ENS - 12.28.2014 - 10Q _FY15

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 December 28, 2014
 
¨
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
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).    ¨  YES    ý  NO.
Common Stock outstanding at January 30, 2015: 44,178,715 shares

1

ENERSYS
INDEX – FORM 10-Q
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
Consolidated Condensed Balance Sheets (Unaudited) as of December 28, 2014 and March 31, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended December 28, 2014 and December 29, 2013
 
 
 
 
 
 
 
2
Acquisitions
 
3
 
4
Goodwill
 
5
 
6
 
7
 
8
 
9
 
10
 
11
 
12
 
13
 
14
 
15
 
16
 
17
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
 
 
 
 
Item 2.
 
 
 
 
Item 4.
 
 
 
 
Item 6.
 
 

 

2
Table of Contents

PART I –
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

ENERSYS
Consolidated Condensed Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Data) 
 
 
December 28, 2014
 
March 31, 2014
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
279,983

 
$
240,103

Accounts receivable, net of allowance for doubtful accounts: December 28, 2014 - $8,323; March 31, 2014 - $9,446
 
506,304

 
564,584

Inventories, net
 
386,739

 
361,846

Deferred taxes
 
44,981

 
64,765

Prepaid and other current assets
 
69,423

 
69,402

Total current assets
 
1,287,430

 
1,300,700

Property, plant, and equipment, net
 
361,544

 
370,166

Goodwill
 
402,903

 
426,056

Other intangible assets, net
 
164,958

 
172,472

Other assets
 
42,164

 
52,464

Total assets
 
$
2,258,999

 
$
2,321,858

Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$
14,375

 
$
33,814

Capital lease obligations
 
303

 
354

Accounts payable
 
236,151

 
259,484

Accrued expenses
 
202,324

 
287,751

Total current liabilities
 
453,153

 
581,403

Long-term debt and capital lease obligations
 
498,861

 
288,132

Deferred taxes
 
91,652

 
101,149

Other liabilities
 
76,530

 
81,225

Total liabilities
 
1,120,196

 
1,051,909

Commitments and contingencies
 


 


Redeemable noncontrolling interests
 
7,536

 
8,047

Redeemable equity component of Convertible Notes
 
3,466

 
9,613

Equity:
 
 
 
 
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 28, 2014 and at March 31, 2014
 
—

 
—

Common Stock, $0.01 par value per share, 135,000,000 shares authorized; 53,645,889 shares issued and 44,536,070 shares outstanding at December 28, 2014; 53,263,348 shares issued and 46,942,126 shares outstanding at March 31, 2014
 
536

 
532

Additional paid-in capital
 
519,009

 
500,254

Treasury stock, at cost, 9,109,819 shares held as of December 28, 2014; 6,321,222 shares held as of March 31, 2014
 
(346,671
)
 
(170,643
)
Retained earnings
 
978,545

 
848,414

Accumulated other comprehensive (loss) income
 
(29,281
)
 
67,845

Total EnerSys stockholders’ equity
 
1,122,138

 
1,246,402

Nonredeemable noncontrolling interests
 
5,663

 
5,887

Total equity
 
1,127,801

 
1,252,289

Total liabilities and equity
 
$
2,258,999

 
$
2,321,858

See accompanying notes.

3
Table of Contents
ENERSYS
Consolidated Condensed Statements of Income (Unaudited)
(In Thousands, Except Share and Per Share Data)

 
 
Quarter ended
 
 
December 28, 2014
 
December 29, 2013
Net sales
 
$
611,578

 
$
643,031

Cost of goods sold
 
454,313

 
475,909

Gross profit
 
157,265

 
167,122

Operating expenses
 
86,145

 
90,083

Restructuring and other exit charges
 
2,437

 
12,920

Goodwill impairment charge
 
—

 
5,179

Operating earnings
 
68,683

 
58,940

Interest expense
 
4,947

 
4,597

Other (income) expense, net
 
(866
)
 
