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 October 3, 2004

or

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

For the transition period from                    to

Commission File Number: 001-32253

 

 

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     o  NO

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  o  YES  ý  NO

 

The number of shares of Common Stock outstanding as of November 16, 2004:   45,955,420

 

 

ENERSYS

 

INDEX – FORM 10-Q

 

				Page
PART I – FINANCIAL INFORMATION
Item 1.		Financial Statements
		Consolidated Condensed Balance Sheets
		October 3, 2004 (Unaudited) and March 31, 2004		3
		Consolidated Condensed Statements of Operations (Unaudited)
		For the Fiscal Quarters Ended October 3, 2004 and September 28, 2003		4
		Consolidated Condensed Statements of Operations (Unaudited)
		For the Six Fiscal Months Ended October 3, 2004 and September 28, 2003		5
		Consolidated Condensed Statements of Cash Flows (Unaudited)
		For the Six Fiscal Months Ended October 3, 2004 and September 28, 2003		6
		Consolidated Condensed Statements of Comprehensive Income (Unaudited)
		For the Three and Six Fiscal Months Ended October 3, 2004 and September 28, 2003		7
		Notes to Consolidated Condensed Financial Statements (Unaudited)		8
Item 2.		Management’s Discussion and Analysis of Financial Condition and
		Results of Operations		16
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		27
Item 4.		Disclosure Controls and Procedures		28
PART II – OTHER INFORMATION
Item 1.		Legal Proceedings		28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		29
Item 3.		Defaults Upon Senior Securities		30
Item 4.		Submission of Matters to a Vote of Security Holders		30
Item 5.		Other Information		30
Item 6.		Exhibits		30
SIGNATURES				32

 

2

 

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

 

ENERSYS

Consolidated Condensed Balance Sheets

(In Thousands, Except Share Data)

 

		October 3, 2004			March 31, 2004
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	15,667		$	17,207
Accounts receivable, net		230,648			227,752
Inventories, net		140,343			131,712
Deferred taxes		25,014			24,616
Prepaid expenses		12,003			17,873
Other current assets		6,706			4,543
Total current assets		430,381			423,703
Property, plant, and equipment, net		276,108			284,850
Goodwill		309,229			306,825
Other intangible assets, net		75,472			75,495
Deferred taxes		26,032			26,025
Other		30,330			34,170
Total assets		$	1,147,552		$	1,151,068
Liabilities and stockholders’ equity
Current liabilities:
Short-term debt		$	10,620		$	2,712
Current portion of long-term debt		6,759			7,014
Current portion of capital lease obligations		2,223			2,150
Accounts payable		98,154			113,043
Accrued expenses		149,141			163,717
Deferred taxes		1,267			340
Total current liabilities		268,164			288,976
Long-term debt		360,438			496,200
Capital lease obligations		2,178			3,227
Deferred taxes		61,045			60,952
Other liabilities		57,638			62,411
Total liabilities		749,463			911,766
Stockholders’ equity:
Series A Convertible Preferred Stock, $0.01 par value, no shares authorized, issued or outstanding at October 3, 2004; and 2,500,000 shares authorized, 665,883 shares issued and outstanding at March 31, 2004		—			7
Common Stock, $0.01 par value, 135,000,000 shares authorized, and 45,945,559 shares issued and outstanding at October 3, 2004; 11,014,421 shares issued and outstanding at March 31, 2004		459			110
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding		—			—
Additional paid-in capital		327,866			188,766
Retained earnings (deficit)		6,573			(8,839		)
Accumulated other comprehensive income		63,191			59,258
Total stockholders’ equity		398,089			239,302
Total liabilities and stockholders’ equity		$	1,147,552		$	1,151,068

 

See accompanying notes.

