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ENS > SEC Filings for ENS > Form 10-Q on 5-Feb-2014All Recent SEC Filings

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Form 10-Q for ENERSYS


5-Feb-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our filings with the Securities and Exchange Commission and its reports to stockholders. Generally, the inclusion of the words "believe," "expect," "intend," "estimate," "anticipate," "will," 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 views and assumptions regarding future events and operating performance, 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 2013 Annual Report on Form 10-K 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 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 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 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;

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;

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;


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our ability to attract and retain qualified 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.

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 equipment enclosure solutions. 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 60% 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 Zurich, Switzerland; and

Asia, which includes Asia, Australia and Oceania, with our segment headquarters in Singapore.

We evaluate business segment performance based primarily upon operating earnings exclusive of highlighted items. Highlighted items are those that the Company deems are not indicative of ongoing operating results, including those charges that the Company incurs as a result of restructuring activities and those charges and credits that are not directly related to ongoing business segment performance. All corporate and centrally incurred costs are allocated to the business segments based principally on net sales. We evaluate business segment cash flow and financial position performance based primarily upon capital expenditures and primary working capital levels (see definition of primary working capital in "Liquidity and Capital Resources" below). Although we monitor the three elements of primary working capital (receivables, inventory and payables), our primary focus is on the total amount due to the significant impact it has on our cash flow.
Our management structure, financial reporting systems, and associated internal controls and procedures, are all consistent with our three geographic business segments. We report on a March 31 fiscal year-end. Our financial results are largely driven by the following factors:
global economic conditions and general cyclical patterns of the industries in which our customers operate;

changes in our selling prices and, in periods when our product costs increase, our ability to raise our selling prices to pass such cost increases through to our customers;

the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity;

the extent to which we can control our fixed and variable costs, including those for our raw materials, manufacturing, distribution and operating activities;

changes in our level of debt and changes in the variable interest rates under our credit facilities; and

the size and number of acquisitions and our ability to achieve their intended benefits.


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We have two primary industrial battery product lines: reserve power products 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 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.

Motive power products are used to provide power for manufacturing, warehousing and other material handling equipment, primarily electric industrial forklift trucks, mining equipment, diesel locomotive starting and other rail equipment.

During the current quarter, we completed the acquisition of Purcell Systems, Inc., a designer, manufacturer and marketer of thermally managed electronic equipment and battery cabinet enclosures, headquartered in Spokane, Washington. With the acquisition of Purcell Systems, Inc., we will be supplementing our reserve power products with thermally managed cabinets and enclosures for electronic equipment and batteries. We also completed the acquisition of Quallion LLC, a manufacturer of lithium ion cells and batteries for high integrity applications including implantable medical devices, defense, aviation and space, headquartered in Sylmar, California. Economic Climate
Recent indicators continue to suggest a mixed trend in economic activity among the different geographical regions. The Americas economic activity continues to be strong. Our overall Asia region's economic growth is slowing but has been positively impacted by increased capital spending in telecommunications. The EMEA economy appears to have stabilized and should experience flat to moderate growth.
Volatility of Commodities and Foreign Currencies Our most significant commodity and foreign currency exposures are related to lead and the euro. 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 may continue to fluctuate as they have in the past several years. Overall, on a consolidated basis, we have experienced stable trends more recently in our revenue and order rates and commodity cost changes have not been substantial. Customer Pricing
Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 35% of our revenue is currently subject to agreements that adjust pricing to a market-based index for lead. During the current quarter and nine months of fiscal 2014, our selling prices increased slightly, compared to the comparable prior year periods. Liquidity and Capital Resources
Our capital structure and liquidity remain strong. As of December 29, 2013, we had $211.6 million of cash and cash equivalents and $349 million, undrawn and available under all our lines of credit including approximately $120 million of uncommitted credit lines. 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. The Convertible Notes became convertible at the option of the holders effective January 2, 2014, as described in Note 11. If the Convertible Notes holders would exercise their conversion rights, we would pay the principal amount by drawing on our $350 million 2011 Credit Facility and, at our election, issue shares or pay cash for any remaining value.
Our leverage has increased in fiscal 2014 mainly due to increased acquisitions activity, initiation of quarterly dividend payments and continuation of our share repurchase program. 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.


