Attached files
| file | filename |
|---|---|
| EX-32.1 - EXHIBIT 32.1 - EnerSys | ens-exhibit321_1qxfy18.htm |
| EX-31.2 - EXHIBIT 31.2 - EnerSys | ens-exhibit312_1qxfy18.htm |
| EX-31.1 - EXHIBIT 31.1 - EnerSys | ens-exhibit311_1qxfy18.htm |
| EX-10.5 - EXHIBIT 10.5 - EnerSys | neddsugrantagreement-exhib.htm |
| EX-10.4 - EXHIBIT 10.4 - EnerSys | conformedcreditagreement_e.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended July 2, 2017
¨ | 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
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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting 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. ¨
1
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 August 4, 2017: 43,401,255 shares
2
ENERSYS
INDEX – FORM 10-Q
Page | |||
Item 1. | |||
Restructuring Charges | |||
Item 2. | |||
Item 3. | |||
Item 4. | |||
Item 1. | |||
Item 1A. | |||
Item 2. | |||
Item 4. | |||
Item 6. | |||
3
PART I – | FINANCIAL INFORMATION |
ITEM 1. | FINANCIAL STATEMENTS |
ENERSYS
Consolidated Condensed Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Data)
July 2, 2017 | March 31, 2017 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 543,039 | $ | 500,329 | ||||
Accounts receivable, net of allowance for doubtful accounts: July 2, 2017 - $12,953; March 31, 2017 - $12,662 | 502,159 | 486,646 | ||||||
Inventories, net | 383,365 | 360,694 | ||||||
Prepaid and other current assets | 77,842 | 71,246 | ||||||
Total current assets | 1,506,405 | 1,418,915 | ||||||
Property, plant, and equipment, net | 356,297 | 348,549 | ||||||
Goodwill | 340,894 | 328,657 | ||||||
Other intangible assets, net | 152,879 | 153,960 | ||||||
Deferred taxes | 34,864 | 31,587 | ||||||
Other assets | 11,515 | 11,361 | ||||||
Total assets | $ | 2,402,854 | $ | 2,293,029 | ||||
Liabilities and Equity | ||||||||
Current liabilities: | ||||||||
Short-term debt | $ | 25,049 | $ | 18,359 | ||||
Accounts payable | 223,580 | 222,493 | ||||||
Accrued expenses | 218,435 | 226,579 | ||||||
Total current liabilities | 467,064 | 467,431 | ||||||
Long-term debt, net of unamortized debt issuance costs | 634,206 | 587,609 | ||||||
Deferred taxes | 45,736 | 45,923 | ||||||
Other liabilities | 88,054 | 83,697 | ||||||
Total liabilities | 1,235,060 | 1,184,660 | ||||||
Commitments and contingencies | ||||||||
Equity: | ||||||||
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at July 2, 2017 and at March 31, 2017 | — | — | ||||||
Common Stock, $0.01 par value per share, 135,000,000 shares authorized; 54,585,646 shares issued and 43,401,255 shares outstanding at July 2, 2017; 54,370,810 shares issued and 43,447,536 shares outstanding at March 31, 2017 | 546 | 544 | ||||||
Additional paid-in capital | 462,295 | 464,092 | ||||||
Treasury stock, at cost, 11,184,391 shares held as of July 2, 2017; 10,923,274 shares held as of March 31, 2017 | (460,991 | ) | (439,800 | ) | ||||
Retained earnings | 1,271,743 | 1,231,444 | ||||||
Accumulated other comprehensive loss | (110,799 | ) | (152,824 | ) | ||||
Total EnerSys stockholders’ equity | 1,162,794 | 1,103,456 | ||||||
Nonredeemable noncontrolling interests | 5,000 | 4,913 | ||||||
Total equity | 1,167,794 | 1,108,369 | ||||||
Total liabilities and equity | $ | 2,402,854 | $ | 2,293,029 | ||||
4
ENERSYS
Consolidated Condensed Statements of Income (Unaudited)
(In Thousands, Except Share and Per Share Data)
Quarter ended | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Net sales | $ | 622,625 | $ | 600,603 | ||||
Cost of goods sold | 459,528 | 434,269 | ||||||
Gross profit | 163,097 | 166,334 | ||||||
Operating expenses | 92,653 | 99,005 | ||||||
Restructuring charges | 833 | 1,297 | ||||||
Operating earnings | 69,611 | 66,032 | ||||||
Interest expense | 5,734 | 5,661 | ||||||
Other (income) expense, net | 2,911 | 1,333 | ||||||
Earnings before income taxes | 60,966 | 59,038 | ||||||
Income tax expense | 12,644 | 14,419 | ||||||
Net earnings | 48,322 | 44,619 | ||||||
Net earnings attributable to noncontrolling interests | 121 | 46 | ||||||
Net earnings attributable to EnerSys stockholders | $ | 48,201 | $ | 44,573 | ||||
Net earnings per common share attributable to EnerSys stockholders: | ||||||||
Basic | $ | 1.11 | $ | 1.03 | ||||
Diluted | $ | 1.09 | $ | 1.02 | ||||
Dividends per common share | $ | 0.175 | $ | 0.175 | ||||
Weighted-average number of common shares outstanding: | ||||||||
Basic | 43,450,082 | 43,269,942 | ||||||
Diluted | 44,163,074 | 43,829,813 | ||||||
See accompanying notes.
5
ENERSYS
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
(In Thousands)
Quarter ended | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Net earnings | $ | 48,322 | $ | 44,619 | ||||
Other comprehensive (loss) income: | ||||||||
Net unrealized (loss) gain on derivative instruments, net of tax | (3,053 | ) | 670 | |||||
Pension funded status adjustment, net of tax | 327 | 281 | ||||||
Foreign currency translation adjustment | 44,717 | (23,340 | ) | |||||
Total other comprehensive gain (loss), net of tax | 41,991 | (22,389 | ) | |||||
Total comprehensive income | 90,313 | 22,230 | ||||||
Comprehensive income (loss) attributable to noncontrolling interests | 87 | (209 | ) | |||||
Comprehensive income attributable to EnerSys stockholders | $ | 90,226 | $ | 22,439 | ||||
See accompanying notes.
