the Company also sold certain licenses and assets for $2,031 and recorded a net gain of $892, which is reported in exit charges.
During the second quarter of fiscal 2020, the Company wrote off $5,441 of assets at its Kentucky and Tennessee plants, as a result of its strategic product mix shift from traditional flooded batteries to maintenance free lead acid and lithium batteries.
During the nine months of fiscal 2019, as part of the aforementioned program to convert its India operations from mainly reserve power production to motive power production, the Company also recorded a non-cash write-off of reserve power inventories of $526, which was reported in cost of goods sold.
Richmond, Kentucky Plant Fire
On September 19, 2019, a fire broke out in the battery formation area of the Company's Richmond, Kentucky motive power production facility. The Company maintains insurance policies for both property damage and business interruption and is in the process of cleanup and repair. The Company estimates that the total claim, including the replacement of inventory and equipment, the cleanup and repairs to the building, as well as the claim for business interruption may exceed $50,000.
As of December 29, 2019, the Company incurred $10,030 of costs associated with the damage caused to its fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire. The Company also received $12,000 of advances related to its initial claims for recovery from its property and casualty insurance carriers, a substantial portion of which has been reflected as operating cash flows in the accompanying statement of cash flows for the nine months ended December 29, 2019.
12. Debt
The following summarizes the Company’s long-term debt as of December 29, 2019 and March 31, 2019:
December 29, 2019 | March 31, 2019 | |||||||||||||||
Principal | Unamortized Issuance Costs | Principal | Unamortized Issuance Costs | |||||||||||||
Senior Notes | $ | 600,000 | $ | 6,601 | $ | 300,000 | $ | 2,497 | ||||||||
Amended Credit Facility, due 2022 | 497,260 | 2,405 | 677,315 | 3,062 | ||||||||||||
$ | 1,097,260 | $ | 9,006 | $ | 977,315 | $ | 5,559 | |||||||||
Less: Unamortized issuance costs | 9,006 | 5,559 | ||||||||||||||
Long-term debt, net of unamortized issuance costs | $ | 1,088,254 | $ | 971,756 | ||||||||||||
The Company's Senior Notes comprise the following:
4.375% Senior Notes due 2027
On December 11, 2019, the Company issued $300,000 in aggregate principal amount of its 4.375% Senior Notes due 2027 (the “2027 Notes”). Proceeds from this offering, net of debt issuance costs were $296,250 and were utilized to pay down the Amended 2017 Revolver (defined below). The 2027 Notes bear interest at a rate of 4.375% per annum accruing from December 11, 2019. Interest is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. The 2027 Notes mature on December 15, 2027, unless earlier redeemed or repurchased in full. The 2027 Notes are unsecured and unsubordinated obligations of the Company. The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, by certain of its subsidiaries that are guarantors under the Amended Credit Facility. These guarantees are unsecured and unsubordinated obligations of such guarantors.
The Company may redeem, prior to September 15, 2027, all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus accrued and unpaid interest and a “make whole” premium to, but excluding, the redemption date. The Company may redeem, on or after September 15, 2027, all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of the 2027 Notes, plus accrued and unpaid interest to, but excluding, the redemption date. If a change of control triggering event occurs, the Company will be required to offer to repurchase the 2027 Notes at a price in cash equal to 101% of the aggregate principal amount of the 2027 Notes, plus accrued and unpaid interest to, but excluding, the date of repurchase. The 2027 Notes rank pari passu with the 2023 Notes.
21
5.00% Senior Notes due 2023
The 5% Senior Notes due April 30, 2023 (the “2023 Notes”) bear interest at a rate of 5.00% per annum and have an original face value of $300,000. Interest is payable semiannually in arrears on April 30 and October 30 of each year and commenced on October 30, 2015. The 2023 Notes will mature on April 30, 2023, unless earlier redeemed or repurchased in full. The 2023 Notes are unsecured and unsubordinated obligations of the Company. The 2023 Notes are fully and unconditionally guaranteed, jointly and severally, by certain of its subsidiaries that are guarantors under the Amended Credit Facility. These guarantees are unsecured and unsubordinated obligations of such guarantors.
2017 Credit Facility and Subsequent Amendment
In fiscal 2018, the Company entered into a credit facility (the “2017 Credit Facility”). The 2017 Credit Facility scheduled to mature on September 30, 2022, comprised a $600,000 senior secured revolving credit facility (“2017 Revolver”) and a $150,000 senior secured term loan (“2017 Term Loan”). The Company utilized the borrowings from the 2017 Credit Facility to repay its pre-existing credit facility.
In fiscal 2019, the Company amended the 2017 Credit Facility (as amended, the “Amended Credit Facility”) to fund the Alpha acquisition. The Amended Credit Facility consists of $449,105 senior secured term loans (the “Amended 2017 Term Loan”), including a CAD 133,050 ($99,105) term loan and a $700,000 senior secured revolving credit facility (the “Amended 2017 Revolver”). The amendment resulted in an increase of the 2017 Term Loan and the 2017 Revolver by $299,105 and $100,000, respectively.
As of December 29, 2019, the Company had $68,000 outstanding under the Amended 2017 Revolver and $429,260 under the Amended 2017 Term Loan.
Subsequent to the amendment, the quarterly installments payable on the Amended 2017 Term Loan are $5,645 beginning December 31, 2018, $8,468 beginning December 31, 2019 and $11,290 beginning December 31, 2020 with a final payment of $320,000 on September 30, 2022. The Amended Credit Facility may be increased by an aggregate amount of $325,000 in revolving commitments and / or one or more new tranches of term loans, under certain conditions. Both the Amended 2017 Revolver and the Amended 2017 Term Loan bear interest, at the Company's option, at a rate per annum equal to either (i) the London Interbank Offered Rate (“LIBOR”) or Canadian Dollar Offered Rate (“CDOR”) plus (i) LIBOR plus between 1.25% and 2.00% (currently 1.50% and based on the Company's consolidated net leverage ratio) or (ii) the U.S. Dollar Base Rate (which equals, for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) Bank of America “Prime Rate” and (c) the Eurocurrency Base Rate plus 1%; provided that, if the Base Rate shall be less than zero, such rate shall be deemed zero) (iii) the CDOR Base Rate equal to the higher of (a) Bank of America “Prime Rate” and (b) average 30-day CDOR rate plus 0.50%. Obligations under the Amended Credit Facility are secured by substantially all of the Company’s existing and future acquired assets, including substantially all of the capital stock of the Company’s United States subsidiaries that are guarantors under the Amended Credit Facility and up to 65% of the capital stock of certain of the Company’s foreign subsidiaries that are owned by the Company’s United States subsidiaries.
The Amended Credit Facility allows for up to two temporary increases in the maximum leverage ratio from 3.50x to 4.00x for a four quarter period following an acquisition larger than $250,000. Effective December 7, 2018 through December 28, 2019, the maximum leverage ratio has been increased to 4.00x. On December 29, 2019, the maximum leverage ratio returned to 3.50x.
The current portion of the Amended 2017 Term Loan of $36,707 is classified as long-term debt as the Company expects to refinance the future quarterly payments with revolver borrowings under the Amended Credit Facility.
Short-Term Debt
As of December 29, 2019 and March 31, 2019, the Company had $36,727 and $54,490, respectively, of short-term borrowings. The weighted average interest rate on these borrowings was approximately 4% at December 29, 2019 and March 31, 2019.
Letters of Credit
As of December 29, 2019 and March 31, 2019, the Company had standby letters of credit of $4,306 and $3,955, respectively.
Debt Issuance Costs
In connection with the issuance of the 2027 Notes, the Company capitalized $4,607 of debt issuance costs. Amortization expense, relating to debt issuance costs, included in interest expense was $409 and $326, respectively, for the quarters ended December 29, 2019 and December 30, 2018 and $1,160 and $953, respectively, for the nine months ended December 29, 2019 and December 30, 2018. Debt issuance costs, net of accumulated amortization, totaled $9,006 and $5,559, respectively, at December 29, 2019 and March 31, 2019.
Available Lines of Credit
As of December 29, 2019 and March 31, 2019, the Company had available and undrawn, under all its lines of credit, $749,522 and $546,960, respectively, including $121,828 and $87,685, respectively, of uncommitted lines of credit as of December 29, 2019 and March 31, 2019.
13. Retirement Plans
The following tables present the components of the Company’s net periodic benefit cost related to its defined benefit pension plans:
United States Plans | International Plans | |||||||||||||||
Quarter ended | Quarter ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Service cost | $ | — | $ | — | $ | 229 | $ | 246 | ||||||||
Interest cost | 154 | 157 | 375 | 449 | ||||||||||||
Expected return on plan assets | (110 | ) | (128 | ) | (542 | ) | (526 | ) | ||||||||
Amortization and deferral | 38 | 46 | 253 | 299 | ||||||||||||
Net periodic benefit cost | $ | 82 | $ | 75 | $ | 315 | $ | 468 | ||||||||
United States Plans | International Plans | |||||||||||||||
Nine months ended | Nine months ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Service cost | $ | — | $ | — | $ | 691 | $ | 753 | ||||||||
Interest cost | 462 | 473 | 1,115 | 1,376 | ||||||||||||
Expected return on plan assets | (336 | ) | (385 | ) | (1,598 | ) | (1,613 | ) | ||||||||
Amortization and deferral | 141 | 138 | 751 | 915 | ||||||||||||
Net periodic benefit cost | $ | 267 | $ | 226 | $ | 959 | $ | 1,431 | ||||||||
14. Stock-Based Compensation
As of December 29, 2019, the Company maintains the 2017 Equity Incentive Plan (“2017 EIP”). The 2017 EIP reserved 4,173,554 shares of common stock for the grant of various classes of nonqualified stock options, restricted stock units, market condition-based on total shareholder return (“TSR”) and performance condition-based share units (“PSU”) and other forms of equity-based compensation.