 

3

 

ENERSYS

Consolidated Condensed Statements of Operations (Unaudited)

(In Thousands, Except Share and Per Share Data)

 

		Fiscal quarter ended
		October 3, 2004			September 28, 2003
Net sales		$	261,313		$	222,139
Cost of goods sold		200,192			164,863
Gross profit		61,121			57,276
Operating expenses		41,230			39,856
Operating earnings		19,891			17,420
Interest expense		5,855			5,106
Special charge relating to a write-off of deferred finance costs and a prepayment penalty		6,022			—
Other income, net		(1,396		)	(1,682		)
Earnings before income taxes		9,410			13,996
Income tax expense		3,026			5,323
Net earnings		$	6,384		$	8,673
Series A convertible preferred stock dividends		—			(5,731		)
Net earnings available to common shareholders		$	6,384		$	2,942
Net earnings per common share:
Basic		$	0.15		$	0.27
Diluted		$	0.15		$	0.26
Weighted-average shares of common stock outstanding:
Basic		42,648,856			11,014,421
Diluted		43,211,763			11,157,737

 

See accompanying notes.

 

4

 

ENERSYS

Consolidated Condensed Statements of Operations (Unaudited)

(In Thousands, Except Share and Per Share Data)

 

		Six fiscal months ended
		October 3, 2004			September 28, 2003
Net sales		$	524,574		$	440,404
Cost of goods sold		396,735			330,572
Gross profit		127,839			109,832
Operating expenses		85,433			79,923
Operating earnings		42,406			29,909
Interest expense		13,294			10,236
Special charge relating to a write-off of deferred finance costs and a prepayment penalty		6,022			—
Other income, net		(679		)	(3,682		)
Earnings before income taxes		23,769			23,355
Income tax expense		8,358			8,882
Net earnings		$	15,411		$	14,473
Series A convertible preferred stock dividends		(8,155		)	(11,374		)
Net earnings available to common shareholders		$	7,256		$	3,099
Net earnings per common share:
Basic		$	0.27		$	0.28
Diluted		$	0.27		$	0.28
Weighted-average shares of common stock outstanding:
Basic		26,831,638			11,014,421
Diluted		27,364,315			11,157,522

 

See accompanying notes.

 

5

 

ENERSYS

Consolidated Condensed Statements of Cash Flows (Unaudited)

(In Thousands)

 

		Six fiscal months ended
		October 3, 2004			September 28, 2003
Cash flows from operating activities
Net earnings		$	15,411		$	14,473
Adjustments to reconcile net earnings to net cash provided by Operating activities:
Non-cash special charge		3,622			—
Depreciation and amortization		20,414			19,240
Provision for doubtful accounts		347			240
Provision for deferred taxes		(317		)	(250		)
Accretion of discount on notes payable		—			2,223
Option liability gain		—			(26		)
Stock-based compensation		210			—
Loss (gain) on disposal of fixed assets		477			(191		)
Changes in assets and liabilities, net of effects of acquisition:
Accounts receivable		(3,186		)	2,227
Inventory		(8,522		)	(9,650		)
Prepaid expenses and other current assets		5,344			1,438
Other assets		1,106			627
Accounts payable		(14,137		)	(9,840		)
Accrued expenses		(16,469		)	1,668
Other liabilities		(3,191		)	767
Net cash provided by operating activities		1,109			22,946
Cash flows from investing activities
Capital expenditures		(14,784		)	(10,582		)
Acquisition		(1,046		)	—
Purchase price adjustment		—			181
Proceeds from disposal of property, plant, and equipment		3,546			184
Net cash used in investing activities		(12,284		)	(10,217		)
Cash flows from financing activities
Net increase in short-term debt		7,842			4,360
Proceeds from the issuance of long-term debt		3,863			—
Payments of long-term debt		(139,880		)	(1,957		)
Payments of capital lease obligations, net		(1,071		)	(1,033		)
Net proceeds from initial public offering		139,232			—
Deferred financing costs		(528		)	—
Net cash provided by financing activities		9,458			1,370
Effect of exchange rate changes on cash		177			327
Net (decrease) increase in cash		(1,540		)	14,426
Cash and cash equivalents at beginning of period		17,207			44,296
Cash and cash equivalents at end of period		$	15,667		$	58,722

 

See accompanying notes.

 

6

 

ENERSYS

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(In Thousands)

 

		Fiscal quarter ended						Six fiscal months ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Net income		$	6,384		$	8,673		$	15,411		$	14,473
Other comprehensive income, net of tax:
Net unrealized gain on derivative instruments		704			624			1,682			483
Minimum pension adjustment		—			472			—			472
Foreign currency translation adjustments		2,103			(1,672		)	2,252			4,440
Total comprehensive income		$	9,191		$	8,097		$	19,345		$	19,868

 

See accompanying notes.