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Quarter ended | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Cash flows from operating activities | ||||||||
Net earnings | $ | 48,322 | $ | 44,619 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
Depreciation and amortization | 13,199 | 13,768 | ||||||
Write-off of assets relating to restructuring charges | — | 718 | ||||||
Non-cash write-off of property, plant and equipment | — | 6,300 | ||||||
Derivatives not designated in hedging relationships: | ||||||||
Net (gains) losses | (48 | ) | 302 | |||||
Cash settlements | (313 | ) | (352 | ) | ||||
Provision for doubtful accounts | 545 | 921 | ||||||
Deferred income taxes | (243 | ) | (204 | ) | ||||
Non-cash interest expense | 347 | 347 | ||||||
Stock-based compensation | 5,230 | 5,067 | ||||||
Loss (gain) on disposal of property, plant, and equipment | 3 | (59 | ) | |||||
Changes in assets and liabilities, net of effects of acquisitions: | ||||||||
Accounts receivable | (3,891 | ) | 29,038 | |||||
Inventories | (18,280 | ) | (22,116 | ) | ||||
Prepaid and other current assets | (4,160 | ) | (2,889 | ) | ||||
Other assets | (500 | ) | 510 | |||||
Accounts payable | (3,352 | ) | (4,431 | ) | ||||
Accrued expenses | (15,171 | ) | (5,286 | ) | ||||
Other liabilities | (69 | ) | 1,304 | |||||
Net cash provided by operating activities | 21,619 | 67,557 | ||||||
Cash flows from investing activities | ||||||||
Capital expenditures | (13,102 | ) | (7,487 | ) | ||||
Purchase of businesses | (2,964 | ) | (12,392 | ) | ||||
Proceeds from disposal of property, plant, and equipment | 64 | 82 | ||||||
Net cash used in investing activities | (16,002 | ) | (19,797 | ) | ||||
Cash flows from financing activities | ||||||||
Net increase (decrease) in short-term debt | 6,729 | (9,499 | ) | |||||
Proceeds from revolving credit borrowings | 112,050 | 84,300 | ||||||
Repayments of revolving credit borrowings | (62,050 | ) | (79,300 | ) | ||||
Repayments of long-term debt | (3,750 | ) | (3,750 | ) | ||||
Option proceeds | 575 | 5 | ||||||
Payment of taxes related to net share settlement of equity awards | (7,367 | ) | (7,644 | ) | ||||
Purchase of treasury stock | (21,191 | ) | — | |||||
Dividends paid to stockholders | (7,595 | ) | (7,600 | ) | ||||
Other | (17 | ) | (29 | ) | ||||
Net cash provided by (used in) financing activities | 17,384 | (23,517 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents | 19,709 | (7,991 | ) | |||||
Net increase in cash and cash equivalents | 42,710 | 16,252 | ||||||
Cash and cash equivalents at beginning of period | 500,329 | 397,307 | ||||||
Cash and cash equivalents at end of period | $ | 543,039 | $ | 413,559 | ||||
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 interim unaudited consolidated condensed financial statements of EnerSys (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States 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 the information and notes required for complete financial statements. In the opinion of management, the unaudited consolidated condensed financial statements include all normal recurring adjustments considered necessary for the fair presentation of the financial position, results of operations, and cash flows for the interim periods presented. The financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s 2017 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 30, 2017 (the “2017 Annual Report”).
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 2018 end on July 2, 2017, October 1, 2017, December 31, 2017, and March 31, 2018, respectively. The four quarters in fiscal 2017 ended on July 3, 2016, October 2, 2016, January 1, 2017, and March 31, 2017, 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 Issued Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” providing guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. In July 2015, the FASB voted to delay the effective date for interim and annual reporting periods beginning after December 15, 2017, with early adoption permissible one year earlier. The standard permits the use of either modified retrospective or full retrospective transition methods. The Company has developed an implementation plan, which is currently in the assessment phase. The Company has not selected a transition method and is currently evaluating the impact that adoption of the standard will have on the financial condition, results of operations and cash flows.
In February 2016, the FASB issued ASU 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. This update is effective for reporting periods beginning after December 15, 2018, using a modified retrospective approach, with early adoption permitted. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other than Inventory. ASU 2016-16 requires that an entity recognize the income tax consequences of an intra-entity transfer of assets other than inventory when the transfer occurs. This update is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods within those annual reporting periods. The Company early adopted the standard on a modified retrospective basis during the first quarter of fiscal 2018 through a cumulative-effect adjustment directly to retained earnings of $137, as of the beginning of the period of adoption.
In March 2017, the FASB issued ASU No. 2017-07,“Compensation—Retirement Benefits (Topic 715)” which requires an entity to report the service cost component of pension and other postretirement benefit costs in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2017 with early adoption permitted. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.
8
2. Inventories
Inventories, net consist of:
July 2, 2017 | March 31, 2017 | |||||||
Raw materials | $ | 84,094 | $ | 85,604 | ||||
Work-in-process | 119,747 | 107,177 | ||||||
Finished goods | 179,524 | 167,913 | ||||||
Total | $ | 383,365 | $ | 360,694 | ||||
3. 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 July 2, 2017 and March 31, 2017, and the basis for that measurement:
Total Fair Value Measurement July 2, 2017 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Lead forward contracts | $ | 2,806 | $ | — | $ | 2,806 | $ | — | ||||||||
Foreign currency forward contracts | (1,372 | ) | — | (1,372 | ) | — | ||||||||||
Total derivatives | $ | 1,434 | $ | — | $ | 1,434 | $ | — | ||||||||
Total Fair Value Measurement March 31, 2017 | Quoted Price in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Lead forward contracts | $ | 1,163 | $ | — | $ | 1,163 | $ | — | ||||||||
Foreign currency forward contracts | (313 | ) | — | (313 | ) | — | ||||||||||
Total derivatives | $ | 850 | $ | — | $ | 850 | $ | — | ||||||||
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 2017 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, accounts receivable and accounts payable approximate carrying value due to their short maturities.
The fair value of the Company’s short-term debt and borrowings under the 2011 Credit Facility (as defined in Note 9), 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.
The Company's 5.00% Senior Notes due 2023 (the “Notes”), with an original face value of $300,000, were issued in April 2015. The fair value of these Notes represent the trading values based upon quoted market prices and are classified as Level 2. The Notes were trading at approximately 103% and 101% of face value on July 2, 2017 and March 31, 2017, respectively.
9
The carrying amounts and estimated fair values of the Company’s derivatives and Notes at July 2, 2017 and March 31, 2017 were as follows:
July 2, 2017 | March 31, 2017 | |||||||||||||||||||||||
Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||||||||||||||
Financial assets: | ||||||||||||||||||||||||
Derivatives (1) | $ | 2,806 | $ | 2,806 | $ | 1,163 | $ | 1,163 | ||||||||||||||||
Financial liabilities: | ||||||||||||||||||||||||
Notes (2) | $ | 300,000 | $ | 309,000 | $ | 300,000 | $ | 303,000 | ||||||||||||||||
Derivatives (1) | 1,372 | 1,372 | 313 | 313 | ||||||||||||||||||||
(1) | Represents lead and foreign currency forward contracts (see Note 4 for asset and liability positions of the lead and foreign currency forward contracts at July 2, 2017 and March 31, 2017). |
(2) | The fair value amount of the Notes at July 2, 2017 and March 31, 2017 represent the trading value of the instruments. |
4. 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 July 2, 2017 and March 31, 2017, the Company has hedged the price to purchase approximately 61.5 million pounds and 45.0 million pounds of lead, respectively, for a total purchase price of $61,038 and $46,550, respectively.
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 July 2, 2017 and March 31, 2017, the Company had entered into a total of $44,073 and $30,751, respectively, of such contracts.