The Company recognized stock-based compensation expense associated with its equity incentive plans of $5,891 for the third quarter of fiscal 2020 and $5,458 for the third quarter of fiscal 2019. Stock-based compensation expense was $14,759 for the nine months of fiscal 2020 and $14,587 for the nine months of fiscal 2019. The Company recognizes compensation expense using the straight-line method over the vesting period of the awards.
During the nine months of fiscal 2020, the Company granted to non-employee directors 39,583 restricted stock units, pursuant to the 2017 EIP. The awards vest immediately upon the date of grant and are settled in shares of common stock, six months after termination of service as a director.
During the nine months of fiscal 2020, the Company granted to management and other key employees 284,109 non-qualified stock options that vest ratably over three years from the date of grant, 62,512 PSUs and 51,063 TSRs units that cliff vest three years from the date of grant, and 301,321 restricted stock units that vest ratably over four years from the date of grant.
Common stock activity during the nine months of fiscal 2020 included the vesting of 168,749 restricted stock units, 171,980 TSRs and the exercise of 8,999 stock options.
As of December 29, 2019, there were 816,815 non-qualified stock options, 881,637 restricted stock units, 207,834 TSRs and 102,248 PSUs outstanding.
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15. Stockholders’ Equity and Noncontrolling Interests
Common Stock
The following demonstrates the change in the number of shares of common stock outstanding during the nine months ended December 29, 2019:
Shares outstanding as of March 31, 2019 | 42,620,750 | ||
Purchase of treasury stock | (581,140 | ) | |
Shares issued towards equity-based compensation plans, net of equity awards surrendered for option price and taxes | 259,106 | ||
Shares outstanding as of December 29, 2019 | 42,298,716 | ||
Treasury Stock
During the nine months ended December 29, 2019, the Company purchased 581,140 shares for $34,561. At December 29, 2019 and March 31, 2019, the Company held 12,799,597 and 12,227,773 shares as treasury stock, respectively. During the nine months ended December 29, 2019, the Company also issued 9,316 shares out of its treasury stock, valued at $62.55 per share, on a LIFO basis, to participants under the Company's Employee Stock Purchase Plan.
Accumulated Other Comprehensive Income (“AOCI ”)
The components of AOCI, net of tax, as of December 29, 2019 and March 31, 2019, are as follows:
March 31, 2019 | Before Reclassifications | Amounts Reclassified from AOCI | December 29, 2019 | |||||||||||||
Pension funded status adjustment | $ | (20,791 | ) | $ | — | $ | 694 | $ | (20,097 | ) | ||||||
Net unrealized (loss) gain on derivative instruments | (130 | ) | (1,478 | ) | (674 | ) | (2,282 | ) | ||||||||
Foreign currency translation adjustment | (121,761 | ) | (7,093 | ) | — | (128,854 | ) | |||||||||
Accumulated other comprehensive (loss) income | $ | (142,682 | ) | $ | (8,571 | ) | $ | 20 | $ | (151,233 | ) | |||||
The following table presents reclassifications from AOCI during the third quarter ended December 29, 2019:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in cash flow hedging relationships: | ||||||
Net unrealized loss on derivative instruments | $ | 1,570 | Cost of goods sold | |||
Tax benefit | (372 | ) | ||||
Net unrealized loss on derivative instruments, net of tax | $ | 1,198 | ||||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 291 | Net periodic benefit cost, included in other (income) expense, net - See Note 13 | |||
Tax benefit | (71 | ) | ||||
Net periodic benefit cost, net of tax | $ | 220 | ||||
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The following table presents reclassifications from AOCI during the third quarter ended December 30, 2018:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in cash flow hedging relationships: | ||||||
Net unrealized loss on derivative instruments | $ | 6,103 | Cost of goods sold | |||
Tax benefit | (1,434 | ) | ||||
Net unrealized loss on derivative instruments, net of tax | $ | 4,669 | ||||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 345 | Net periodic benefit cost, included in other (income) expense, net - See Note 13 | |||
Tax benefit | (141 | ) | ||||
Net periodic benefit cost, net of tax | $ | 204 | ||||
The following table presents reclassifications from AOCI during the nine months ended December 29, 2019:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in Cash Flow Hedging Relationships: | ||||||
Net unrealized gain on derivative instruments | $ | (882 | ) | Cost of goods sold | ||
Tax expense | 208 | |||||
Net unrealized gain on derivative instruments, net of tax | $ | (674 | ) | |||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 892 | Net periodic benefit cost, included in other (income) expense, net - See Note 13 | |||
Tax benefit | (198 | ) | ||||
Net periodic benefit cost, net of tax | $ | 694 | ||||
The following table presents reclassifications from AOCI during the nine months ended December 30, 2018:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in Cash Flow Hedging Relationships: | ||||||
Net unrealized loss on derivative instruments | $ | 9,625 | Cost of goods sold | |||
Tax benefit | (2,261 | ) | ||||
Net unrealized loss on derivative instruments, net of tax | $ | 7,364 | ||||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 1,053 | Net periodic benefit cost, included in other (income) expense, net - See Note 13 | |||
Tax benefit | (249 | ) | ||||
Net periodic benefit cost, net of tax | $ | 804 | ||||
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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the nine months ended December 29, 2019:
(In Thousands, Except Per Share Data) | Preferred Stock | Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Contra-Equity | Total EnerSys Stockholders’ Equity | Non- redeemable Non- Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | — | $ | 548 | $ | 512,696 | $ | (530,760 | ) | $ | 1,450,325 | $ | (142,682 | ) | $ | (7,840 | ) | $ | 1,282,287 | $ | 3,730 | $ | 1,286,017 | |||||||||||||||||
Stock-based compensation | — | — | 3,874 | — | — | — | — | 3,874 | — | 3,874 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | 3 | 35 | — | — | — | — | 38 | — | 38 | ||||||||||||||||||||||||||||||
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net | — | — | (6,081 | ) | — | — | — | — | (6,081 | ) | — | (6,081 | ) | |||||||||||||||||||||||||||
Purchase of common stock | — | — | — | (23,029 | ) | — | — | — | (23,029 | ) | — | (23,029 | ) | |||||||||||||||||||||||||||
Other | — | — | (80 | ) | — | — | — | — | (80 | ) | — | (80 | ) | |||||||||||||||||||||||||||
Net earnings | — | — | — | — | 48,636 | — | — | 48,636 | — | 48,636 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 133 | — | (7,632 | ) | — | — | (7,499 | ) | — | (7,499 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $68) | — | — | — | — | — | 237 | — | 237 | — | 237 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax benefit of $720) | — | — | — | — | — | (2,329 | ) | — | (2,329 | ) | — | (2,329 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (3,128 | ) | — | (3,128 | ) | (83 | ) | (3,211 | ) | ||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | — | $ | 551 | $ | 510,577 | $ | (553,789 | ) | $ | 1,491,329 | $ | (147,902 | ) | $ | (7,840 | ) | $ | 1,292,926 | $ | 3,647 | $ | 1,296,573 | |||||||||||||||||
Stock-based compensation | — | — | 4,994 | — | — | — | — | 4,994 | — | 4,994 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | (13 | ) | — | — | — | — | (13 | ) | — | (13 | ) | |||||||||||||||||||||||||||
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net | — | — | (169 | ) | — | — | — | — | (169 | ) | — | (169 | ) | |||||||||||||||||||||||||||
Purchase of common stock | — | — | — | (11,532 | ) | — | — | — | (11,532 | ) | — | (11,532 | ) | |||||||||||||||||||||||||||
Reissuance of treasury stock towards employee stock purchase plan | — | — | — | 213 | — | — | — | 213 | — | 213 | ||||||||||||||||||||||||||||||
Contra equity - adjustment to indemnification receivable for acquisition related tax liability | — | — | — | — | — | — | 2,002 | 2,002 | — | 2,002 | ||||||||||||||||||||||||||||||
Net earnings | — | — | — | — | 62,698 | — | — | 62,698 | — | 62,698 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 209 | — | (7,608 | ) | — | — | (7,399 | ) | — | (7,399 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $59) | — | — | — | — | — | 237 | — | 237 | — | 237 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax expense of $1,112) | — | — | — | — | — | 3,586 | — | 3,586 | — | 3,586 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (32,068 | ) | — | (32,068 | ) | (131 | ) | (32,199 | ) | ||||||||||||||||||||||||||
Balance at September 29, 2019 | $ | — | $ | 551 | $ | 515,598 | $ | (565,108 | ) | $ | 1,546,419 | $ | (176,147 | ) | $ | (5,838 | ) | $ | 1,315,475 | $ | 3,516 | $ | 1,318,991 | |||||||||||||||||
Stock-based compensation | — | — | 5,891 | — | — | — | — | 5,891 | — | 5,891 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 480 | — | — | — | — | 480 | — | 480 | ||||||||||||||||||||||||||||||
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net | — | — | (31 | ) | — | — | — | — | (31 | ) | — | (31 | ) | |||||||||||||||||||||||||||
Reissuance of treasury stock towards employee stock purchase plan | — | — | — | 231 | — | — | — | 231 | — | 231 | ||||||||||||||||||||||||||||||