 

7

 

ENERSYS

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

(In Thousands, Except Share and Per Share Data)

 

NOTE 1:                BASIS OF PRESENTATION

 

The accompanying interim unaudited condensed consolidated 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 financial statements include all adjustments, consisting only of normal recurring accruals 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 Prospectus dated July 29, 2004, which forms part of the Company’s Registration Statement (SEC File No. 333-115553) on Form S-1, as amended (the “Company’s Prospectus”).  The results of operations for the second quarter and for the six fiscal months ended October 3, 2004, are not necessarily indicative of the results to be expected for the full year.

 

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 fiscal quarters in fiscal 2005 end on July 4, 2004, October 3, 2004, January 2, 2005, and March 31, 2005, respectively.  The four fiscal quarters in fiscal 2004 ended on June 29, 2003, September 28, 2003, December 28, 2003, and March 31, 2004.

 

NOTE 2:                INITIAL PUBLIC OFFERING

 

In August 2004, EnerSys completed an initial public offering (the “IPO”) and issued 12,500,000 shares of our common stock at a value of $12.50 per share.  The Company’s Registration Statement (SEC File No. 333-115553) for its IPO was declared effective by the Securities and Exchange Commission on July 26, 2004.  The Company’s common stock commenced trading on the New York Stock Exchange on July 30, 2004 under the trading symbol “ENS.”  At the completion of the offering, we had 45,945,559 shares of common stock outstanding, which included 11,014,421 shares that were outstanding prior to the IPO, 22,431,138 shares of common stock converted from preferred shares, and 12,500,000 new shares issued in the IPO.  The net proceeds from the offering were $139,232.  The net proceeds and $1,696 of other corporate funds were used to prepay the entire principal and accrued interest and prepayment penalty on our senior second lien term loan ($123,015) and to prepay a portion ($17,913) of our $380,000 senior secured term loan B.

 

8

 

NOTE 3:                PROPOSED ACCOUNTING PRONOUNCEMENT

 

In March 2004, the Financial Accounting Standards Board (“FASB”) issued an exposure document entitled Share-Based Payment – an amendment of Statements No. 123 and 95 (Proposed Statement of Financial Accounting Standards).  The Proposed Statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees and generally require that such transactions be accounted for using a fair-value-based method.  This accounting treatment, if approved, could result in significant compensation expense.  The Proposed Statement, if adopted, would be effective for public entities for interim or annual periods beginning after June 15, 2005.

 

NOTE 4:                INVENTORIES

 

Inventories, net consist of:

 

		October 3, 2004			March 31, 2004
Raw Materials		$	36,052		$	32,003
Work-in-Process		38,375			36,670
Finished Goods		65,916			63,039
		$	140,343		$	131,712

 

NOTE 5:                ACCOUNTING FOR DERIVATIVES

 

The Company accounts for derivative instruments and hedging activities in accordance with SFAS 133 Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities and SFAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (collectively, “SFAS 133”).  SFAS 133 establishes accounting and reporting standards for derivative instruments and hedging activities.  SFAS 133 requires that all derivatives be recognized as either assets or liabilities at fair value.  The Company does not enter into derivative contracts for speculative trading purposes.  Derivatives are used to hedge the volatility arising from movements in a portion of the cost of lead purchases as well as to hedge certain interest rates.  The changes in the fair value of these contracts are recorded in Accumulated Other Comprehensive Income until the related purchased lead or incurred interest rates are charged to earnings.  At that time, the portion recorded in Accumulated Other Comprehensive Income is recognized in the Statement of Operations.  The amount of Accumulated Other Comprehensive Income related to lead contracts at October 3, 2004, net of tax, was a credit of approximately $1,702.

 

The following table describes the Company’s interest rate swaps as of October 3, 2004, and March 31, 2004.  These interest rate swaps are designated as cash flow hedges and, therefore, changes in their fair value, net of tax, are recorded in Accumulated Other Comprehensive Income.  The amount of Accumulated Other Comprehensive Income related to interest rate swaps as of October 3, 2004, net of tax, was a debit of approximately $(2,597).