In the coming twelve months, the Company anticipates that $1,722 of pretax loss relating to lead and foreign currency forward contracts will be reclassified from accumulated other comprehensive income (“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 Statement 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 July 2, 2017 and March 31, 2017, the notional amount of these contracts was $13,018 and $13,560, respectively.
10
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
July 2, 2017 and March 31, 2017
Derivatives and Hedging Activities Designated as Cash Flow Hedges | Derivatives and Hedging Activities Not Designated as Hedging Instruments | |||||||||||||||
July 2, 2017 | March 31, 2017 | July 2, 2017 | March 31, 2017 | |||||||||||||
Prepaid and other current assets | ||||||||||||||||
Lead forward contracts | $ | 2,806 | $ | 1,163 | $ | — | $ | — | ||||||||
Foreign currency forward contracts | $ | — | $ | 11 | $ | 37 | $ | — | ||||||||
Total assets | $ | 2,806 | $ | 1,174 | $ | 37 | $ | — | ||||||||
Accrued expenses | ||||||||||||||||
Lead forward contracts | $ | — | $ | — | $ | — | $ | — | ||||||||
Foreign currency forward contracts | 1,409 | — | — | 324 | ||||||||||||
Total liabilities | $ | 1,409 | $ | — | $ | — | $ | 324 | ||||||||
The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended July 2, 2017
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 | $ | (814 | ) | Cost of goods sold | $ | 1,803 | ||||
Foreign currency forward contracts | (2,059 | ) | Cost of goods sold | 164 | ||||||
Total | $ | (2,873 | ) | $ | 1,967 | |||||
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 | $ | 48 | ||
Total | $ | 48 | |||
The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended July 3, 2016
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 | $ | 1,813 | Cost of goods sold | $ | 1,059 | |||||
Foreign currency forward contracts | 128 | Cost of goods sold | (180 | ) | ||||||
Total | $ | 1,941 | $ | 879 | ||||||
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 | $ | (302 | ) | |
Total | $ | (302 | ) | ||
5. Income Taxes
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the first quarters of fiscal 2018 and 2017 was based on the estimated effective tax rates applicable for the full years ending March 31, 2018 and March 31, 2017, 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 and the amount of the Company's consolidated income before taxes.
11
The consolidated effective income tax rates were 20.7% and 24.4%, respectively, for the first quarters of fiscal 2018 and 2017. The rate decrease in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 is primarily due to changes in the mix of earnings among tax jurisdictions.
Foreign income as a percentage of worldwide income is estimated to be 61% for fiscal 2018 compared to 55% for fiscal 2017. The foreign effective income tax rates for the first quarter of fiscal 2018 and 2017 were 11.6% and 14.4%, respectively. The rate decrease compared to the prior year period is primarily due to 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 is taxed at an effective income tax rate of approximately 6%.
6. 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, claims costs may differ from amounts provided. An analysis of changes in the liability for product warranties is as follows:
Quarter ended | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Balance at beginning of period | $ | 46,116 | $ | 48,422 | ||||
Current period provisions | 3,091 | 5,236 | ||||||
Costs incurred | (3,196 | ) | (2,359 | ) | ||||
Foreign currency translation adjustment | 666 | (3,224 | ) | |||||
Balance at end of period | $ | 46,677 | $ | 48,075 | ||||
7. 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 many 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, such 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 have 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 is responding to inquiries related to these matters. 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. As of July 2, 2017 and March 31, 2017, the Company had a reserve balance of $1,955 and $1,830, respectively, relating to the Belgian regulatory proceeding. The change in the reserve balance between July 2, 2017 and March 31, 2017 was solely due to foreign currency translation impact.
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 $14,393, which was paid on July 11, 2017. As of July 2, 2017 and March 31, 2017, the Company had a reserve balance of $14,393 and 13,463, respectively, relating to this matter. Also in June 2017, the German competition authority issued a fining decision related to the Company's reserve power battery business, which constitutes the remaining portion of the previously disclosed German proceeding. The Company is appealing this decision, including payment of the proposed fine of $11,415, and believes that the reserve power matter does not, based on current facts and circumstances, require an accrual. The Company is not required to escrow any portion of this fine during the appeal process.
In July 2017, the Company settled the Dutch regulatory proceeding and agreed to pay a fine of $10,785, which is payable by August 11, 2017. For the Dutch regulatory proceeding, the Company had reserved $10,785 and $10,258, respectively, as of July 2, 2017 and March 31, 2017.
As of July 2, 2017 and March 31, 2017, the Company had a total reserve balance of $27,133 and $25,551, respectively, in connection with these remaining investigations and other related legal matters, included in accrued expenses on the Consolidated Condensed Balance Sheets. The foregoing estimate of losses is based upon currently available information for these proceedings. However, the precise scope, timing and
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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 $1,117 and $1,123 as of July 2, 2017 and March 31, 2017. 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 4 - Derivative Financial Instruments for more details.
8. Restructuring and Other Exit Charges
During fiscal 2016, the Company announced restructurings to improve efficiencies primarily related to its motive power assembly and distribution center in Italy and its sales and administration organizations in EMEA. In addition, the Company announced a further restructuring related to its manufacturing operations in Europe. The Company estimates that the total charges for these actions will amount to approximately $6,600 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 130 employees upon completion. In fiscal 2016, the Company recorded restructuring charges of $5,232 and recorded an additional $1,251 during fiscal 2017. The Company incurred $2,993 in costs against the accrual in fiscal 2016 and incurred an additional $3,037 against the accrual during fiscal 2017. During the first quarter of fiscal 2018, the Company recorded restructuring charges of $100 and incurred $133 against the accrual. As of July 2, 2017, the reserve balance associated with these actions is $379. The Company expects no further restructuring charges related to these actions and expects to complete the program during fiscal 2018.
During fiscal 2017, the Company announced restructuring programs to improve efficiencies primarily related to its motive power production in EMEA. The Company estimates that the total charges for these actions will amount to approximately $4,800, 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 45 employees upon completion. During fiscal 2017, the Company recorded restructuring charges of $3,104 and incurred $749 in costs against the accrual. During the first quarter of fiscal 2018, the Company recorded restructuring charges of $733 and incurred $930 against the accrual. As of July 2, 2017, the reserve balance associated with these actions is $2,218. The Company expects to be committed to an additional $1,000 in restructuring charges related to this action in fiscal 2018, when it expects to complete this program.
During the first quarter of fiscal 2017, the Company announced a restructuring primarily to complete the transfer of equipment and clean-up of its manufacturing facility located in Jiangdu, the People’s Republic of China, which stopped production during fiscal 2016. This program was completed during the first quarter of fiscal 2018. The total cash charges for these actions amounted to $779. During fiscal 2017, the Company recorded charges of $779 and incurred $648 in costs against the accrual. During the first quarter of fiscal 2018, the Company recorded charges of $0 and incurred $129 in costs against the accrual.