Contra equity - adjustment to indemnification receivable for acquisition related tax liability | — | — | — | — | — | — | (769 | ) | (769 | ) | — | (769 | ) | |||||||||||||||||||||||||||
Net earnings | — | — | — | — | 27,305 | — | — | 27,305 | — | 27,305 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 208 | — | (7,609 | ) | — | — | (7,401 | ) | — | (7,401 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $71) | — | — | — | — | — | 220 | — | 220 | — | 220 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax benefit of $1,055) | — | — | — | — | — | (3,409 | ) | — | (3,409 | ) | — | (3,409 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | 28,103 | — | 28,103 | 64 | 28,167 | ||||||||||||||||||||||||||||||
Balance at December 29, 2019 | $ | — | $ | 551 | $ | 522,146 | $ | (564,877 | ) | $ | 1,566,115 | $ | (151,233 | ) | $ | (6,607 | ) | $ | 1,366,095 | $ | 3,580 | $ | 1,369,675 | |||||||||||||||||
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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the nine months ended December 30, 2018:
(In Thousands, Except Per Share Data) | Preferred Stock | Common Stock | Additional Paid-in Capital | Treasury Stock | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Contra-Equity | Total EnerSys Stockholders’ Equity | Non- redeemable Non- Controlling Interests | Total Equity | ||||||||||||||||||||||||||||||
Balance at March 31, 2018 | $ | — | $ | 546 | $ | 477,288 | $ | (560,991 | ) | $ | 1,320,549 | $ | (41,717 | ) | $ | — | $ | 1,195,675 | $ | 5,436 | $ | 1,201,111 | ||||||||||||||||||
Stock-based compensation | — | — | 4,341 | — | — | — | — | 4,341 | — | 4,341 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | 2 | 6,795 | — | — | — | — | 6,797 | — | 6,797 | ||||||||||||||||||||||||||||||
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net | — | — | (3,453 | ) | — | — | — | — | (3,453 | ) | — | (3,453 | ) | |||||||||||||||||||||||||||
Other | — | — | (152 | ) | — | — | — | — | (152 | ) | — | (152 | ) | |||||||||||||||||||||||||||
Net earnings | — | — | — | — | 45,860 | — | — | 45,860 | 160 | 46,020 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 141 | — | (7,512 | ) | — | — | (7,371 | ) | — | (7,371 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $68) | — | — | — | — | — | 300 | — | 300 | — | 300 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax expense of $306) | — | — | — | — | — | 1,005 | — | 1,005 | — | 1,005 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (71,664 | ) | — | (71,664 | ) | (499 | ) | (72,163 | ) | ||||||||||||||||||||||||||
Balance at July 1, 2018 | $ | — | $ | 548 | $ | 484,960 | $ | (560,991 | ) | $ | 1,358,897 | $ | (112,076 | ) | $ | — | $ | 1,171,338 | $ | 5,097 | $ | 1,176,435 | ||||||||||||||||||
Stock-based compensation | — | — | 4,788 | — | — | — | — | 4,788 | — | 4,788 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 1,469 | — | — | — | — | 1,469 | — | 1,469 | ||||||||||||||||||||||||||||||
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net | — | — | 69 | — | — | — | — | 69 | — | 69 | ||||||||||||||||||||||||||||||
Other | — | — | (1 | ) | — | — | — | — | (1 | ) | — | (1 | ) | |||||||||||||||||||||||||||
Net earnings | — | — | — | — | 47,424 | — | — | 47,424 | 23 | 47,447 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 187 | — | (7,563 | ) | — | — | (7,376 | ) | — | (7,376 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $40) | — | — | — | — | — | 300 | — | 300 | — | 300 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax benefit of $1,899) | — | — | — | — | — | (6,179 | ) | — | (6,179 | ) | — | (6,179 | ) | |||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (13,927 | ) | — | (13,927 | ) | (223 | ) | (14,150 | ) | ||||||||||||||||||||||||||
Balance at September 30, 2018 | $ | — | $ | 548 | $ | 491,472 | $ | (560,991 | ) | $ | 1,398,758 | $ | (131,882 | ) | $ | — | $ | 1,197,905 | $ | 4,897 | $ | 1,202,802 | ||||||||||||||||||
Stock-based compensation | — | — | 5,458 | — | — | — | — | 5,458 | — | 5,458 | ||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 780 | — | — | — | — | 780 | — | 780 | ||||||||||||||||||||||||||||||
Purchase of common stock | — | — | — | (25,000 | ) | — | — | — | (25,000 | ) | — | (25,000 | ) | |||||||||||||||||||||||||||
Reissuance of treasury stock, on LIFO basis, towards Alpha purchase consideration | — | — | 13,537 | 86,463 | — | — | — | 100,000 | — | 100,000 | ||||||||||||||||||||||||||||||
Net earnings | — | — | — | — | 48,417 | — | — | 48,417 | 197 | 48,614 | ||||||||||||||||||||||||||||||
Dividends ($0.175 per common share) | — | — | 195 | — | (7,728 | ) | — | — | (7,533 | ) | — | (7,533 | ) | |||||||||||||||||||||||||||
Other comprehensive income: | ||||||||||||||||||||||||||||||||||||||||
Pension funded status adjustment (net of tax benefit of $141) | — | — | — | — | — | 204 | — | 204 | — | 204 | ||||||||||||||||||||||||||||||
Net unrealized gain (loss) on derivative instruments (net of tax expense of $1,453) | — | — | — | — | — | 4,732 | — | 4,732 | — | 4,732 | ||||||||||||||||||||||||||||||
Foreign currency translation adjustment | — | — | — | — | — | (15,861 | ) | — | (15,861 | ) | 84 | (15,777 | ) | |||||||||||||||||||||||||||
Balance at December 30, 2018 | $ | — | $ | 548 | $ | 511,442 | $ | (499,528 | ) | $ | 1,439,447 | $ | (142,807 | ) | $ | — | $ | 1,309,102 | $ | 5,178 | $ | 1,314,280 | ||||||||||||||||||
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16. Earnings Per Share
The following table sets forth the reconciliation from basic to diluted weighted-average number of common shares outstanding and the calculations of net earnings per common share attributable to EnerSys stockholders.
Quarter ended | Nine months ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Net earnings attributable to EnerSys stockholders | $ | 27,305 | $ | 48,417 | $ | 138,639 | $ | 141,701 | ||||||||
Weighted-average number of common shares outstanding: | ||||||||||||||||
Basic | 42,286,641 | 42,337,459 | 42,445,006 | 42,161,163 | ||||||||||||
Dilutive effect of: | ||||||||||||||||
Common shares from exercise and lapse of equity awards, net of shares assumed reacquired | 552,328 | 765,139 | 443,489 | 655,599 | ||||||||||||
Diluted weighted-average number of common shares outstanding | 42,838,969 | 43,102,598 | 42,888,495 | 42,816,762 | ||||||||||||
Basic earnings per common share attributable to EnerSys stockholders | $ | 0.65 | $ | 1.14 | $ | 3.27 | $ | 3.36 | ||||||||
Diluted earnings per common share attributable to EnerSys stockholders | $ | 0.64 | $ | 1.12 | $ | 3.23 | $ | 3.31 | ||||||||
Anti-dilutive equity awards not included in diluted weighted-average common shares | 636,255 | 356,510 | 766,130 | 310,007 | ||||||||||||
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17. Business Segments
The Company's three reportable segments, based on geographic regions, are as follows:
• | Americas, which includes North and South America, with segment headquarters in Reading, Pennsylvania, USA; |
• | EMEA, which includes Europe, the Middle East and Africa, with segment headquarters in Zug, Switzerland; and |
• | Asia, which includes Asia, Australia and Oceania, with segment headquarters in Singapore. |
Summarized financial information related to the Company's reportable segments for the third quarter and nine months ended December 29, 2019 and December 30, 2018, is shown below:
Quarter ended | Nine months ended | |||||||||||||||
December 29, 2019 | December 30, 2018 | December 29, 2019 | December 30, 2018 | |||||||||||||
Net sales by segment to unaffiliated customers | ||||||||||||||||
Americas | $ | 503,061 | $ | 401,999 | $ | 1,545,110 | $ | 1,183,147 | ||||||||
EMEA | 202,278 | 217,792 | 588,279 | 632,283 | ||||||||||||
Asia | 58,359 | 60,231 | 172,676 | 195,984 | ||||||||||||
Total net sales | $ | 763,698 | $ | 680,022 | $ | 2,306,065 | $ | 2,011,414 | ||||||||
Net sales by product line | ||||||||||||||||
Reserve power | $ | 448,181 | $ | 329,478 | $ | 1,310,846 | $ | 966,834 | ||||||||
Motive power | 315,517 | 350,544 | 995,219 | 1,044,580 | ||||||||||||
Total net sales | $ | 763,698 | $ | 680,022 | $ | 2,306,065 | $ | 2,011,414 | ||||||||
Intersegment sales | ||||||||||||||||
Americas | $ | 13,022 | $ | 7,208 | $ | 30,450 | $ | 20,954 | ||||||||
EMEA | 40,236 | 26,354 | 114,959 | 93,480 | ||||||||||||
Asia | 5,575 | 12,823 | 17,617 | 28,492 | ||||||||||||
Total intersegment sales (1) | $ | 58,833 | $ | 46,385 | $ | 163,026 | $ | 142,926 | ||||||||
Operating earnings by segment | ||||||||||||||||
Americas | $ | 43,081 | $ | 37,961 | $ | 149,574 | $ | 134,003 | ||||||||
EMEA | 12,608 | 17,659 | 41,614 | 48,691 | ||||||||||||
Asia | 657 | 627 | 858 | 4,475 | ||||||||||||
Inventory step up to fair value relating to acquisitions - Americas | (2,475 | ) | (3,747 | ) | (2,475 | ) | (3,747 | ) | ||||||||
Inventory step up to fair value relating to acquisition - EMEA | (1,370 | ) | — | (1,370 | ) | — | ||||||||||
Restructuring charges - Americas | (1,322 | ) | (628 | ) | (2,448 | ) | (628 | ) | ||||||||
Restructuring and other exit charges - EMEA | (7,706 | ) | (4,411 | ) | (9,032 | ) | (6,610 | ) | ||||||||
Restructuring charges - Asia | (389 | ) | (353 | ) | (1,150 | ) | (1,014 | ) | ||||||||
Inventory adjustment relating to exit activities - Asia | — | — | — | (526 | ) | |||||||||||
Fixed asset write-off relating to exit activities and other - Americas | — | — | (5,441 | ) | — | |||||||||||
Legal proceedings settlement income | — | 2,843 | — | 2,843 | ||||||||||||
Total operating earnings (2) | $ | 43,084 | $ | 49,951 | $ | 170,130 | $ | 177,487 | ||||||||
(1) Intersegment sales are presented on a cost-plus basis, which takes into consideration the effect of transfer prices between legal entities.