 

9

 

Notional Amount			Origination Date		Maturity Date		Fixed Interest Rate Paid		Variable Interest Rate Received		Fair Value at October 3, 2004			Fair Value at March 31, 2004
$	60,000		02/22/01		02/22/08		5.16	%	3-month LIBOR		$	(3,579	)	$	(4,316	)
68,000			05/05/04		05/05/08		3.67	%(1)	3-month LIBOR		(767		)	NA
$	128,000										$	(4,346	)	$	(4,316	)

 

(1)          Fixed interest rate paid is 2.85% in year one, 3.15% in year two, 3.95% in year three and 4.68% in year four, which averages 3.67% for the four-year period.

 

NOTE 6:                INCOME TAXES

 

The Company’s income tax provisions for all periods consist of federal, state and foreign income taxes.  The tax provisions for the second quarter and for the six fiscal months ended October 3, 2004 and September 28, 2003 were based on the estimated effective tax rates applicable for the full years ending March 31, 2005 and March 31, 2004, after giving effect to items specifically related to the interim periods.  The second quarter and year-to-date fiscal 2005 effective income tax rates were 32% and 35%, respectively.  The tax provision for the second quarter ended October 3, 2004 reflects a reduction of the estimated effective tax rates for the full year ending March 31, 2005.  The second quarter and year-to-date fiscal 2004 effective tax rates were 38%.

 

NOTE 7:                WARRANTY

 

The Company provides for estimated product warranty expenses when the related products are sold, with related liabilities primarily included within accrued expenses.  Because warranty estimates are forecasts that are based on the best available information, primarily historical claims experience, claims costs may differ from amounts provided.  An analysis of changes in the liability for product warranties is as follows:

 

		Six fiscal months ended
		October 3, 2004			September 28, 2003
Balance at beginning of period		$	23,249		$	24,198
Current period provisions		7,878			6,913
Costs incurred		(7,018		)	(6,455		)
Balance at end of period		$	24,109		$	24,656

 

10

 

NOTE 8:                RESTRUCTURING ACTIVITY

 

On March 22, 2002, the Company acquired the assets, stock and business of substantially all subsidiaries and affiliates comprising the Energy Storage Group (“ESG”) of Invensys PLC.  As of the acquisition date, the Company began to formulate an exit and restructuring plan for certain ESG facilities in North America and Europe.  This restructuring activity is more fully disclosed in Note 3 to the Consolidated Financial Statements included in the Company’s Prospectus dated July 29, 2004.  A rollforward of this restructuring reserve is as follows:

 

		Six fiscal months ended
		October 3, 2004			September 28, 2003
Balance at beginning of period		$	38,344		$	39,379
Costs incurred		(8,584		)	(1,853		)
Foreign currency impact and other		(514		)	1,968
Balance at end of period		$	29,246		$	39,494

 

The costs incurred in the six months ended October 3, 2004 related primarily to approximately $4,100 of restructuring activity in our United Kingdom facility and approximately $3,300 of restructuring activity in our German facility.  Since inception of these aggregate restructuring reserves, $30,347 of costs have been incurred.

 

During the fiscal year ended March 31, 2002, the Company also decided to close and downsize certain existing manufacturing locations in North and South America, reduce product offerings, reduce sales and distribution facilities, and implement other consolidation initiatives.  This restructuring activity is more fully described in Note 23 to the Consolidated Financial Statements included in the Company’s Prospectus dated July 29, 2004.  A rollforward of this restructuring reserve is as follows:

 

		Six fiscal months ended
		October 3, 2004			September 28, 2003
Balance at beginning of period		$	12,063		$	11,722
Costs incurred		(8,581		)	(750		)
Balance at end of period		$	3,482		$	10,972

 

The costs incurred in the six months ended October 3, 2004 relate primarily to the settlement in the second quarter of a union matter related to the closing of a manufacturing location.  Since the inception of these aggregate reserves, $19,998 of costs have been incurred.

 

11

 

NOTE 9:                PENSIONS

 

The Company has adopted the disclosure requirements of SFAS No. 132 (revised 2003), Employers’ Disclosures about Pensions and Other Postretirement Benefits, as is reflected in Note 14 of its Consolidated Financial Statements for the year ended March 31, 2004 included in the Company’s Prospectus dated July 29, 2004.  The following table presents the interim disclosure requirements of components of the Company’s net periodic benefit cost related to its defined benefit pension plans.