A roll-forward of the restructuring reserve is as follows:
Employee Severance | Other | Total | ||||||||||
Balance as of March 31, 2017 | $ | 2,668 | $ | 144 | $ | 2,812 | ||||||
Accrued | 738 | 95 | 833 | |||||||||
Costs incurred | (1,034 | ) | (158 | ) | (1,192 | ) | ||||||
Foreign currency impact | 141 | 3 | 144 | |||||||||
Balance as of July 2, 2017 | $ | 2,513 | $ | 84 | $ | 2,597 | ||||||
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9. Debt
The following summarizes the Company’s long-term debt as of July 2, 2017 and March 31, 2017:
July 2, 2017 | March 31, 2017 | |||||||||||||||
Principal | Unamortized Issuance Costs | Principal | Unamortized Issuance Costs | |||||||||||||
5.00% Senior Notes due 2023 | $ | 300,000 | $ | 3,590 | $ | 300,000 | $ | 3,746 | ||||||||
2011 Credit Facility, due 2018 | 338,750 | 954 | 292,500 | 1,145 | ||||||||||||
$ | 638,750 | $ | 4,544 | $ | 592,500 | $ | 4,891 | |||||||||
Less: Unamortized issuance costs | 4,544 | 4,891 | ||||||||||||||
Long-term debt, net of unamortized issuance costs | $ | 634,206 | $ | 587,609 | ||||||||||||
5.00% Senior Notes
The Company's $300,000 5.00% Senior Notes due 2023 bear interest at a rate of 5.00% per annum. Interest is payable semiannually in arrears on April 30 and October 30 of each year, commencing on October 30, 2015. The Notes will mature on April 30, 2023, unless earlier redeemed or repurchased in full. The Notes are unsecured and unsubordinated obligations of the Company. The Notes are fully and unconditionally guaranteed (the “Guarantees”), jointly and severally, by each of its subsidiaries that are guarantors under the 2011 Credit Facility (the “Guarantors”). The Guarantees are unsecured and unsubordinated obligations of the Guarantors.
2011 Credit Facility
The Company is party to a $500,000 senior secured revolving credit facility and a $150,000 senior secured incremental term loan (the “Term Loan”) that matures on September 30, 2018, comprising the “2011 Credit Facility”. The quarterly installments payable on the Term Loan were $1,875 beginning June 30, 2015 and $3,750 beginning June 30, 2016 with a final payment of $108,750 on September 30, 2018. The 2011 Credit Facility may be increased by an aggregate amount of $300,000 in revolving commitments and/or one or more new tranches of term loans, under certain conditions. Both revolver loans and the Term Loan under the 2011 Credit Facility bear interest, at the Company's option, at a rate per annum equal to either (i) the London Interbank Offered Rate (“LIBOR”) plus between 1.25% and 1.75% (currently 1.25% and based on the Company's consolidated net leverage ratio) or (ii) the Base Rate (which is the highest of (a) the Bank of America prime rate, and (b) the Federal Funds Effective Rate) plus between 0.25% and 0.75% (based on the Company’s consolidated net leverage ratio). Obligations under the 2011 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 credit facility and 65% of the capital stock of certain of the Company’s foreign subsidiaries that are owned by the Company’s United States subsidiaries.
The current portion of the Term Loan of $15,000 is classified as long-term debt as the Company expects to refinance the future quarterly payments with revolver borrowings under its 2011 Credit Facility.
As of July 2, 2017, the Company had $215,000 outstanding in revolver borrowings and $123,750 under its Term Loan borrowings.
Short-Term Debt
As of July 2, 2017 and March 31, 2017, the Company had $25,049 and $18,359, respectively, of short-term borrowings. The weighted-average interest rate on these borrowings was approximately 6% and 7% at July 2, 2017 and March 31, 2017, respectively.
Letters of Credit
As of July 2, 2017 and March 31, 2017, the Company had $3,383 and $2,189, respectively, of standby letters of credit.
Debt Issuance Costs
Amortization expense, relating to debt issuance costs, included in interest expense was $347, for the quarters ended July 2, 2017 and July 3, 2016. Debt issuance costs, net of accumulated amortization, totaled $4,544 and $4,891, respectively, at July 2, 2017 and March 31, 2017.
Available Lines of Credit
As of July 2, 2017 and March 31, 2017, the Company had available and undrawn, under all its lines of credit, $421,725 and $475,947, respectively, including $138,650 and $142,872, respectively, of uncommitted lines of credit as of July 2, 2017 and March 31, 2017.
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10. 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 | |||||||||||||||
July 2, 2017 | July 3, 2016 | July 2, 2017 | July 3, 2016 | |||||||||||||
Service cost | $ | — | $ | 91 | $ | 243 | $ | 223 | ||||||||
Interest cost | 167 | 170 | 432 | 494 | ||||||||||||
Expected return on plan assets | (120 | ) | (204 | ) | (548 | ) | (510 | ) | ||||||||
Amortization and deferral | 79 | 132 | 351 | 265 | ||||||||||||
Net periodic benefit cost | $ | 126 | $ | 189 | $ | 478 | $ | 472 | ||||||||
11. Stock-Based Compensation
As of July 2, 2017, the Company maintains the Second Amended and Restated EnerSys 2010 Equity Incentive Plan, (“2010 EIP”). The 2010 EIP reserved 3,177,477 shares of common stock for the grant of various classes of nonqualified stock options, restricted stock units, market condition-based share units and other forms of equity-based compensation.
The Company recognized stock-based compensation expense associated with its equity incentive plans of $5,230 for the first quarter of fiscal 2018 and $5,067 for the first quarter of fiscal 2017. The Company recognizes compensation expense using the straight-line method over the vesting period of the awards.
During the first quarter fiscal 2018, the Company granted to non-employee directors 1,783 restricted stock units, pursuant to the 2010 EIP.
During the first quarter fiscal 2018, the Company granted to management and other key employees 169,703 non-qualified stock options and 60,008 market condition-based share units that vest three years from the date of grant, and 160,313 restricted stock units that vest 25% each year over four years from the date of grant.
Common stock activity during the first quarter fiscal 2018 included the vesting of 147,123 restricted stock units and 142,426 market condition-based share units and the exercise of 55,422 stock options.
As of July 2, 2017, there were 563,860 non-qualified stock options, 615,804 restricted stock units and 357,431 market condition-based share units outstanding.
12. Stockholders’ Equity and Noncontrolling Interests
Common Stock
The following demonstrates the change in the number of shares of common stock outstanding during the first quarter ended July 2, 2017:
Shares outstanding as of March 31, 2017 | 43,447,536 | ||
Purchase of treasury stock | (261,117 | ) | |
Shares issued towards equity-based compensation plans, net of equity awards surrendered for option price and taxes | 214,836 | ||
Shares outstanding as of July 2, 2017 | 43,401,255 | ||
Treasury Stock
During the first quarter ended July 2, 2017, the Company purchased 261,117 shares for $21,191. At July 2, 2017 and March 31, 2017, the Company held 11,184,391 and 10,923,274 shares as treasury stock, respectively.