(2) The Company does not allocate interest expense or other (income) expense to the reportable segments.
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Goodwill
The changes in the carrying amount of goodwill by reportable segment during fiscal 2020 are as follows:
Americas | EMEA | Asia | Total | |||||||||||||
Balance at March 31, 2019 | $ | 470,194 | $ | 143,269 | $ | 42,936 | $ | 656,399 | ||||||||
Goodwill acquired during the period - NorthStar | 17,398 | 5,844 | — | 23,242 | ||||||||||||
Purchase accounting adjustment - Alpha | (1,390 | ) | — | — | (1,390 | ) | ||||||||||
Foreign currency translation adjustment | 3,784 | (2,981 | ) | (3 | ) | 800 | ||||||||||
Balance as of December 29, 2019 | $ | 489,986 | $ | 146,132 | $ | 42,933 | $ | 679,051 | ||||||||
18. Subsequent Events
On February 5, 2020, the Board of Directors approved a quarterly cash dividend of $0.175 per share of common stock to be paid on
March 27, 2020, to stockholders of record as of March 13, 2020.
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ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of EnerSys. EnerSys and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in EnerSys’ filings with the Securities and Exchange Commission and its reports to stockholders. Generally, the inclusion of the words “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “will,” “plans,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that EnerSys expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management, and are applicable only as of the dates of such statements.
Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the Company’s 2019 Annual Report on Form 10-K (the “2019 Annual Report”) and other unforeseen risks. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Our actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including the following factors:
• | general cyclical patterns of the industries in which our customers operate; |
• | the extent to which we cannot control our fixed and variable costs; |
• | the raw materials in our products may experience significant fluctuations in market price and availability; |
• | certain raw materials constitute hazardous materials that may give rise to costly environmental and safety claims; |
• | legislation regarding the restriction of the use of certain hazardous substances in our products; |
• | risks involved in our operations such as disruption of markets, changes in import and export laws, environmental regulations, currency restrictions and local currency exchange rate fluctuations; |
• | our ability to raise our selling prices to our customers when our product costs increase; |
• | the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity; |
• | general economic conditions in the markets in which we operate; |
• | competitiveness of the battery markets and other energy solutions for industrial applications throughout the world; |
• | our timely development of competitive new products and product enhancements in a changing environment and the acceptance of such products and product enhancements by customers; |
• | our ability to adequately protect our proprietary intellectual property, technology and brand names; |
• | litigation and regulatory proceedings to which we might be subject; |
• | our expectations concerning indemnification obligations; |
• | changes in our market share in the geographic business segments where we operate; |
• | our ability to implement our cost reduction initiatives successfully and improve our profitability; |
• | quality problems associated with our products; |
• | our ability to implement business strategies, including our acquisition strategy, manufacturing expansion and restructuring plans; |
• | our acquisition strategy may not be successful in locating advantageous targets; |
• | our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we acquire into our operations and our ability to realize related revenue synergies, strategic gains, and cost savings may be significantly harder to achieve, if at all, or may take longer to achieve; |
• | potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames; |
• | our debt and debt service requirements which may restrict our operational and financial flexibility, as well as imposing unfavorable interest and financing costs; |
• | our ability to maintain our existing credit facilities or obtain satisfactory new credit facilities; |
• | adverse changes in our short and long-term debt levels under our credit facilities; |
• | our exposure to fluctuations in interest rates on our variable-rate debt; |
• | our ability to attract and retain qualified management and personnel; |
• | our ability to maintain good relations with labor unions; |
• | credit risk associated with our customers, including risk of insolvency and bankruptcy; |
• | our ability to successfully recover in the event of a disaster affecting our infrastructure, supply chain, or our facilities, such as the Richmond, Kentucky facility, including, but not limited to, satisfactory resolution of insurance coverage and claims for both property damage, business interruption and other insurable losses, strategy for business interruption and revenue loss; |
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• | terrorist acts or acts of war, could cause damage or disruption to our operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability; and |
• | the operation, capacity and security of our information systems and infrastructure. |
This list of factors that may affect future performance is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under Securities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q. EnerSys’ management uses the non-GAAP measures “primary working capital” and “primary working capital percentage” in its evaluation of business segment cash flow and financial position performance. These disclosures have limitations as an analytical tool, should not be viewed as a substitute for cash flow determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes that this non-GAAP supplemental information is helpful in understanding the Company’s ongoing operating results.
Overview
EnerSys (the “Company,” “we,” or “us”) is the world’s largest manufacturer, marketer and distributor of industrial batteries. We also manufacture, market and distribute products such as battery chargers, power equipment, battery accessories, and outdoor cabinet enclosures. Additionally, we provide related aftermarket and customer-support services for our products. We market our products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force.
We operate and manage our business in three geographic regions of the world—Americas, EMEA and Asia, as described below. Our business is highly decentralized with manufacturing locations throughout the world. More than half of our manufacturing capacity is located outside the United States, and approximately 40% of our net sales were generated outside the United States. The Company currently has three reportable business segments based on geographic regions, defined as follows:
• | Americas, which includes North and South America, with our segment headquarters in Reading, Pennsylvania, U.S.A.; |
• | EMEA, which includes Europe, the Middle East and Africa, with our segment headquarters in Zug, Switzerland; and |
• | Asia, which includes Asia, Australia and Oceania, with our segment headquarters in Singapore. |
We did not change our reportable segments this quarter as previously disclosed. We are continuing to make our evaluation based on more current information.
Alpha Acquisition
On December 7, 2018, the Company completed the acquisition of all of the issued and outstanding common stock of Alpha Technologies Services, Inc. (“ATS”) and Alpha Technologies Ltd. (“ATL”), resulting in ATS and ATL becoming wholly-owned subsidiaries of the Company (the “Alpha share purchase”). Additionally, the Company acquired substantially all of the assets of Alpha Technologies Inc. and certain assets of Altair Advanced Industries, Inc. and other affiliates of ATS and ATL (all such sellers, together with ATS and ATL, “Alpha”), in each case in accordance with the terms and conditions of certain restructuring agreements (collectively, the “Alpha asset acquisition” and together with the Alpha share purchase, the “Alpha acquisition”). Based in Bellingham, Washington, Alpha is a global industry leader in the comprehensive commercial-grade energy solutions for broadband, telecom, renewable, industrial and traffic customers around the world. The initial purchase consideration for the Alpha acquisition was $750.0 million of which $650.0 million was paid in cash and the balance was settled by issuing 1,177,630 shares of EnerSys common stock. These shares were issued out of the Company's treasury stock and were valued at $84.92 per share, which was based on the thirty-day volume weighted average stock price of the Company’s common stock at closing, in accordance with the purchase agreement. The 1,177,630 shares had a closing date fair value of $93.3 million, based upon the December 7, 2018 closing date spot rate of $79.20. The total purchase consideration, consisting of cash paid of $650.0 million, shares valued at $93.3 million and adjustment for working capital (due from seller of $0.8 million) was $742.5 million.
During the current quarter, we completed purchase accounting for the Alpha acquisition and a final allocation of the purchase price to the acquired assets, liabilities and goodwill was made. See Note 4 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for details.
The results of operations of Alpha have been included in our Americas segment.
NorthStar Acquisition
On September 30, 2019, we completed the acquisition of NorthStar, headquartered in Stockholm, Sweden, for $77.8 million in cash consideration and the assumption of $107.0 million in debt, which was funded using existing cash and credit facilities. NorthStar, through its direct and indirect subsidiaries, manufactures and distributes thin plate pure lead (TPPL) batteries and battery enclosures.
The results of the NorthStar acquisition have been included in our results of operations from the date of acquisition. Pro forma earnings and earnings per share computations have not been presented as this acquisition was not considered material.
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The North American and European results of operations of NorthStar have been included in our Americas segment and EMEA segment, respectively.
Economic Climate
Recent indicators suggest a slowdown in economic activity among all the different geographical regions in which we do business.
Volatility of Commodities and Foreign Currencies
Our most significant commodity and foreign currency exposures are related to lead and the Euro, respectively. Historically, volatility of commodity costs and foreign currency exchange rates have caused large swings in our production costs. As the global economic climate changes, we anticipate that our commodity costs and foreign currency exposures may continue to fluctuate as they have in the past several years.
Customer Pricing
Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 30% of our revenue is currently subject to agreements that adjust pricing to a market-based index for lead. Lead prices rose for the most part of fiscal 2018 in response to increased lead and other commodity costs, peaked in the first quarter of fiscal 2019 and then declined sequentially in every quarter in fiscal 2019. In the nine months of our fiscal 2020, our selling prices declined in response to declining commodity costs. Based on current commodity markets, we will likely see continued year over year benefits in fiscal 2020 from declining commodity costs, with some related reduction in our selling prices in the upcoming year.
Liquidity and Capital Resources
We believe that our financial position is strong, and we have substantial liquidity with $273 million of available cash and cash equivalents and available and undrawn credit lines of approximately $750 million at December 29, 2019 to cover short-term liquidity requirements and anticipated growth in the foreseeable future.
During the current quarter, we issued $300 million in aggregate principal amount of our 4.375% Senior Notes due 2027 (the “2027 Notes”). Proceeds from this offering, net of debt issuance costs were $296.3 million and were utilized to pay down the balance outstanding on the revolver borrowings.