 

		United States Plans						International Plan
		Six fiscal months ended						Six fiscal months ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Service cost		$	98		$	196		$	1,582		$	1,437
Interest cost		247			236			198			113
Actual return on plan assets		(276		)	(222		)	(277		)	(139		)
Amortization and deferral		69			107			—			(3		)
Net periodic benefit cost		$	138		$	317		$	1,503		$	1,408

 

Significant assumptions used in the accounting for the pension benefit plans are as follows:

 

		United States Plans				International Plan
		Six fiscal months ended				Six fiscal months ended
		October 3, 2004		September 28, 2003		October 3, 2004		September 28, 2003
Discount rate		6.0	%	6.0	%	5.8	%	5.8	%
Expected return on plan assets		9.0	%	9.0	%	7.8	%	7.8	%
Rate of compensation increase		N/A		N/A		3.8	%	3.8	%

 

NOTE 10:              STOCK PLANS

 

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation as amended, to options granted under the stock option plan.  For purposes of this pro forma disclosure, the estimated value of the options is amortized ratably to expense over the options’ vesting periods.  Because the estimated value is determined as of the date of grant, the actual value ultimately realized by the employee may be significantly different.

 

12

 

		Fiscal quarter ended						Six fiscal months ended
		October 3, 2004			September 28, 2003			October 3, 2004			September 28, 2003
Net earnings available to common shareholders – as reported		$	6,384		$	2,942		$	7,256		$	3,099
Stock-based compensation expense included in net earnings, net of tax		11			—			136			—
Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(647		)	(555		)	(1,285		)	(1,110		)
Net earnings available to common shareholders – pro forma		$	5,748		$	2,387		$	6,107		$	1,989
Net earnings per common share – basic – as reported		$	0.15		$	0.27		$	0.27		$	0.28
Net earnings per common share – basic – pro forma		$	0.13		$	0.22		$	0.23		$	0.18
Net earnings per common share – diluted – as reported		$	0.15		$	0.26		$	0.27		$	0.28
Net earnings per common share – diluted –pro forma		$	0.13		$	0.21		$	0.22		$	0.18
Weighted average fair value of options granted during the period		N/A			$	2.29		$	2.00		$	2.67

 

SFAS No. 123 requires the use of option-pricing models that were not developed for use in valuing employee stock options.  The Black-Scholes option-pricing model was developed for use in estimating the fair value of short-lived exchange traded options that have no vesting restrictions and are fully transferable.  In addition, option-pricing models require the input of highly subjective assumptions, including the option’s expected life and the price volatility of the underlying stock.  Because changes in the subjective input assumptions can materially affect the fair value estimate, in the opinion of management, the existing models do not necessarily provide a reliable single measure of the fair value of employee stock options.

 

13

 

NOTE 11:              EARNINGS PER SHARE

 

Net earnings per share – basic is based on the weighted average number of shares of Common Stock outstanding.  Net earnings per share – diluted reflects the potential dilution that could occur if stock options were exercised.  See Note 2 for description of the effect of IPO on shares outstanding.  Weighted average common shares and common shares – diluted were as follows:

 

		Fiscal quarter ended				Six fiscal months ended
		October 3, 2004		September 28, 2003		October 3, 2004		September 28, 2003
Weighted average shares of common stock outstanding		42,648,856		11,014,421		26,831,638		11,014,421
Assumed exercise of stock options, net of shares assumed reacquired		562,907		143,316		532,677		143,101
Weighted average common shares - diluted		43,211,763		11,157,737		27,364,315		11,157,522

 

At October 3, 2004, there were 3,077,538 outstanding employee stock options that are out-of-the money and therefore were excluded from the calculation of the dilutive effect of employee stock options.  All share data reflects the twenty-eight and one-half to one stock split of the Company’s common stock on July 9, 2004.

 

NOTE 12:              COMMITMENTS AND CONTINGENCIES

 

As more fully disclosed in Note 18 of Notes to the Consolidated Financial Statements for the year ended March 31, 2004, included in the Company’s Prospectus dated July 29, 2004, the Company is involved in litigation incidental to conduct of its business, the results of which, in the opinion of management, are not likely to be material to the Company’s financial condition, results of operations, or cash flows.