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Accumulated Other Comprehensive Income ("AOCI")
The components of AOCI, net of tax, as of July 2, 2017 and March 31, 2017, are as follows:
March 31, 2017 | Before Reclassifications | Amounts Reclassified from AOCI | July 2, 2017 | |||||||||||||
Pension funded status adjustment | $ | (25,555 | ) | $ | — | $ | 327 | $ | (25,228 | ) | ||||||
Net unrealized gain (loss) on derivative instruments | 1,975 | (1,814 | ) | (1,239 | ) | (1,078 | ) | |||||||||
Foreign currency translation adjustment | (129,244 | ) | 44,751 | — | (84,493 | ) | ||||||||||
Accumulated other comprehensive loss | $ | (152,824 | ) | $ | 42,937 | $ | (912 | ) | $ | (110,799 | ) | |||||
The following table presents reclassifications from AOCI during the first quarter ended July 2, 2017:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in cash flow hedging relationships: | ||||||
Net gain on cash flow hedging derivative instruments | $ | (1,967 | ) | Cost of goods sold | ||
Tax expense | 728 | |||||
Net gain on derivative instruments, net of tax | $ | (1,239 | ) | |||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 430 | Net periodic benefit cost, included in cost of goods sold and operating expenses - See Note 10 | |||
Tax benefit | (103 | ) | ||||
Net periodic benefit cost, net of tax | $ | 327 | ||||
The following table presents reclassifications from AOCI during the first quarter ended July 3, 2016:
Components of AOCI | Amounts Reclassified from AOCI | Location of (Gain) Loss Recognized on Income Statement | ||||
Derivatives in cash flow hedging relationships: | ||||||
Net gain on cash flow hedging derivative instruments | $ | (879 | ) | Cost of goods sold | ||
Tax expense | 324 | |||||
Net gain on derivative instruments, net of tax | $ | (555 | ) | |||
Defined benefit pension costs: | ||||||
Prior service costs and deferrals | $ | 397 | Net periodic benefit cost, included in cost of goods sold and operating expenses - See Note 10 | |||
Tax benefit | (116 | ) | ||||
Net periodic benefit cost, net of tax | $ | 281 | ||||
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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the first quarter ended July 2, 2017:
Equity Attributable to EnerSys Stockholders | Nonredeemable Noncontrolling Interests | Total Equity | ||||||||||
Balance as of March 31, 2017 | $ | 1,103,456 | $ | 4,913 | $ | 1,108,369 | ||||||
Total comprehensive income: | ||||||||||||
Net earnings | 48,201 | 121 | 48,322 | |||||||||
Net unrealized loss on derivative instruments, net of tax | (3,053 | ) | — | (3,053 | ) | |||||||
Pension funded status adjustment, net of tax | 327 | — | 327 | |||||||||
Foreign currency translation adjustment | 44,751 | (34 | ) | 44,717 | ||||||||
Total other comprehensive gain (loss), net of tax | 42,025 | (34 | ) | 41,991 | ||||||||
Total comprehensive income | 90,226 | 87 | 90,313 | |||||||||
Other changes in equity: | ||||||||||||
Purchase of treasury stock | (21,191 | ) | (21,191 | ) | ||||||||
Cash dividends - common stock ($0.175 per share) | (7,595 | ) | — | (7,595 | ) | |||||||
Other, including activity related to equity awards | (2,102 | ) | — | (2,102 | ) | |||||||
Balance as of July 2, 2017 | $ | 1,162,794 | $ | 5,000 | $ | 1,167,794 | ||||||
13. 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 | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Net earnings attributable to EnerSys stockholders | $ | 48,201 | $ | 44,573 | ||||
Weighted-average number of common shares outstanding: | ||||||||
Basic | 43,450,082 | 43,269,942 | ||||||
Dilutive effect of: | ||||||||
Common shares from exercise and lapse of equity awards, net of shares assumed reacquired | 712,992 | 559,871 | ||||||
Diluted weighted-average number of common shares outstanding | 44,163,074 | 43,829,813 | ||||||
Basic earnings per common share attributable to EnerSys stockholders | $ | 1.11 | $ | 1.03 | ||||
Diluted earnings per common share attributable to EnerSys stockholders | $ | 1.09 | $ | 1.02 | ||||
Anti-dilutive equity awards not included in diluted weighted-average common shares | 230,811 | 389,956 | ||||||
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14. Business Segments
The Company has three reportable business segments based on geographic regions, defined 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 first quarter ended July 2, 2017 and July 3, 2016 is shown below:
Quarter ended | ||||||||
July 2, 2017 | July 3, 2016 | |||||||
Net sales by segment to unaffiliated customers | ||||||||
Americas | $ | 354,603 | $ | 329,720 | ||||
EMEA | 199,077 | 197,130 | ||||||
Asia | 68,945 | 73,753 | ||||||
Total net sales | $ | 622,625 | $ | 600,603 | ||||
Net sales by product line | ||||||||
Reserve power | $ | 305,177 | $ | 296,041 | ||||
Motive power | 317,448 | 304,562 | ||||||
Total net sales | $ | 622,625 | $ | 600,603 | ||||
Intersegment sales | ||||||||
Americas | $ | 7,237 | $ | 6,004 | ||||
EMEA | 28,817 | 22,163 | ||||||
Asia | 5,133 | 3,697 | ||||||
Total intersegment sales (1) | $ | 41,187 | $ | 31,864 | ||||
Operating earnings by segment | ||||||||
Americas | $ | 53,661 | $ | 43,310 | ||||
EMEA | 13,539 | 19,836 | ||||||
Asia | 3,244 | 4,183 | ||||||
Restructuring charges - Americas | — | (892 | ) | |||||
Restructuring charges - EMEA | (833 | ) | (269 | ) | ||||
Restructuring charges - Asia | — | (136 | ) | |||||
Total operating earnings (2) | $ | 69,611 | $ | 66,032 | ||||
(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.
15. Subsequent Events
On August 2, 2017, the Board of Directors approved a quarterly cash dividend of $0.175 per share of common stock to be paid on September 29, 2017, to stockholders of record as of September 15, 2017.
On August 4, 2017, the Company refinanced its existing 2011 Credit Facility comprising of a $500,000 senior secured revolving credit facility and a $150,000 senior secured incremental term loan that matures on September 30, 2018, with a new facility that includes a $600,000 senior secured revolving credit facility and a $150,000 senior secured term loan, with a maturity date of September 30, 2022.
On August 9, 2017, the Company also announced the establishment of a new $100,000 stock repurchase authorization, with no expiration date. This authorization is in addition to the existing stock repurchase program, established in connection with the dilutive effects of previously granted equity-based awards.