A substantial majority of the Company’s cash and investments are held by foreign subsidiaries and are considered to be indefinitely reinvested and expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.
We believe that our strong capital structure and liquidity affords us access to capital for future acquisition and stock repurchase opportunities and continued dividend payments.
Results of Operations
Net Sales
Net sales increased $83.7 million or 12.3% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. This increase was the result of a 20% increase from the Alpha and NorthStar acquisitions, partially offset by a 5% decrease in organic volume, a 2% decrease in pricing and a 1% decrease in foreign currency translation impact.
Net sales increased $294.6 million or 14.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019. This increase was the result of a 22% increase from the Alpha and NorthStar acquisitions, partially offset by a 4% decrease in organic volume, a 2% decrease in foreign currency translation impact and a 1% decrease in pricing.
Organic volume decline in both the current quarter and nine months of fiscal 2020 reflects the impact of the recent fire and ERP execution challenges in our Richmond, Kentucky facility and weakness in the European markets.
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Segment sales
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Americas | $ | 503.1 | 65.9 | % | $ | 402.0 | 59.1 | % | $ | 101.1 | 25.1 | % | |||||||||
EMEA | 202.3 | 26.5 | 217.8 | 32.0 | (15.5 | ) | (7.1 | ) | |||||||||||||
Asia | 58.3 | 7.6 | 60.2 | 8.9 | (1.9 | ) | (3.1 | ) | |||||||||||||
Total net sales | $ | 763.7 | 100.0 | % | $ | 680.0 | 100.0 | % | $ | 83.7 | 12.3 | % | |||||||||
Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Americas | $ | 1,545.1 | 67.0 | % | $ | 1,183.1 | 58.8 | % | $ | 362.0 | 30.6 | % | |||||||||
EMEA | 588.3 | 25.5 | 632.3 | 31.4 | (44.0 | ) | (7.0 | ) | |||||||||||||
Asia | 172.6 | 7.5 | 196.0 | 9.8 | (23.4 | ) | (11.9 | ) | |||||||||||||
Total net sales | $ | 2,306.0 | 100.0 | % | $ | 2,011.4 | 100.0 | % | $ | 294.6 | 14.6 | % | |||||||||
The Americas segment’s net sales increased $101.1 million or 25.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 32% increase from the Alpha and NorthStar acquisitions, partially offset by a 4% decrease in organic volume, a 2% decrease in pricing and a 1% decrease in foreign currency translation impact. Net sales increased $362.0 or 30.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 36% increase from the Alpha and NorthStar acquisitions, partially offset by a 3% decrease in organic volume and a 1% decrease each in pricing and foreign currency translation impact.
The EMEA segment’s net sales decreased $15.5 million or 7.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 9% decrease in organic volume and a 2% decrease in foreign currency translation impact, partially offset by a 4% increase from the NorthStar acquisition. Net sales decreased $44.0 or 7.0% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 4% decrease each in organic volume and foreign currency translation impact, a 1% decrease in pricing, partially offset by a 2% increase from the NorthStar acquisition.
The Asia segment’s net sales decreased $1.9 million or 3.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 2% decrease in pricing and a 1% decrease in foreign currency translation impact. Net sales decreased $23.4 or 11.9% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 9% decrease in organic volume and a 3% decrease in foreign currency translation impact.
Product line sales
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Reserve power | $ | 448.2 | 58.7 | % | $ | 329.5 | 48.5 | % | $ | 118.7 | 36.0 | % | |||||||||
Motive power | 315.5 | 41.3 | 350.5 | 51.5 | (35.0 | ) | (10.0 | ) | |||||||||||||
Total net sales | $ | 763.7 | 100.0 | % | $ | 680.0 | 100.0 | % | $ | 83.7 | 12.3 | % | |||||||||
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Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Reserve power | $ | 1,310.8 | 56.8 | % | $ | 966.9 | 48.1 | % | $ | 343.9 | 35.6 | % | |||||||||
Motive power | 995.2 | 43.2 | 1,044.5 | 51.9 | (49.3 | ) | (4.7 | ) | |||||||||||||
Total net sales | $ | 2,306.0 | 100.0 | % | $ | 2,011.4 | 100.0 | % | $ | 294.6 | 14.6 | % | |||||||||
Net sales of our reserve power products in the third quarter of fiscal 2020 increased $118.7 million or 36.0% compared to the third quarter of fiscal 2019. The increase was primarily due to a 41% increase from the Alpha and NorthStar acquisitions, partially offset by a 2% decrease each in organic volume and pricing and a 1% decrease in foreign currency translation impact. Net sales increased $343.9 or 35.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 45% increase from the Alpha and NorthStar acquisitions, partially offset by a 7% decrease in organic volume, a 1% decrease each in foreign currency translation impact and pricing. The decrease in organic volume in both the current quarter and nine months is primarily from the deferral of spending by telecom and broadband customers and the conclusion of a large enclosure order a year ago.
Net sales of our motive power products segment in the third quarter of fiscal 2020 decreased by $35.0 million or 10.0% compared to the third quarter of fiscal 2019. The decrease was primarily due to an 8% decrease in organic volume and a 1% decrease each in foreign currency translation impact and pricing. Net sales decreased $49.3 or 4.7% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 2% decrease each in organic volume and foreign currency translation impact and a 1% decrease in pricing. The motive power product organic volume decline reflects the impact of the weakness in the European markets and the recent fire and ERP execution challenges in our Richmond, Kentucky facility.
Gross Profit
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Gross Profit | $ | 185.3 | 24.3 | % | $ | 164.6 | 24.2 | % | $ | 20.7 | 12.6 | % | |||||||||
Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Gross Profit | $ | 584.1 | 25.3 | % | $ | 490.8 | 24.4 | % | $ | 93.3 | 19.0 | % | |||||||||
Gross profit increased $20.7 million or 12.6% in the third quarter and increased $93.3 million or 19.0% in the nine months of fiscal 2020 compared to the comparable periods of fiscal 2019. Gross profit, as a percentage of net sales, increased 10 basis points and 90 basis points in the third quarter and nine months of fiscal 2020 compared to the third quarter and nine months of fiscal 2019, respectively. This increase in the gross profit margin in both the third quarter and nine months is largely a function of declines in commodity costs relative to pricing, partially offset by higher manufacturing costs.
Operating Items
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Operating expenses | $ | 132.8 | 17.4 | % | $ | 112.0 | 16.5 | % | $ | 20.8 | 18.5 | % | |||||||||
Restructuring charges | $ | 9.4 | 1.3 | % | $ | 5.4 | 0.8 | % | $ | 4.0 | 74.7 | % | |||||||||
Legal proceedings settlement income | $ | — | — | % | $ | (2.8 | ) | (0.4 | )% | $ | 2.8 | NM | |||||||||
NM = not meaningful
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Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Operating expenses | $ | 395.9 | 17.1 | % | $ | 307.8 | 15.3 | % | $ | 88.1 | 28.6 | % | |||||||||
Restructuring charges | $ | 18.1 | 0.8 | % | $ | 8.3 | 0.4 | % | $ | 9.8 | NM | ||||||||||
Legal proceedings settlement income | $ | — | — | % | $ | (2.8 | ) | (0.1 | )% | $ | 2.8 | NM | |||||||||
NM = not meaningful
Operating expenses, as a percentage of sales, increased 90 basis points and 180 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the comparable periods of fiscal 2019. Excluding the impact of the foreign currency translation, the increase in dollars reflects the inclusion of Alpha and the additional investments in new product development.
Selling expenses, our main component of operating expenses, was 44.7% of total operating expenses in both the third quarter and nine months, respectively, compared to 44.0% and 47.0% of total operating expenses in the third quarter and nine months of fiscal 2019.
Restructuring, Exit and Other Charges
Included in our third quarter of fiscal 2020 operating results are restructuring charges of $1.3 million in the Americas and $5.5 million in EMEA, both primarily relating to the recent NorthStar acquisition and $0.4 million in Asia. Also included in the third quarter of fiscal 2020 operating results are cash exit charges of $2.2 million in EMEA, relating to the closure of our facility in Targovishte, Bulgaria.
Included in our third quarter of fiscal 2019 operating results were restructuring charges of $0.6 million in Americas, $4.4 million in EMEA and $0.4 million in Asia. The charges in the Americas related to improving efficiencies of our general operations. Of the $4.4 million charges in EMEA, $0.9 million related to improving efficiencies of our general operations and $3.5 million related to the sale of 100% of the shares in GAZ Geräte- und Akkumulatorenwerk Zwickau GmbH, a wholly-owned German subsidiary, which closed in the fourth quarter of fiscal 2019. The exit is a consequence of the Company's strategic decision to streamline its product portfolio and focus its efforts on new technologies. The charges in Asia primarily related to improving efficiencies in the People's Republic of China (“PRC”).
Richmond, Kentucky Plant Fire
On September 19, 2019, a fire broke out in the battery formation area of our Richmond, Kentucky motive power production facility. We maintain insurance policies for both property damage and business interruption and are in the process of cleanup and repair. We believe that the total claim, including the replacement of inventory and equipment, the cleanup and repairs to the building, as well as the claim for business interruption may exceed $50 million.
As of December 29, 2019, we incurred $10.0 million of costs associated with the damage caused to our fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire. We also received $12.0 million of advances related to our initial claims for recovery from our property and casualty insurance carriers, a substantial part of which has been reflected as operating cash flows in the Consolidated Condensed Statements of Cash Flows included in this Quarterly Report on Form 10-Q.