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Results of Operations
Net Sales

                                    Quarter ended                    Quarter ended
                                    December 29, 2013                December 30, 2012               Increase (Decrease)
                                                Percentage                       Percentage
                                    In           of Total            In           of Total             In
Current quarter by segment       Millions        Net Sales        Millions        Net Sales         Millions             %
EMEA                         $    251.3              39.1 %   $    231.4              41.5 %   $     19.9                 8.6 %
Americas                          327.0              50.8 %        275.8              49.5 %         51.2                18.6 %
Asia                               64.8              10.1 %         50.1               9.0 %         14.7                29.3 %
Total net sales              $    643.1             100.0 %   $    557.3             100.0 %   $     85.8                15.4 %



                                  Nine months ended              Nine months ended
                                   December 29, 2013              December 30, 2012            Increase (Decrease)
                                              Percentage                     Percentage
                                   In          of Total           In          of Total          In
Year to date by segment         Millions       Net Sales       Millions       Net Sales      Millions            %
EMEA                         $      705.6          39.0 %   $      683.9          40.1 %   $     21.7            3.2  %
Americas                            930.3          51.4 %          841.4          49.3 %         88.9           10.6  %
Asia                                173.3           9.6 %          180.1          10.6 %         (6.8 )         (3.8 )%
Total net sales              $    1,809.2         100.0 %   $    1,705.4         100.0 %   $    103.8            6.1  %

Net sales increased $85.8 million or 15.4% in the third quarter of fiscal 2014 from the comparable period in fiscal 2013. This increase for the quarter was the result of a 9% increase in organic volume and a 6% increase due to acquisitions.

Net sales increased $103.8 million or 6.1% in the nine months of fiscal 2014 from the comparable period in fiscal 2013. This increase for the nine months was the result of a 4% increase in organic volume and a 2% increase due to acquisitions.
Segment sales
The EMEA segment's net sales increased $19.9 million or 8.6% in the third quarter of fiscal 2014, as compared to the third quarter of fiscal 2013, primarily due to a 6% increase in organic volume and a 3% increase in foreign currency translation impact. Net sales increased $21.7 million or 3.2% in the nine months of fiscal 2014, as compared to the nine months of fiscal 2013, primarily due to an increase of approximately 2% related to currency translation impact and a 1% increase in pricing.
The Americas segment's net sales increased $51.2 million or 18.6% in the third quarter of fiscal 2014, as compared to the third quarter of fiscal 2013, primarily due to an increase of approximately 7% in organic volume and a 12% increase due to acquisitions. Net sales increased $88.9 million or 10.6% in the nine months of fiscal 2014, as compared to the nine months of fiscal 2013, primarily due to higher organic volume of approximately 7% and a 4% increase due to acquisitions.
The Asia segment's net sales increased $14.7 million or 29.3% in the third quarter of fiscal 2014, as compared to the third quarter of fiscal 2013, primarily due to higher organic volume of 34% partially offset by a decrease due to foreign currency translation impact of approximately 4% and a 1% decrease in pricing. Net sales decreased $6.8 million or 3.8% in the nine months of fiscal 2014, as compared to the nine months of fiscal 2013, primarily due to a decrease of approximately 3% due to foreign currency translation and a 2% decrease due to pricing, partially offset by an increase of 1% due to organic volume.


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Product line sales

                                    Quarter ended                    Quarter ended
                                    December 29, 2013                December 30, 2012               Increase (Decrease)
                                                Percentage                       Percentage
                                    In           of Total            In           of Total             In
                                 Millions        Net Sales        Millions        Net Sales         Millions             %
Reserve power                $    328.8              51.1 %   $    265.2              47.6 %   $     63.6                24.0 %
Motive power                      314.3              48.9 %        292.1              52.4 %         22.2                 7.6 %
Total net sales              $    643.1             100.0 %   $    557.3             100.0 %   $     85.8                15.4 %



                                  Nine months ended              Nine months ended
                                   December 29, 2013              December 30, 2012               Increase (Decrease)
                                              Percentage                     Percentage
                                   In          of Total           In          of Total              In
                                Millions       Net Sales       Millions       Net Sales          Millions              %
Reserve power                $      901.1          49.8 %   $      839.8          49.2 %   $       61.3                 7.3 %
Motive power                        908.1          50.2 %          865.6          50.8 %           42.5                 4.9 %
Total net sales              $    1,809.2         100.0 %   $    1,705.4         100.0 %   $      103.8                 6.1 %

Net sales of our reserve power products in the third quarter of fiscal 2014 increased $63.6 million or 24.0% compared to the third quarter of fiscal 2013. Organic volume and acquisitions contributed to this improvement by approximately 11% and 13%, respectively. Net sales in the nine months of fiscal 2014 increased $61.3 million or 7.3% compared to the nine months of fiscal 2013. Organic volume and acquisitions contributed to this improvement by approximately 3% and 4%, respectively.
Net sales of our motive power products in the third quarter of fiscal 2014 increased by $22.2 million or 7.6% compared to the third quarter of fiscal 2013. An improvement of approximately 7% in organic volume and a 1% increase due to foreign currency translation impact contributed to this improvement in the third quarter of fiscal 2014. Net sales in the nine months of fiscal 2014 increased $42.5 million or 4.9% compared to the nine months of fiscal 2013, primarily due to a 4% increase in organic volume and a combined 1% increase due to pricing and foreign currency translation impact.