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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 2017 Annual Report on Form 10-K (the "2017 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 and cost savings within expected time frames; |
• | 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; |
• | 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. |
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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”, “primary working capital percentage” and capital expenditures 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 50% of our net sales were generated outside the United States. The Company 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, USA; |
• | 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 have two primary product lines: reserve power and motive power products. Net sales classifications by product line are as follows:
• | Reserve power products are used for backup power for the continuous operation of critical applications in telecommunications systems, uninterruptible power systems, or “UPS” applications for computer and computer-controlled systems, and other specialty power applications, including medical and security systems, premium starting, lighting and ignition applications, in switchgear, electrical control systems used in electric utilities, large-scale energy storage, energy pipelines, in commercial aircraft, satellites, military aircraft, submarines, ships and tactical vehicles. Reserve power products also include thermally managed cabinets and enclosures for electronic equipment and batteries. |
• | Motive power products are used to provide power for electric industrial forklifts used in manufacturing, warehousing and other material handling applications as well as mining equipment, diesel locomotive starting and other rail equipment. |
Economic Climate
Recent indicators continue to suggest a mixed trend in economic activity among the different geographical regions. North America and EMEA are experiencing limited economic growth. Our Asia region continues to grow faster than any other region in which we do business, but at a slower pace than a few years ago.
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. Over the past year, on a consolidated basis, we have experienced rising commodity costs.
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. During the first quarter of fiscal 2018, our selling prices increased due to increased commodity costs, compared to the comparable prior year period.
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Liquidity and Capital Resources
We believe that our financial position is strong, and we have substantial liquidity with $543 million of available cash and cash equivalents and available and undrawn credit lines of approximately $422 million at July 2, 2017 to cover short-term liquidity requirements and anticipated growth in the foreseeable future.
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
Segment sales
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Americas | $ | 354.6 | 56.9 | % | $ | 329.7 | 54.9 | % | $ | 24.9 | 7.5 | % | |||||||||
EMEA | 199.1 | 32.0 | 197.1 | 32.8 | 2.0 | 1.0 | |||||||||||||||
Asia | 68.9 | 11.1 | 73.8 | 12.3 | (4.9 | ) | (6.5 | ) | |||||||||||||
Total net sales | $ | 622.6 | 100.0 | % | $ | 600.6 | 100.0 | % | $ | 22.0 | 3.7 | % | |||||||||
Net sales increased $22.0 million or 3.7% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. This increase for the first quarter was the result of a 4% increase in pricing and a 1% increase in organic volume, partially offset by a 1% decrease due to foreign currency translation impact.
The Americas segment’s net sales increased $24.9 million or 7.5% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, primarily due to a 5% increase in organic volume and a 3% increase in pricing.
The EMEA segment’s net sales increased $2.0 million or 1.0% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, primarily due to a 5% increase in pricing, partially offset by a 3% decrease in organic volume and a 1% decrease due to foreign currency translation impact.
The Asia segment’s net sales decreased $4.9 million or 6.5% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, primarily due to a 8% decrease in organic volume and a 2% decrease in foreign currency translation impact, partially offset by a 3% increase in pricing.
Product line sales
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Reserve power | $ | 305.2 | 49.0 | % | $ | 296.0 | 49.3 | % | $ | 9.2 | 3.1 | % | |||||||||
Motive power | 317.4 | 51.0 | 304.6 | 50.7 | 12.8 | 4.2 | |||||||||||||||
Total net sales | $ | 622.6 | 100.0 | % | $ | 600.6 | 100.0 | % | $ | 22.0 | 3.7 | % | |||||||||
Net sales of our reserve power products in the first quarter of fiscal 2018 increased $9.2 million or 3.1% compared to the first quarter of fiscal 2017. The increase was primarily due to a 4% increase in pricing, partially offset by a 1% decrease due to foreign currency translation impact.
Net sales of our motive power products in the first quarter of fiscal 2018 increased by $12.8 million or 4.2% compared to the first quarter of fiscal 2017. The increase was primarily due to a 4% increase in pricing and a 1% increase in organic volume, partially offset by a 1% decrease due to foreign currency translation impact.
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Gross Profit
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Gross Profit | $ | 163.1 | 26.2 | % | $ | 166.3 | 27.7 | % | $ | (3.2 | ) | (2.0 | )% | ||||||||
Gross profit decreased $3.2 million or 2.0% in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. Gross profit, as a percentage of net sales, decreased 150 basis points in the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017. The decrease in the gross profit margin in the current quarter is primarily due to an increase in lead cost of approximately $34 million, partially offset by price recoveries and cost saving initiatives.
Operating Items
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Operating expenses | $ | 92.7 | 14.9 | % | $ | 99.0 | 16.5 | % | $ | (6.3 | ) | (6.4 | )% | ||||||||
Restructuring charges | $ | 0.8 | 0.1 | % | $ | 1.3 | 0.2 | % | $ | (0.5 | ) | (35.8 | )% | ||||||||
Operating expenses as a percentage of net sales decreased 160 basis points in the first quarter of fiscal 2018, compared to the first quarter of fiscal 2017. Operating expenses, excluding the effect of foreign currency translation, decreased $5.7 million or 6.3% in the first quarter of fiscal 2018, as compared to the first quarter of fiscal 2017. Excluding the impact of the $6.3 million write-off of previously capitalized costs relating to the ERP system implementation in our Americas region during the first quarter of fiscal 2017, operating expenses were comparable to prior year quarter. Selling expenses, our main component of operating expenses, were 53.4% of total operating expenses in the first quarter of fiscal 2018, compared to 53.1% of total operating expenses in the first quarter of fiscal 2017.
Restructuring charges
Included in our first quarter of fiscal 2018 operating results are $0.8 million relating to restructuring charges in EMEA consisting of cash charges primarily relating to severance. Included in our first quarter of fiscal 2017 operating results were restructuring charges in Americas, EMEA and Asia of $0.9 million, $0.3 million and $0.1 million, respectively, primarily for our Cleveland, Ohio charger manufacturing facility in the U.S., motive power assembly and distribution center in Italy as well as our European manufacturing operations, along with costs to complete the transfer of equipment and clean-up of our manufacturing facility located in Jiangdu, the People’s Republic of China (“PRC”).
Operating Earnings
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales (1) | In Millions | Percentage of Total Net Sales (1) | In Millions | % | ||||||||||||||||
Americas | $ | 53.7 | 15.1 | % | $ | 43.3 | 13.1 | % | $ | 10.4 | 23.9 | % | |||||||||
EMEA | 13.5 | 6.8 | 19.8 | 10.1 | (6.3 | ) | (31.7 | ) | |||||||||||||
Asia | 3.2 | 4.7 | 4.2 | 5.7 | (1.0 | ) | (22.4 | ) | |||||||||||||
Subtotal | 70.4 | 11.3 | 67.3 | 11.2 | 3.1 | 4.6 | |||||||||||||||
Restructuring charges - Americas | — | — | (0.9 | ) | (0.3 | ) | 0.9 | NM | |||||||||||||
Restructuring charges - EMEA | (0.8 | ) | (0.4 | ) | (0.3 | ) | (0.1 | ) | (0.5 | ) | NM | ||||||||||
Restructuring charges - Asia | — | — | (0.1 | ) | (0.2 | ) | 0.1 | NM | |||||||||||||
Total operating earnings | $ | 69.6 | 11.2 | % | $ | 66.0 | 11.0 | % | $ | 3.6 | 5.4 | % | |||||||||
(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.