35
Operating Earnings
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales (1) | In Millions | Percentage of Total Net Sales (1) | In Millions | % | ||||||||||||||||
Americas | $ | 43.1 | 8.6 | % | $ | 38.0 | 9.4 | % | $ | 5.1 | 13.5 | % | |||||||||
EMEA | 12.6 | 6.2 | 17.6 | 8.1 | (5.0 | ) | (28.6 | ) | |||||||||||||
Asia | 0.6 | 1.1 | 0.7 | 1.0 | (0.1 | ) | 4.8 | ||||||||||||||
Subtotal | 56.3 | 7.4 | 56.3 | 8.3 | — | 0.2 | |||||||||||||||
Inventory step up to fair value relating to acquisitions - Americas | (2.5 | ) | (0.5 | ) | (3.7 | ) | (0.9 | ) | 1.2 | (33.9 | ) | ||||||||||
Inventory step up to fair value relating to acquisition - EMEA | (1.3 | ) | (0.7 | ) | — | — | (1.3 | ) | NM | ||||||||||||
Restructuring charges - Americas | (1.3 | ) | (0.3 | ) | (0.6 | ) | (0.2 | ) | (0.7 | ) | NM | ||||||||||
Restructuring and other exit charges - EMEA | (7.7 | ) | (3.8 | ) | (4.4 | ) | (2.0 | ) | (3.3 | ) | 74.7 | ||||||||||
Restructuring charges - Asia | (0.4 | ) | (0.7 | ) | (0.4 | ) | (0.6 | ) | — | 10.2 | |||||||||||
Legal proceedings settlement income | — | — | 2.8 | 1.3 | (2.8 | ) | NM | ||||||||||||||
Total operating earnings | $ | 43.1 | 5.6 | % | $ | 50.0 | 7.3 | % | $ | (6.9 | ) | (13.7 | )% | ||||||||
NM = not meaningful
(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.
Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales (1) | In Millions | Percentage of Total Net Sales (1) | In Millions | % | ||||||||||||||||
Americas | $ | 149.6 | 9.7 | % | $ | 134.1 | 11.3 | % | $ | 15.5 | 11.6 | % | |||||||||
EMEA | 41.6 | 7.1 | 48.6 | 7.7 | (7.0 | ) | (14.5 | ) | |||||||||||||
Asia | 0.8 | 0.5 | 4.5 | 2.3 | (3.7 | ) | (80.8 | ) | |||||||||||||
Subtotal | 192.0 | 8.3 | 187.2 | 9.3 | 4.8 | 2.6 | |||||||||||||||
Inventory step up to fair value relating to acquisitions - Americas | (2.5 | ) | (0.2 | ) | (3.7 | ) | (0.3 | ) | 1.2 | (51.4 | ) | ||||||||||
Inventory step up to fair value relating to acquisition - EMEA | (1.3 | ) | (0.2 | ) | — | — | (1.3 | ) | NM | ||||||||||||
Restructuring charges - Americas | (2.4 | ) | (0.2 | ) | (0.6 | ) | (0.1 | ) | (1.8 | ) | NM | ||||||||||
Restructuring and other exit charges - EMEA | (9.0 | ) | (1.5 | ) | (6.6 | ) | (1.0 | ) | (2.4 | ) | 36.6 | ||||||||||
Restructuring charges - Asia | (1.2 | ) | (0.7 | ) | (1.1 | ) | (0.5 | ) | (0.1 | ) | 13.4 | ||||||||||
Fixed asset write-off relating to exit activities and other - Americas | (5.5 | ) | (0.4 | ) | — | — | (5.5 | ) | NM | ||||||||||||
Inventory write-off relating to exit activities - Asia | — | — | (0.5 | ) | (0.3 | ) | 0.5 | NM | |||||||||||||
Legal proceedings settlement income | — | — | 2.8 | 0.4 | (2.8 | ) | NM | ||||||||||||||
Total operating earnings | $ | 170.1 | 7.4 | % | $ | 177.5 | 8.8 | % | $ | (7.4 | ) | (4.1 | )% | ||||||||
NM = not meaningful
(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.
Operating earnings decreased $6.9 million or 13.7% and decreased $7.4 million or 4.1% in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. Operating earnings, as a percentage of net sales, decreased 170 basis points and 140 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019, primarily due to the recent fire and ERP execution challenges at our Richmond, Kentucky facility which continued to result in missed sales opportunities and higher manufacturing costs, as well as the decline in our organic volume in EMEA and Asia.
The Americas segment's operating earnings, excluding inventory step up relating to recent acquisitions, restructuring, exit and other charges, decreased 80 basis points and 160 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. The decrease is primarily due to the recent fire and ERP execution challenges at our Richmond, Kentucky, facility which continued to result in missed sales opportunities, tariffs and higher manufacturing costs. This negative impact was partially
36
offset by the impact of lower commodity costs and Alpha's contribution to operating earnings of $12 million or 8.9% of its sales for the third quarter and $47 million or 10.9% of its sales for the nine months of fiscal 2020.
The EMEA segment's operating earnings, excluding inventory step up relating to recent acquisition, restructuring and other exit charges, decreased 190 basis points and 60 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019 due to lower volume driven in part by the return of a competitor to the market in fiscal 2020. This competitor was absent in fiscal 2019.
The Asia segment's operating earnings, excluding restructuring charges, increased 10 basis points and decreased 180 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. The slight improvement in the third quarter of fiscal 2020 is due to favorable commodity costs. The decrease of 180 basis points in the nine months of fiscal 2020 is primarily due to lower organic volume caused by the slowdown in the Chinese economy.
Interest Expense
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Interest expense | $ | 11.1 | 1.4 | % | $ | 7.1 | 1.0 | % | $ | 4.0 | 56.6 | % | |||||||||
Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Interest expense | $ | 32.1 | 1.4 | % | $ | 20.0 | 1.0 | % | $ | 12.1 | 60.3 | % | |||||||||
Interest expense of $11.1 million in the third quarter of fiscal 2020 (net of interest income of $0.5 million) was $4.0 million higher than the interest expense of $7.1 million in the third quarter of fiscal 2019 (net of interest income of $0.5 million). Interest expense of $32.1 million in the nine months of fiscal 2020 (net of interest income of $1.6 million) was $12.1 million higher than the interest expense of $20.0 million in the nine months of fiscal 2019 (net of interest income of $1.5 million).
The increase in interest expense in the third quarter and nine months of fiscal 2020 is primarily due to higher average debt. Our average debt outstanding was $1,149.3 million and $1,084.8 million in the third quarter and nine months of fiscal 2020, respectively, compared to $664.7 million and $636.8 million in the third quarter and nine months of fiscal 2019. The increased borrowings were primarily to fund the Alpha acquisition in the third quarter of fiscal 2019.
In connection with the issuance of the 2027 Notes, we capitalized $4.6 million of debt issuance costs. Included in interest expense are non-cash charges for deferred financing fees of $0.4 million and $1.1 million in the third quarter and nine months of fiscal 2020 compared to $0.3 million and $0.9 million, in the third quarter and nine months of fiscal 2019.
Other (Income) Expense, Net
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | ||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | |||||||||||||||
Other (income) expense, net | $ | (0.6 | ) | (0.1 | )% | $ | — | — | % | $ | (0.6 | ) | NM | |||||||
NM = not meaningful
Nine months ended December 29, 2019 | Nine months ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Other (income) expense, net | $ | (1.6 | ) | — | % | $ | (0.9 | ) | (0.1 | )% | $ | (0.7 | ) | 48.2 | % | ||||||
37
Other (income) expense, net in the third quarter of fiscal 2020 was income of $0.6 million compared to $0.0 million in the third quarter of fiscal 2019. Other (income) expense, net in the nine months of fiscal 2020 was income of $1.6 million compared to income of $0.9 million in the nine months of fiscal 2019. Foreign currency impact resulted in a loss of $0.1 million and a gain of $1.0 million, in the third quarter and nine months of fiscal 2020, respectively, compared to a foreign currency gain of $1.0 million and $3.2 million in the third quarter and nine months of fiscal 2019.
Earnings Before Income Taxes
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Earnings before income taxes | $ | 32.6 | 4.3 | % | $ | 42.9 | 6.3 | % | $ | (10.3 | ) | (24.1 | )% | ||||||||
Nine months ended December 29, 2019 | Nine months ended December 29, 2019 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Earnings before income taxes | $ | 139.6 | 6.0 | % | $ | 158.4 | 7.9 | % | $ | (18.8 | ) | (11.9 | )% | ||||||||
As a result of the above, earnings before income taxes in the third quarter of fiscal 2020 decreased $10.3 million, or 24.1%, compared to the third quarter of fiscal 2019 and decreased $18.8 million or 11.9%, in the nine months of fiscal 2020, compared to the nine months of fiscal 2019.
Income Tax Expense (Benefit)
Quarter ended December 29, 2019 | Quarter ended December 30, 2018 | Increase (Decrease) | ||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | |||||||||||||||
Income tax expense (benefit) | $ | 5.3 | 0.7 | % | $ | (5.7 | ) | (0.8 | )% | $ | 11.0 | NM | ||||||||
Effective tax rate | 16.2% | (13.3)% | 29.5% | |||||||||||||||||
NM = not meaningful
Nine months ended December 29, 2019 | Nine Months Ended December 30, 2018 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Income tax expense | $ | 1.0 | — | % | $ | 16.4 | 0.8 | % | $ | (15.4 | ) | (94.1 | )% | ||||||||
Effective tax rate | 0.7% | 10.4% | (9.7)% | ||||||||||||||||||
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarter of fiscal 2020 and 2019 was based on the estimated effective tax rates applicable for the full years ending March 31, 2020 and March 31, 2019, respectively, after giving effect to items specifically related to the interim periods. Our effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which we operate, change in tax laws and the amount of our consolidated income before taxes.