 

NOTE 13:              BUSINESS SEGMENTS

 

The Company has the following two reportable business segments:

 

The Reserve Power segment manufactures batteries used to provide backup power for the continuous operation of critical systems during power disruptions.  They include telecommunications and computer systems, such as process control and database systems.  This segment also includes aerospace and defense applications including battery power systems for combat vehicles, commercial and military aircraft and submarines.

 

14

 

The Motive Power segment manufactures batteries used to power mobile manufacturing, warehousing and other ground handling equipment, primarily electric industrial forklift trucks.

 

The following table provides selected financial data for the Company’s reportable business segments:

 

		Reserve Power			Motive Power			Other (1)			Consolidated
Fiscal quarter ended October 3, 2004:
Net Sales		$	129,251		$	132,062		$	—		$	261,313
Operating earnings (loss)		$	9,892		$	10,072		$	(73	)	$	19,891
Fiscal quarter ended September 28, 2003:
Net Sales		$	109,375		$	112,764		$	—		$	222,139
Operating earnings (loss)		$	9,560		$	7,933		$	(73	)	$	17,420

 

		Reserve Power			Motive Power			Other (1)			Consolidated
Six fiscal months ended October 3, 2004:
Net Sales		$	254,051		$	270,523		$	—		$	524,574
Operating earnings (loss)		$	21,177		$	21,350		$	(121	)	$	42,406
Six fiscal months ended September 28, 2003:
Net Sales		$	216,735		$	223,669		$	—		$	440,404
Operating earnings (loss)		$	13,713		$	16,315		$	(119	)	$	29,909

 

(1) Other includes certain corporate services.

 

NOTE 14:              SPECIAL CHARGE

 

In August 2004, the Company used the net proceeds from its initial public offering and $1,696 of other corporate funds to prepay the entire principal and accrued interest and prepayment penalty on our senior second lien term loan ($123,015) and to prepay a portion ($17,913) of our $380,000 senior secured term loan B.  In connection with these prepayments, the Company incurred a non-operating special charge of $6,022 for the write-off of a portion of unamortized deferred finance costs and the prepayment penalty on the senior second lien term loan.

 

15

 

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

 

FORWARD-LOOKING STATEMENTS

 

The Private Securities 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 the Company’s 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.  EnerSys undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

 

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 Prospectus dated July 29, 2004, which forms part of the Company’s Registration Statement (SEC File No. 333-115553) on Form S-1, as amended (the “Company’s Prospectus”) 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, 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.

 

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 can control our fixed and variable costs;

•                  the raw material in our products may experience significant fluctuations in market price;

•                  certain raw materials constitute hazardous materials that may give rise to costly environmental and safety claims;

•                  risks involved in foreign operations such as disruption of markets, changes in import and export laws, currency restrictions and currency exchange rate fluctuations;

 

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•                  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 their capacity;

•                  general economic conditions in the markets in which we operate;

•                  competitiveness of the battery markets in the Americas, Europe and Asia;

•                  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;

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

•                  changes in our market share in the business segments and regions where we operate;

•                  our ability to implement our cost reduction initiatives successfully and improve our profitability;

•                  unanticipated quality problems associated with our products;

•                  our ability to implement business strategies, including our acquisition strategy, 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;

•                  implementation of a new enterprise resource planning system could adversely affect our operations;

•                  our ability to comply with the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002;

•                  our debt and debt service requirements which may restrict our operational and financial flexibility, as well as imposing unfavorable interest and financing costs;

•                  adverse changes in our short- and long-term debt levels and adverse changes in the floating interest rates under our credit facilities;

•                  our exposure to fluctuations in interest rates on our variable-rate debt;

•                  our inability to attract and retain qualified personnel;

•                  credit risk associated with our customers, including risk of insolvency and bankruptcy; and

•                  terrorist acts or acts of war, whether in the United States or abroad, could cause damage or disruption to our operations, our suppliers, channels to market or customers, or could cause costs to increase, or create political or economic instability, any of which could have a material adverse effect on our business.