Gross Profit

                                      Quarter ended                      Quarter ended
                                      December 29, 2013                  December 30, 2012                Increase (Decrease)
                                                   Percentage                         Percentage
                                      In            of Total             In            of Total             In
                                   Millions         Net Sales         Millions         Net Sales         Millions             %
Gross Profit                  $     167.2              26.0 %    $     143.7              25.8 %    $     23.5               16.3 %



                                     Nine months ended                  Nine months ended
                                      December 29, 2013                  December 30, 2012                 Increase (Decrease)
                                                   Percentage                         Percentage
                                      In            of Total             In            of Total              In
                                   Millions         Net Sales         Millions         Net Sales          Millions              %
Gross Profit                  $     451.6              25.0 %    $     430.3              25.2 %    $      21.3                 4.9 %

Gross profit increased $23.5 million or 16.3% in the third quarter of fiscal 2014 and increased $21.3 million or 4.9% in the nine months of fiscal 2014 compared to the comparable periods of fiscal 2013. Gross profit, as a percentage of net sales increased 20 basis points in the third quarter but decreased 20 basis points in the nine months of fiscal 2014, when compared to the comparable periods of fiscal 2013. The increase in the current quarter is primarily attributed to higher volume and pricing partially offset by higher commodity costs. The decrease in the nine months of fiscal 2014 compared to the prior year nine months is primarily due to higher commodity costs partially offset by higher volume and pricing.


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Operating Items

                                   Quarter ended                Quarter ended
                                   December 29, 2013            December 30, 2012             Increase (Decrease)
                                             Percentage                   Percentage
                                   In         of Total          In         of Total             In
                                Millions      Net Sales      Millions      Net Sales         Millions             %
Operating expenses            $     90.1         14.0 %    $     80.2         14.4 %    $     9.9                12.3 %
Restructuring charges         $     13.0          2.0 %    $      3.7          0.7 %    $     9.3                  NM
Goodwill impairment charge    $      5.2          0.8 %    $        -            - %    $     5.2                  NM

NM = not meaningful

                                     Nine months ended                  Nine months ended
                                      December 29, 2013                  December 30, 2012                 Increase (Decrease)
                                                   Percentage                         Percentage
                                      In            of Total             In            of Total              In
                                   Millions         Net Sales         Millions         Net Sales          Millions              %
Operating expenses            $     249.4              13.8 %    $     232.0              13.6 %    $      17.4                 7.5 %
Restructuring charges         $      14.5               0.8 %    $       5.4               0.3 %    $       9.1                  NM
Goodwill impairment charge    $       5.2               0.3 %    $         -                 - %    $       5.2                  NM

Operating expenses as a percentage of net sales decreased 40 basis points in the third quarter and increased 20 basis points in the nine months of fiscal 2014 compared to the third quarter and nine months of fiscal 2013. Operating expenses, excluding the effect of foreign currency translation, increased $10.1 million or 12.6% in the third quarter of fiscal 2014 and increased $18.1 million or 7.8% in the nine months of fiscal 2014 compared to the nine months of fiscal 2013. Increase in operating expenses in both the quarter and nine months is primarily due to increased sales volume, acquisitions, acquisition related fees and payroll related expenses. Selling expenses, our main component of operating expenses, were 55.4% and 57.5% of total operating expenses in the third quarter and nine months of fiscal 2014, respectively, compared to 58.0% and 59.4% of total operating expenses in the third quarter and nine months of fiscal 2013, respectively.
Restructuring charges
Included in our third quarter and nine months of fiscal 2014 operating results are $13.0 million and $14.5 million of restructuring charges, respectively, primarily for staff reductions and write-off of fixed assets and inventory in EMEA and relocating our motive power and a portion of our reserve power manufacturing from Bulgaria to our facilities in Western Europe. Included in our third quarter and nine months of fiscal 2013 operating results are $3.7 million and $5.4 million of restructuring charges, respectively, primarily for staff reductions and write-off of fixed assets and inventory in EMEA and Asia. Goodwill impairment charge
Goodwill is tested annually for impairment during the fourth quarter or earlier . . .

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