On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures are effective January 1, 2020. Certain provisions of the TRAF were enacted during the second quarter of fiscal 2020. Significant changes in the tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The transitional provisions of the TRAF allow companies to elect tax basis adjustments to fair value, which is used for tax depreciation and amortization purposes resulting in a deduction over the transitional period. We recorded a deferred tax asset of $21.0 million during the second quarter of fiscal 2020, related to the amortizable goodwill, subject to final negotiations with the Swiss federal and cantonal tax authority.
38
The consolidated effective income tax rates for the third quarter of fiscal 2020 and 2019 were 16.2% and (13.3)%, respectively and were 0.7% and 10.4% for the nine months of fiscal 2020 and 2019, respectively. The rate increase in the third quarter of fiscal 2020 compared to the comparable prior year quarter is primarily due changes in mix of earnings among tax jurisdictions and items related to the Tax Cuts and Jobs Act (“Tax Act”), including a $13.5 million benefit in fiscal 2019. The rate decrease in the nine months of fiscal 2020 compared to the prior year period is primarily due to changes in mix of earnings among tax jurisdictions, Swiss tax reform, and items related to the Tax Act in fiscal 2019.
Foreign income as a percentage of worldwide income is estimated to be 76% for fiscal 2020 compared to 74% for fiscal 2019. The foreign effective income tax rates for the nine months of fiscal 2020 and 2019 were (3.9)% and 11.8%, respectively. The rate decrease compared to the prior year period is primarily due to Swiss tax reform and changes in the mix of earnings among tax jurisdictions. Income from the Company's Swiss subsidiary comprised a substantial portion of our overall foreign mix of income and is taxed at an effective income tax rate of approximately 6% in both the current and prior year quarter of fiscal 2020 and fiscal 2019.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies from those discussed under the caption “Critical Accounting Policies and Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2019 Annual Report. The adoption of ASC 842 did not result in a material change to our current critical accounting estimates. See Recently Adopted Accounting Pronouncements in Note 1 - Basis of Presentation, to the Consolidated Condensed Financial Statements, for further information on the adoption of ASC 842.
Liquidity and Capital Resources
Cash Flow Analysis
Operating activities provided cash of $175.8 million in the nine months of fiscal 2020 compared to $166.4 million in the comparable period of fiscal 2019. In the nine months of fiscal 2020, cash provided by operating activities was primarily from net earnings of $138.6 million, depreciation and amortization of $65.8 million, non-cash charges relating to restructuring, exit and other charges of $10.0 million, stock-based compensation of $14.8 million, provision for doubtful debts of $2.9 million and non-cash interest of $1.2 million, partially offset by deferred taxes of $21.0 million resulting from the Swiss Tax Reform. Cash provided by earnings adjusted for non-cash items were partially offset by the increase in primary working capital of $11.0 million, net of currency translation changes. Accrued expenses decreased by $7.3 million primarily for payments of $7.3 million related to the German competition authority matter (See Note 10 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q) and $6.1 million paid to the seller in connection with the Alpha acquisition, for certain reimbursable pre-acquisition items, partially offset by payroll related accruals of $6.1 million and exit activities of $2.3 million. Prepaid and other current assets increased by $7.0 million, primarily due to contract assets of $14.8 million, insurance receivable of $9.8 million relating to the Richmond plant claim, partially offset by insurance proceeds of $12.0 million and VAT refund of $7.0 million. Other liabilities decreased by $14.7 million due to income taxes.
In the nine months of fiscal 2019, cash provided by operating activities was primarily from net earnings of $142.0 million, depreciation and amortization of $42.5 million, stock-based compensation of $14.6 million, non-cash charges relating to write-off of assets of $4.5 million and non-cash interest of $0.9 million. Cash provided by earnings as adjusted for non-cash items were partially offset by the increase in primary working capital of $15.2 million, net of currency translation changes, and an outflow primarily related to taxes of $12.5 million in prepaid assets and $23.5 million in other liabilities. Accrued expenses provided a source of funds of $14.3 million primarily relating to acquisition costs and payroll and incentives.
As explained in the discussion of our use of “non-GAAP financial measures,” we monitor the level and percentage of primary working capital to sales. Primary working capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable. The resulting net amount is divided by the trailing three month net sales (annualized) to derive a primary working capital percentage. Primary working capital was $857.1 million (yielding a primary working capital percentage of 28.1%) at December 29, 2019, $835.6 million (yielding a primary working capital percentage of 26.2%) at March 31, 2019 and $827.8 million at December 30, 2018 (yielding a primary working capital percentage of 24.9%). The primary working capital percentage of 28.1% at December 29, 2019 is 190 basis points higher than that for March 31, 2019, and 320 basis points higher than that for the prior year period. The increase in primary working capital compared to the prior year periods is primarily due to the build up of inventories in the Americas due to disruption caused by the Richmond fire.
39
Primary working capital and primary working capital percentages at December 29, 2019, March 31, 2019 and December 30, 2018 are computed as follows:
($ in Millions) | |||||||||||||||||||||||
Balance At (1) | Trade Receivables | Inventory | Accounts Payable | Total | Quarter Revenue Annualized | Primary Working Capital % | |||||||||||||||||
December 29, 2019 | $ | 578.4 | $ | 557.5 | $ | (278.8 | ) | $ | 857.1 | $ | 3,054.8 | 28.1 | % | ||||||||||
March 31, 2019 | 624.1 | 503.9 | (292.4 | ) | 835.6 | 3,186.4 | 26.2 | ||||||||||||||||
December 30, 2018 | 607.4 | 501.3 | (280.9 | ) | 827.8 | 3,330.4 | 24.9 | ||||||||||||||||
(1) The Company acquired NorthStar on September 30, 2019, as disclosed in Note 4 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q. Therefore, the Primary working capital and related calculations as of December 30, 2018 and March 31, 2019, do not include NorthStar's primary working capital and its components. The inclusion of NorthStar's Primary working capital did not have a material impact on the Company's consolidated Primary working capital as of December 29, 2019.
Investing activities used cash of $234.4 million in the nine months of fiscal 2020 which primarily consisted of $176.5 million paid towards the NorthStar acquisition and capital expenditures of $60.9 million relating to plant improvements.
Investing activities used cash of $702.1 million in the nine months of fiscal 2019 which primarily consisted of $650.0 million paid towards the Alpha acquisition and $52.7 million of capital expenditures relating to plant improvements.
Financing activities provided cash of $33.4 million in the nine months of fiscal 2020. During the nine months of fiscal 2020, we issued our 2027 Notes for $300 million, the proceeds of which were utilized to pay down the existing revolver borrowings. We borrowed $326.7 million under the Amended 2017 Revolver and repaid $497.7 million of the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was $11.3 million and net payments on short-term debt were $17.6 million. Treasury stock open market purchases were $34.6 million, payment of cash dividends to our stockholders were $22.3 million and payment of taxes related to net share settlement of equity awards were $6.3 million.
Financing activities provided cash of $451.2 million in the nine months of fiscal 2019. During the nine months of fiscal 2019, we borrowed $454.5 million under the Amended 2017 Revolver and $299.1 million under the Amended 2017 Term Loan, primarily to fund the Alpha acquisition and repaid $246.0 million of the Amended 2017 Revolver. Treasury stock open market purchases were $25.0 million, payment of cash dividends to our stockholders were $22.3 million and payment of taxes related to net share settlement of equity awards were $3.4 million. Proceeds from stock options were $9.0 million and net payments on short-term debt were $13.6 million.
Currency translation had a negative impact of $1.6 million on our cash balance in the nine months of fiscal 2020 compared to a negative impact of $40.5 million in the nine months of fiscal 2019. In the nine months of fiscal 2020, principal currencies in which we do business such as the Euro, Swiss franc, Polish zloty and British Pound generally trended stronger versus the U.S. dollar.
As a result of the above, total cash and cash equivalents decreased by $26.7 million to $272.5 million, in the nine months of fiscal 2020 compared to a decrease by $125.0 million to $397.2 million, in the comparable period of fiscal 2019.
Compliance with Debt Covenants
All obligations under our Amended Credit Facility are secured by, among other things, substantially all of our U.S. assets. The Amended Credit Facility contains various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions. There are no prepayment penalties on loans under this credit facility.
We are in compliance with all covenants and conditions under our Amended Credit Facility and Senior Notes. We believe that we will continue to comply with these covenants and conditions, and that we have the financial resources and the capital available to fund the foreseeable organic growth in our business and to remain active in pursuing further acquisition opportunities. See Note 8 to the Consolidated Financial Statements included in our 2019 Annual Report and Note 12 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for a detailed description of our debt.
Contractual Obligations and Commercial Commitments
A table of our obligations is contained in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations of our 2019 Annual Report for the year ended March 31, 2019. On December 11, 2019, the Company issued its 2027 Notes, in an aggregate principal amount of $300 million. The proceeds, net of fees, were utilized in paying down the borrowings on our Amended 2017 Revolver, which after such repayment is outstanding in the amount of $68 million, as of December 29, 2019. The 2027 Notes mature on December 15, 2027, unless redeemed or repurchased earlier. See Note 12 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for a detailed description of the 2027 Notes.
40
As of December 29, 2019, except for presentation changes resulting from the adoption of ASC 842 effective our first quarter of fiscal 2020 and the aforementioned issuance of 2027 Notes, we had no significant changes to our contractual obligations table contained in our 2019 Annual Report.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks
Our cash flows and earnings are subject to fluctuations resulting from changes in raw material costs, foreign currency exchange rates and interest rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.
Counterparty Risks
We have entered into lead forward purchase contracts and foreign exchange forward and purchased option contracts to manage the risk associated with our exposures to fluctuations resulting from changes in raw material costs and foreign currency exchange rates. The Company’s agreements are with creditworthy financial institutions. Those contracts that result in a liability position at December 29, 2019 are $4.3 million (pre-tax). Those contracts that result in an asset position at December 29, 2019 are $0.4 million (pre-tax) and the vast majority of these will settle within one year. The impact on the Company due to nonperformance by the counterparties has been evaluated and not deemed material.