 

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NON-GAAP MEASURES

 

This report contains financial information determined by methods other than in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”).  EnerSys’ management uses non-GAAP measures in their analysis of the Company’s performance.  These measures, as used by EnerSys, adjust net earnings determined in accordance with GAAP to exclude effects of special items, including significant gains or losses that are unusual in nature or are associated with our IPO and certain non-cash charges.  Management believes presentations of financial measures excluding the impact of these items provide useful supplemental information in evaluating the operating results of our business.  These disclosures should not be viewed as a substitute for net earnings determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies.

 

OVERVIEW

 

In August 2004, EnerSys completed an initial public offering (the “IPO”) and issued 12,500,000 shares of our common stock at a value of $12.50 per share.  The Company’s Registration Statement (SEC File No. 333-115553) for its IPO was declared effective by the Securities and Exchange Commission on July 26, 2004.  The Company’s common stock commenced trading on the New York Stock Exchange on July 30, 2004 under the trading symbol “ENS.”  At the completion of the offering, we had 45,945,559 shares of common stock outstanding, which included 11,014,421 shares that were outstanding prior to the IPO, 22,431,138 shares of common stock converted from preferred shares, and 12,500,000 new shares issued in the IPO.  The net proceeds from the offering were approximately $139.2 million.  The net proceeds and $1.7 million of other corporate funds were used to prepay the entire principal and accrued interest and prepayment penalty on our senior second lien term loan ($123.0 million) and to prepay a portion ($17.9 million) of our $380.0 million senior secured term loan B.

 

We manufacture, market and distribute reserve power and motive power lead-acid industrial batteries and related products such as chargers, power equipment and battery accessories.  We also provide related after-market and customer-support services for lead-acid industrial batteries.  We market and sell our products globally in more than 100 countries to over 10,000 customers through a network of distributors, independent representatives and an internal sales force.

 

We have two business segments, reserve power and motive power:

 

•                  Reserve power batteries are used to provide backup power for the continuous operation of critical telecommunications and uninterruptible power systems during power disruptions.  They include telecommunications and computer systems, such as process control and database systems.  This segment also includes aerospace and defense applications including battery power systems for combat vehicles, commercial and military aircraft and submarines.

•                  Motive power batteries are used to power mobile manufacturing, warehousing and other ground handling equipment, primarily electric industrial forklift trucks.

 

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We evaluate business segment performance based primarily upon operating earnings.  We also evaluate each business segment’s cash flow and financial position performance based upon primary working capital.  Although we monitor the three elements of primary working capital (receivables, inventory and accounts payable), our primary focus is on the total amount.  Primary working capital ratio is a calculation of the sum of trade accounts receivable, plus inventories, minus trade accounts payable divided by the trailing three-month net sales (annualized).  Primary working capital was $272.8 million (yielding a primary working capital percentage ratio of 26.1%) at October 3, 2004, and $246.4 million (yielding a primary working capital percentage ratio of 22.4%) at March 31, 2004.  We closely manage our level of working capital due to the significant impact it has on cash flow and, as a result, our level of debt.  The increase in the ratio during fiscal 2005 was primarily due to slower collections of receivables in Europe and higher levels of inventory to support shifts in the production locations of certain products.  Although collections in Europe improved in the quarter, both of these areas remain a focus for improvement.

 

On a consolidated basis, we monitor daily short-term and long-term debt levels, as well as the corresponding leverage ratios (primarily using debt to EBITDA).  EBITDA is earnings before interest, income taxes, depreciation and amortization.

 

We operate and manage our business in three primary geographic regions of the world - the Americas, Europe and Asia.  Our business is highly decentralized with 20 manufacturing locations throughout the world.  Over half our net sales for the second quarter and for the year-to-date of fiscal 2005 and 2004 were generated outside of the Americas.

 

We place strong emphasis on reducing our costs in order to maintain and improve our operating earnings and corresponding margins.

 

RESULTS OF OPERATIONS

 

NET SALES

 

By segment

 

		Fiscal quarter ended October 3, 2004					Fiscal quarter ended September 28, 2003					Increase
		In Millions			Percentage of Total Net Sales		In Millions			Percentage of Total Net Sales		In Millions			Percentage
Reserve power		$	129.3		49.5	%	$	109.4		49.2	%	$	19.9		18.2	%
Motive power		132.0			50.5		112.7			50.8		19.3			17.1
Total		$	261.3		100.0	%	$	222.1		100.0	%	$	39.2		17.6	%

 

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