8,193

Earnings before income taxes
 
64,602

 
46,150

Income tax expense (benefit)
 
15,271

 
(6,240
)
Net earnings
 
49,331

 
52,390

Net earnings (losses) attributable to noncontrolling interests
 
79

 
(2,910
)
Net earnings attributable to EnerSys stockholders
 
$
49,252

 
$
55,300

Net earnings per common share attributable to EnerSys stockholders:
 
 
 
 
Basic
 
$
1.09

 
$
1.17

Diluted
 
$
1.04

 
$
1.10

Dividends per common share
 
$
0.175

 
$
0.125

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
45,188,942

 
47,351,750

Diluted
 
47,368,173

 
50,214,782

                                                                       
See accompanying notes.

4
Table of Contents
ENERSYS
Consolidated Condensed Statements of Income (Unaudited)
(In Thousands, Except Share and Per Share Data)

 
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
Net sales
 
$
1,875,615

 
$
1,809,175

Cost of goods sold
 
1,393,233

 
1,357,564

Gross profit
 
482,382

 
451,611

Operating expenses
 
272,114

 
249,419

Restructuring and other exit charges
 
6,076

 
14,460

Reversal of legal accrual, net of fees - See Note 9
 
(16,233
)
 
—

Goodwill impairment charge
 
—

 
5,179

Operating earnings
 
220,425

 
182,553

Interest expense
 
14,192

 
12,987

Other (income) expense, net
 
(3,244
)
 
11,066

Earnings before income taxes
 
209,477

 
158,500

Income tax expense
 
54,481

 
24,542

Net earnings
 
154,996

 
133,958

Net earnings (losses) attributable to noncontrolling interests
 
259

 
(3,528
)
Net earnings attributable to EnerSys stockholders
 
$
154,737

 
$
137,486

Net earnings per common share attributable to EnerSys stockholders:
 
 
 
 
Basic
 
$
3.36

 
$
2.89

Diluted
 
$
3.19

 
$
2.77

Dividends per common share
 
$
0.525

 
$
0.375

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
46,073,961

 
47,598,076

Diluted
 
48,543,896

 
49,641,848

See accompanying notes.

5
Table of Contents
ENERSYS
Consolidated Condensed Statements of Comprehensive Income (Unaudited)
(In Thousands)

 
 
Quarter ended
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Net earnings
 
$
49,331

 
$
52,390

 
$
154,996

 
$
133,958

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Net unrealized (loss) gain on derivative instruments, net of tax
 
(5,268
)
 
1,322

 
(2,701
)
 
3,612

Pension funded status adjustment, net of tax
 
155

 
152

 
521

 
468

Foreign currency translation adjustment
 
(42,925
)
 
7,665

 
(95,940
)
 
30,332

       Total other comprehensive (loss) income, net of tax
 
(48,038
)
 
9,139

 
(98,120
)
 
34,412

Total comprehensive income
 
1,293

 
61,529

 
56,876

 
168,370

Comprehensive loss attributable to noncontrolling interests
 
(286
)
 
(3,157
)
 
(735
)
 
(4,787
)
Comprehensive income attributable to EnerSys stockholders
 
$
1,579

 
$
64,686

 
$
57,611

 
$
173,157

See accompanying notes.


6
Table of Contents
ENERSYS
Consolidated Condensed Statements of Cash Flows (Unaudited)
(In Thousands)

 
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
Cash flows from operating activities
 
 
 
 
Net earnings
 
$
154,996

 
$
133,958

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
42,124

 
38,903

Write-off of assets relating to restructuring
 
644

 
5,298

Non-cash write-off of other assets
 
—

 
5,000

Goodwill impairment charges
 
—

 
5,179

Derivatives not designated in hedging relationships:
 
 
 
 
Net (gains) losses
 
(132
)
 
56

Cash proceeds (settlements)
 