Interest Rate Risks
We are exposed to changes in variable U.S. interest rates on borrowings under our credit agreements as well as short-term borrowings in our foreign subsidiaries.
A 100 basis point increase in interest rates would have increased interest expense, on an annualized basis, by approximately $5.4 million on the variable rate portions of our debt.
Commodity Cost Risks – Lead Contracts
We have a significant risk in our exposure to certain raw materials. Our largest single raw material cost is for lead, for which the cost remains volatile. In order to hedge against increases in our lead cost, we have entered into forward contracts with financial institutions to fix the price of lead. A vast majority of such contracts are for a period not extending beyond one year. We had the following contracts outstanding at the dates shown below:
Date | $’s Under Contract (in millions) | # Pounds Purchased (in millions) | Average Cost/Pound | Approximate % of Lead Requirements (1) | ||||||||||
December 29, 2019 | $ | 57.1 | 61.0 | $ | 0.94 | 8 | % | |||||||
March 31, 2019 | 39.2 | 42.0 | 0.93 | 7 | ||||||||||
December 30, 2018 | 70.2 | 77.0 | 0.91 | 13 | ||||||||||
(1) Based on approximate annual lead requirements for the periods then ended.
For the remaining one quarter of this fiscal year, we believe approximately 100% of the cost of our lead requirements is known. This takes into account the hedge contracts in place at December 29, 2019, lead purchased by December 29, 2019 that will be reflected in future costs under our FIFO accounting policy, and the benefit from our lead tolling program.
We estimate that a 10% increase in our cost of lead would have increased our cost of goods sold by approximately $15 million and $47 million, in the third quarter and nine months of fiscal 2020.
Foreign Currency Exchange Rate Risks
We manufacture and assemble our products globally in the Americas, EMEA and Asia. Approximately 40% of our sales and expenses are transacted in foreign currencies. Our sales revenue, production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. Additionally, as we report our financial statements in U.S. dollars, our financial results are affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar. The principal foreign currencies in which we conduct business are the Euro, Swiss franc, British pound, Polish zloty, Chinese renminbi and Mexican peso.
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We quantify and monitor our global foreign currency exposures. Our largest foreign currency exposure is from the purchase and conversion of U.S. dollar based lead costs into local currencies in Europe. Additionally, we have currency exposures from intercompany financing and intercompany and third party trade transactions. On a selective basis, we enter into foreign currency forward contracts and purchase option contracts to reduce the impact from the volatility of currency movements; however, we cannot be certain that foreign currency fluctuations will not impact our operations in the future.
We hedge approximately 5% - 10% of the nominal amount of our known foreign exchange transactional exposures. We primarily enter into foreign currency exchange contracts to reduce the earnings and cash flow impact of the variation of non-functional currency denominated receivables and payables. The vast majority of such contracts are for a period not extending beyond one year.
Gains and losses resulting from hedging instruments offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. We also selectively hedge anticipated transactions that are subject to foreign exchange exposure, primarily with foreign currency exchange contracts, which are designated as cash flow hedges in accordance with Topic 815 - Derivatives and Hedging.
At December 29, 2019 and December 30, 2018, we estimate that an unfavorable 10% movement in the exchange rates would have adversely changed our hedge valuations by approximately $3.7 million and $6.9 million, respectively.
ITEM 4. | CONTROLS AND PROCEDURES |
(a) Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective. We completed the Alpha acquisition on December 7, 2018 and the NorthStar acquisition on September 30, 2019, and are in the process, but have not yet concluded our assessment of the effectiveness of our internal control over financial reporting including these recent acquisitions. Accordingly, pursuant to the SEC's general guidance that an assessment of a recently acquired business may be omitted from the scope of an assessment in the year of acquisition, the scope of our assessment of the effectiveness of our disclosure controls and procedures does not include Alpha and NorthStar. For the third quarter and nine months of fiscal 2020, Alpha accounted for $135.3 million and $432.4 million, respectively, of our total net sales and as of December 29, 2019 had total assets of $878.2 million. NorthStar accounted for $27.8 million of our total net sales for the third quarter of fiscal 2020 and had total assets of $218.0 million as of December 29, 2019.
(b) Internal Control Over Financial Reporting. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and determined that there was no change in our internal control over financial reporting during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II | OTHER INFORMATION |
Item 1. | Legal Proceedings |
From time to time, we are involved in litigation incidental to the conduct of our business. See Litigation and Other Legal Matters in Note 10 - Commitments, Contingencies and Litigation to the Consolidated Condensed Financial Statements, which is incorporated herein by reference.
Item 1A. | Risk Factors |
Other than the risk factors set forth below, there have been no material changes to the risk factors disclosed in Part I, Item 1A. Risk Factors in our 2019 Annual Report for the year ended March 31, 2019, which could materially affect our business, financial condition or future results.
Our international operations may be adversely affected by actions taken by foreign governments or other forces or events over which we may have no control.
We currently have significant manufacturing and / or distribution facilities outside of the United States, in Argentina, Australia, Belgium, Brazil, Canada, the Czech Republic, France, Germany, India, Italy, Malaysia, Mexico, the PRC, Poland, Spain, Switzerland and the United Kingdom. Our global operations are dependent upon products manufactured, purchased and sold in the U.S. and internationally, including in countries with political and economic instability or uncertainty. This includes, for example, the uncertainty related to the United Kingdom following its withdrawal from the European Union (commonly known as “Brexit”) and the adoption and expansion of trade restrictions, including the occurrence or escalation of a "trade war," or other governmental action related to tariffs or trade agreements or policies among the governments of the United States, PRC and other countries. On January 31, 2020, the United Kingdom left the European Union pursuant to a withdrawal agreement which provides for, among other things, a transition period ending on December 31, 2020 during which the United Kingdom will remain (i) subject to all European Union laws and all international agreements that the European Union has signed and (ii) in the European Union Customs Union and the European Union Single Market. Before July 1, 2020, the United Kingdom and the European Union can jointly extend this transition period once by up to one to two years. Some countries have greater political and economic volatility and greater vulnerability to infrastructure and labor disruptions than others. Our business could be negatively impacted by adverse fluctuations in freight costs, limitations on shipping and receiving capacity, and other disruptions in the transportation and shipping infrastructure at important geographic points of exit and entry for our products. Operating in different regions and countries exposes us to a number of risks, including:
• | multiple and potentially conflicting laws, regulations and policies that are subject to change; |
• | imposition of currency restrictions, restrictions on repatriation of earnings or other restraints imposition of burdensome import duties, tariffs or quotas; |
• | changes in trade agreements; |
• | imposition of new or additional trade and economic sanctions, laws imposed by the U.S. or foreign governments; |
• | war or terrorist acts; and |
• | political and economic instability or civil unrest that may severely disrupt economic activity in affected countries. |
The occurrence of one or more of these events may negatively impact our business, results of operations and financial condition.
We face risks related to health epidemics and other outbreaks, which could significantly disrupt our operations.
Our business could be adversely impacted by the effects of the Coronavirus or other epidemics to the extent that Coronavirus or any other epidemic harms the Chinese economy in general. We may also experience impacts to our plants, our operations, certain of our customers and / or suppliers in the PRC, as a result of a health epidemic or other outbreak, which may materially and adversely affect our business, financial condition and results of operations. Further, our operation may experience disruptions, such as temporary closure of our plants and / or those of our customers or suppliers and suspension of services, which may materially and adversely affect our business, financial condition and results of operations.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The following table summarizes the number of shares of common stock we purchased from participants in our equity incentive plans as well as repurchases of common stock authorized by the Board of Directors. As provided by the Company’s equity incentive plans, (a) vested options outstanding may be exercised through surrender to the Company of option shares or vested options outstanding under the Company’s equity incentive plans to satisfy the applicable aggregate exercise price (and any withholding tax) required to be paid upon such exercise and (b) the withholding tax requirements related to the vesting and settlement of restricted stock units and market condition-based share units may be satisfied by the surrender of shares of the Company’s common stock.
Purchases of Equity Securities
Period | (a) Total number of shares (or units) purchased | (b) Average price paid per share (or unit) | (c) Total number of shares (or units) purchased as part of publicly announced plans or programs | (d) Maximum number (or approximate dollar value) of shares (or units) that may be purchased under the plans or programs (1) (2) | ||||||||||
September 30 – October 27, 2019 | 23 | $ | 64.52 | — | $ | 9,002,889 | ||||||||
October 28 – November 24, 2019 | 163 | 67.90 | — | 9,002,889 | ||||||||||
November 25 – December 29, 2019 | 9,939 | 72.90 | — | 9,002,889 | ||||||||||
Total | 10,125 | $ | 72.80 | — | ||||||||||
(1) The Company's Board of Directors has authorized the Company to repurchase up to such number of shares as shall equal the dilutive effects of any equity based award granted during such fiscal year under the 2017 Equity Incentive Plan and the number of shares exercised through stock option awards during such fiscal year.
(2) On November 8, 2017, the Company announced the establishment of a $100 million stock repurchase authorization, with no expiration date which has a remaining authorization of $59.1 million as of December 29, 2019. The authorization is in addition to the existing stock repurchase programs.
Item 4. | Mine Safety Disclosures |
Not applicable.
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ITEM 6. | EXHIBITS |
Exhibit Number | Description of Exhibit | |
3.1 | ||
3.2 | ||
4.1 | ||
4.2 | ||
31.1 | ||
31.2 | ||
32.1 | ||
101.INS | XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document. | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
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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.
ENERSYS (Registrant) | ||
By | /s/ Michael J. Schmidtlein | |
Michael J. Schmidtlein | ||
Chief Financial Officer | ||
Date: February 5, 2020
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