NM = not meaningful
22
Operating earnings increased $3.6 million or 5.4% in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017. Operating earnings, as a percentage of net sales, increased 20 basis points in the first quarter of fiscal 2018, compared to the first quarter of fiscal 2017. Excluding the impact of the $6.3 million write-off of previously capitalized costs relating to the ERP system implementation in our Americas region during the first quarter of fiscal 2017, operating earnings in the current quarter decreased 90 basis points due to an increase in lead cost, partially offset by price recoveries and cost saving initiatives.
The Americas segment's operating earnings, excluding restructuring charges, increased 200 basis points in the first quarter of fiscal 2018, compared to the first quarter of fiscal 2017. Excluding the impact of the $6.3 million write-off of previously capitalized costs relating to the ERP system implementation in our Americas region during the first quarter of fiscal 2017, operating earnings in the current quarter increased by 10 basis points due to higher organic volume and pricing offset by higher lead costs.
The EMEA segment's operating earnings, excluding restructuring charges discussed above, decreased 330 basis points in the first quarter of fiscal 2018, compared to the first quarter of fiscal 2017 primarily due to delayed pricing recovery on unfavorable lead impact, partially offset by benefits from cost reduction programs.
Operating earnings decreased 100 basis points in the Asia segment in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 primarily due to slow down in the telecom spending in the PRC.
Interest Expense
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Interest expense | $ | 5.7 | 0.9 | % | $ | 5.7 | 0.9 | % | $ | — | 1.3 | % | |||||||||
Interest expense of $5.7 million in the first quarter of fiscal 2018 (net of interest income of $0.7 million) was the same as the interest expense of $5.7 million in the first quarter of fiscal 2017 (net of interest income of $0.4 million) as the increase in interest rates in the current quarter impacted both interest expense and income for a zero impact in the current quarter. Our average debt outstanding was $630.8 million in the first quarter of fiscal 2018, compared to $636.8 million in the first quarter of fiscal 2017.
Included in interest expense are non-cash charges for deferred financing fees of $0.4 million and $0.3 million, respectively, in the first quarters of fiscal 2018 and fiscal 2017.
Other (Income) Expense, Net
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | ||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | |||||||||||||||
Other (income) expense, net | $ | 2.9 | 0.5 | % | $ | 1.3 | 0.3 | % | $ | 1.6 | NM | |||||||||
NM = not meaningful
Other (income) expense, net in the first quarter of fiscal 2018 was an expense of $2.9 million compared to expense of $1.3 million in the first quarter of fiscal 2017. Foreign currency impact resulted in a loss of $2.6 million in the first quarter of fiscal 2018, compared to the foreign currency losses of $1.0 million in the first quarter of fiscal 2017.
Earnings Before Income Taxes
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Earnings before income taxes | $ | 61.0 | 9.8 | % | $ | 59.0 | 9.8 | % | $ | 2.0 | 3.3 | % | |||||||||
As a result of the above, earnings before income taxes in the first quarter of fiscal 2018 increased $2.0 million, or 3.3%, compared to the first quarter of fiscal 2017.
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Income Tax Expense
Quarter ended July 2, 2017 | Quarter ended July 3, 2016 | Increase (Decrease) | |||||||||||||||||||
In Millions | Percentage of Total Net Sales | In Millions | Percentage of Total Net Sales | In Millions | % | ||||||||||||||||
Income tax expense | $ | 12.7 | 2.0 | % | $ | 14.4 | 2.4 | % | $ | (1.7 | ) | (12.3 | )% | ||||||||
Effective tax rate | 20.7% | 24.4% | (3.7)% | ||||||||||||||||||
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the first quarters of fiscal 2018 and 2017 was based on the estimated effective tax rates applicable for the full years ending March 31, 2018 and March 31, 2017, 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 and the amount of our consolidated income before taxes.
The consolidated effective income tax rates were 20.7% and 24.4%, respectively, for the first quarters of fiscal 2018 and 2017. The rate decrease in the first quarter of fiscal 2018 compared to the first quarter of fiscal 2017 is primarily due to changes in the mix of earnings among tax jurisdictions.
Foreign income as a percentage of worldwide income is estimated to be 61% for fiscal 2018 compared to 55% for fiscal 2017. The foreign effective income tax rates for the current quarter of fiscal 2018 and 2017 were 11.6% and 14.4%, respectively. The rate decrease compared to the prior year period is primarily due to changes in the mix of earnings among tax jurisdictions. Income from our 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%.
Critical Accounting Policies and Estimates
Except as discussed in the following paragraph, 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 2017 Annual Report.
Liquidity and Capital Resources
Operating activities provided cash of $21.6 million in the first quarter of fiscal 2018 compared to $67.6 million in the comparable period of fiscal 2017. In the first quarter of fiscal 2018, cash provided by operating activities was primarily from net earnings of $48.3 million, depreciation and amortization of $13.2 million, stock-based compensation of $5.2 million, provision of doubtful accounts of $0.5 million and non-cash interest of $0.3 million. Cash provided by operating activities were partially offset by the increase in primary working capital of $25.5 million, net of currency translation changes, accrued expenses of $15.2 million, comprising primarily of payroll related expenses and income taxes and prepaid and other current assets of $4.2 million, comprising primarily of prepaid taxes.
In the first quarter of fiscal 2017, cash provided by operating activities was primarily from net earnings of $44.6 million, depreciation and amortization of $13.8 million, non-cash charges relating to write-offs relating to restructuring and ERP implementation of $7.0 million, stock-based compensation of $5.1 million, provision of doubtful accounts of $0.9 million and non-cash interest of $0.3 million. Also contributing to our cash provided from operating activities was the decrease in primary working capital of $2.5 million, net of currency translation changes, compared to the decrease in primary working capital of $31.0 million in the prior year quarter.
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 $661.9 million (yielding a primary working capital percentage of 26.6%) at July 2, 2017, $624.8 million (yielding a primary working capital percentage of 24.9%) at March 31, 2017 and $586.5 million at July 3, 2016 (yielding a primary working capital percentage of 24.4%). The primary working capital percentage of 26.6% at July 2, 2017 is 170 basis points higher than that for March 31, 2017, and is 220 basis points higher than that for the prior year period. Primary working capital percentage increased during the current quarter of fiscal 2018 largely due to higher inventory levels and accounts receivable. The reason for the increase in inventory is partially due to rising lead costs, slower inventory turns and a weaker U.S. dollar. Accounts receivable is higher mainly due to increased volume and higher selling prices.