461

 
(420
)
Provision for doubtful accounts
 
609

 
278

Deferred income taxes
 
21,951

 
(24,942
)
Reversal of legal accrual, net of fees - See Note 9
 
(16,233
)
 
—

Gain on disposition of equity interest in Altergy - See Note 9
 
(2,000
)
 
—

Non-cash interest expense
 
7,078

 
6,594

Stock-based compensation
 
21,339

 
12,186

Gain on disposal of property, plant, and equipment
 
(79
)
 
(301
)
Changes in assets and liabilities:
 
 
 
 
Accounts receivable
 
23,556

 
(46,548
)
Inventories
 
(52,050
)
 
5,774

Prepaid and other current assets
 
(5,857
)
 
(15,720
)
Other assets
 
(168
)
 
95

Accounts payable
 
(9,056
)
 
(26,348
)
Accrued expenses
 
(65,547
)
 
11,218

Other liabilities
 
11,277

 
(11,210
)
Net cash provided by operating activities
 
132,913

 
99,050

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Capital expenditures
 
(47,184
)
 
(48,856
)
Purchases of businesses
 
—

 
(146,196
)
Proceeds from disposition of equity interest in Altergy
 
2,000

 
—

Proceeds from disposal of property, plant, and equipment
 
177

 
1,373

Net cash used in investing activities
 
(45,007
)
 
(193,679
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Net (decrease) increase in short-term debt
 
(17,824
)
 
12,264

Proceeds from revolving credit borrowings
 
337,700

 
213,100

Repayments of revolving credit borrowings
 
(282,700
)
 
(93,300
)
Proceeds from long-term debt
 
150,000

 
—

Repurchase of Convertible Notes
 
(234
)
 
—

Deferred financing costs
 
(1,076
)
 
(823
)
Capital lease obligations
 
(183
)
 
(277
)
Option proceeds (taxes paid related to net share settlement of equity awards), net
 
(12,656
)
 
(7,945
)
Excess tax benefits from exercise of stock options and vesting of equity awards
 
3,341

 
4,614

Purchase of treasury stock
 
(176,028
)
 
(49,568
)
Dividends paid to stockholders
 
(24,021
)
 
(17,809
)
Payment of deferred consideration
 
—

 
(4,820
)
Purchase of noncontrolling interests
 
—

 
(6,012
)
Net cash (used in) provided by financing activities
 
(23,681
)
 
49,424

Effect of exchange rate changes on cash and cash equivalents
 
(24,345
)
 
7,498

Net increase (decrease) in cash and cash equivalents
 
39,880

 
(37,707
)
Cash and cash equivalents at beginning of period
 
240,103

 
249,348

Cash and cash equivalents at end of period
 
$
279,983

 
$
211,641


See accompanying notes.

7
Table of Contents

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 2014 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 28, 2014 (the "2014 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 2015 end on June 29, 2014, September 28, 2014, December 28, 2014, and March 31, 2015, respectively. The four quarters in fiscal 2014 ended on June 30, 2013, September 29, 2013, December 29, 2013, and March 31, 2014, 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.
The Company also consolidates certain subsidiaries in which the noncontrolling interest party has within its control the right to require the Company to redeem all or a portion of its interest in the subsidiary. The redeemable noncontrolling interests are reported at their estimated redemption value, and the amount presented in temporary equity is not less than the initial amount reported in temporary equity. Any adjustment to the redemption value impacts retained earnings but does not impact net income or comprehensive income. Noncontrolling interests which are redeemable only upon future events, the occurrence of which is not currently probable, are recorded at carrying value.
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. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a full retrospective or modified retrospective transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on the consolidated financial position, results of operations and related disclosures.