Primary working capital and primary working capital percentages at July 2, 2017, March 31, 2017 and July 3, 2016 are computed as follows:
($ in Millions) | |||||||||||||||||||||||
Balance At | Trade Receivables | Inventory | Accounts Payable | Total | Quarter Revenue Annualized | Primary Working Capital % | |||||||||||||||||
July 2, 2017 | $ | 502.1 | $ | 383.4 | $ | (223.6 | ) | $ | 661.9 | $ | 2,490.5 | 26.6 | % | ||||||||||
March 31, 2017 | 486.6 | 360.7 | (222.5 | ) | 624.8 | 2,507.2 | 24.9 | ||||||||||||||||
July 3, 2016 | 456.1 | 351.6 | (221.2 | ) | 586.5 | 2,402.4 | 24.4 | ||||||||||||||||
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Investing activities used cash of $16.0 million in the first quarter of fiscal 2018 and primarily consisted of capital expenditures of $13.1 million, and acquisitions of $3.0 million.
Investing activities used cash of $19.8 million in the first quarter of fiscal 2017 and were primarily comprised of capital expenditures of $7.5 million, and acquisitions of $12.4 million.
Financing activities provided cash of $17.4 million in the first quarter of fiscal 2018 primarily due to revolver borrowings of $112.1 million and repayments of $62.1 million, purchase of treasury stock of $21.2 million, repayment of our Term Loan of $3.8 million, payment of cash dividends to our stockholders of $7.6 million, and payment of taxes related to net share settlement of equity awards of $7.4 million. Net borrowings on short-term debt were $6.7 million and proceeds from stock options were $0.6 million.
Financing activities used cash of $23.5 million in the first quarter of fiscal 2017 primarily due to revolver borrowings and repayments of $84.3 million and $79.3 million, respectively, repayment of our Term Loan of $3.8 million, payment of cash dividends to our stockholders of $7.6 million, and payment of taxes related to net share settlement of equity awards of $7.6 million. Net borrowings on short-term debt were $9.5 million.
As a result of the above, total cash and cash equivalents increased by $42.7 million to $543.0 million, in the first quarter of fiscal 2018 compared to an increase by $16.3 million to $413.6 million, in the comparable period of fiscal 2017.
All obligations under our 2011 Credit Facility are secured by, among other things, substantially all of our U.S. assets. The 2011 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 credit agreement. 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 2017 Annual Report and Note 9 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 2017 Annual Report for the year ended March 31, 2017. As of July 2, 2017, we had no significant changes to our contractual obligations table contained in our 2017 Form 10-K.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risks
Our cash flows and earnings are subject to fluctuations resulting from changes in interest rates, foreign currency exchange rates and raw material costs. 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 July 2, 2017 are $1.7 million (pre-tax). Those contracts that result in an asset position at July 2, 2017 are $3.1 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 $3.4 million on the variable rate portions of our debt.
25
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) | ||||||||||
July 2, 2017 | $ | 61.0 | 61.5 | $ | 0.99 | 11 | % | |||||||
March 31, 2017 | 46.6 | 45.0 | 1.03 | 8 | ||||||||||
July 3, 2016 | 18.5 | 23.9 | 0.77 | 5 | ||||||||||
(1) Based on approximate annual lead requirements for the periods then ended.
For the remaining three quarters of this fiscal year, we believe approximately 46% of the cost of our lead requirements is known. This takes into account the hedge contracts in place at July 2, 2017, lead purchased by July 2, 2017 that will be reflected in future costs under our FIFO accounting treatment, 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 $17 million in the first quarter of fiscal 2018.
Foreign Currency Exchange Rate Risks
We manufacture and assemble our products globally in the Americas, EMEA and Asia. Approximately 50% 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.
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 10% - 15% 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 ASC 815.
At July 2, 2017 and July 3, 2016, we estimate that an unfavorable 10% movement in the exchange rates would have adversely changed our hedge valuations by approximately $4.7 million and $2.4 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.
(b) Internal Control Over Financial Reporting. There have not been any changes 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) during the quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
26
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 7 - Commitments, Contingencies and Litigation to the Consolidated Condensed Financial Statements, which is incorporated herein by reference.
Item 1A. | Risk Factors |
In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2017 Annual Report for the year ended March 31, 2017 which could materially affect our business, financial condition or future results.
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) | ||||||||||
April 1 – April 30, 2017 | 6,809 | $ | 83.67 | — | $ | 25,000,000 | ||||||||
May 1 – May 28, 2017 | 287,580 | 82.26 | 207,345 | 24,792,655 | ||||||||||
May 29 – July 2, 2017 | 62,825 | 79.22 | 53,772 | 24,738,883 | ||||||||||
Total | 357,214 | $ | 81.75 | 261,117 | ||||||||||
(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 2010 Equity Incentive Plan and the number of shares exercised through stock option awards during such fiscal year. |
(2) | On August 9, 2017, the Company announced the establishment of the establishment of a new $100,000 stock repurchase authorization, with no expiration date. |
Item 4. | Mine Safety Disclosures |
Not applicable.
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ITEM 6. | EXHIBITS |
Exhibit Number | Description of Exhibit | |
3.1 | Fifth Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-115553) filed on July 13, 2004). | |
3.2 | Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on August 3, 2016). | |
10.1 | Form of letter agreement, dated June 7, 2017, between EnerSys and David M. Shaffer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on June 12, 2017). | |
10.2 | Form of letter agreement, dated June 7, 2017, between EnerSys and an executive officer incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on June 12, 2017). | |
10.3 | EnerSys 2017 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 001-32253) filed on June 19, 2017). | |
10.4 | Credit Agreement, dated as of August 4, 2017, among EnerSys, certain other borrowers and guarantors identified therein, Bank of America, N.A., as administrative agent, swing line lender and Letters of Credit issuer, and other lenders party thereto (filed herewith). | |
10.5 | Form of Deferred Stock Unit Agreement - Non-Employee Directors - 2017 Equity Incentive Plan (filed herewith). | |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith). | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith). | |
32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). | |
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: August 9, 2017
29
EnerSys
EXHIBIT INDEX
Exhibit Number | Description of Exhibit | |
3.1 | Fifth Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-115553) filed on July 13, 2004). | |
3.2 | Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on August 3, 2016). | |
10.1 | Form of letter agreement, dated June 7, 2017, between EnerSys and David M. Shaffer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on June 12, 2017). | |
10.2 | Form of letter agreement, dated June 7, 2017, between EnerSys and an executive officer incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on June 12, 2017). | |
10.3 | EnerSys 2017 Equity Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A (File No. 001-32253) filed on June 19, 2017). | |
10.4 | Credit Agreement, dated as of August 4, 2017, among EnerSys, certain other borrowers and guarantors identified therein, Bank of America, N.A., as administrative agent, swing line lender and Letters of Credit issuer, and other lenders party thereto (filed herewith). | |
10.5 | Form of Deferred Stock Unit Agreement - Non-Employee Directors - 2017 Equity Incentive Plan (filed herewith). | |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith). | |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith). | |
32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith). | |
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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