2. Acquisitions
In fiscal 2014, the Company completed the acquisitions of Purcell Systems, Inc. ("Purcell"), Quallion, LLC. ("Quallion"), and UTS Holdings Sdn. Bhd. and its subsidiaries ("UTS") and assigned values and useful lives to assets acquired based on preliminary valuations. During the first quarter of fiscal 2015, the Company completed purchase accounting for Purcell and based on final valuations performed, trademarks were valued at $16,800, technology at $7,900, customer relationships at $35,700, and goodwill was recorded at $50,889. The useful lives of technology and customer relationships were estimated at 10 and 9 years, respectively. Trademarks were considered to be indefinite-lived assets.
During the first quarter of fiscal 2015, the Company also completed purchase accounting for Quallion and based on final valuations performed, trademarks were valued at $500, technology at $4,400, customer relationships at $3,400, and goodwill was recorded at $13,502. The useful lives of technology and customer relationships were estimated at 20 and 14 years, respectively. Trademarks were considered to be indefinite-lived assets.
The Company expects to complete purchase accounting for UTS in the fourth quarter of fiscal 2015.

3. Inventories
Inventories, net consist of:
 
 
December 28, 2014
 
March 31, 2014
Raw materials
 
$
99,548

 
$
87,469

Work-in-process
 
113,014

 
116,124

Finished goods
 
174,177

 
158,253

Total
 
$
386,739

 
$
361,846



8
Table of Contents

4. Goodwill
The changes in the carrying amount of goodwill during the nine months of fiscal 2015 by reportable segment are as follows:
 
 
 
 
 
 
Americas
 
EMEA
 
Asia
 
Total
Balance as of March 31, 2014
 
$
215,630

 
$
177,586

 
$
32,840

 
$
426,056

Adjustments related to the finalization of purchase accounting for Purcell
 
(3,256
)
 
—

 
—

 
(3,256
)
Foreign currency translation adjustment
 
(1,417
)
 
(17,751
)
 
(729
)
 
(19,897
)
Balance as of December 28, 2014
 
$
210,957

 
$
159,835

 
$
32,111

 
$
402,903


5. Fair Value of Financial Instruments
The following tables represent the financial assets and (liabilities) measured at fair value on a recurring basis as of December 28, 2014 and March 31, 2014:
 
 
 
Total Fair Value
Measurement
December 28,
2014
 
Quoted Price in
Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Lead forward contracts
 
$
(6,437
)
 
$
—

 
$
(6,437
)
 
$
—

Foreign currency forward contracts
 
168

 
—

 
168

 
—

Total derivatives
 
$
(6,269
)
 
$
—

 
$
(6,269
)
 
$
—

 
 
 
Total Fair Value
Measurement
March 31,
2014
 
Quoted Price in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Lead forward contracts
 
$
(2,371
)
 
$
—

 
$
(2,371
)
 
$
—

Foreign currency forward contracts
 
113

 
—

 
113

 
—

Total derivatives
 
$
(2,258
)
 
$
—

 
$
(2,258
)
 
$
—

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 the Company's consolidated financial statements included in its 2014 Annual Report in Note 1, Summary of Significant Accounting Policies.
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 11), 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 3.375% convertible senior notes due 2038 (“Convertible Notes”), with an original face value of $172,500, were issued when the Company’s stock price was trading at $30.19 per share. On December 28, 2014, the Company’s stock price closed at $61.78 per share. The conversion rate of the Convertible Notes as of January 1, 2015, the date when the the holders were notified that they can submit the Convertible Notes for conversion, was 25.0416 shares of the Company's common stock per one thousand dollars in principal amount of the Convertible Notes, which equated to $39.93 per share. The conversion rate may be adjusted in accordance with the terms of the Convertible Notes and the indenture under which the Convertible Notes were issued. The fair value of these notes represent the trading values based upon quoted market prices and are classified as Level 2. The Convertible Notes were trading at 154% of face value on December 28, 2014 and at 175% of face value on March 31, 2014. See Note 11 for further details.

9
Table of Contents

The carrying amounts and estimated fair values of the Company’s derivatives and Convertible Notes at December 28, 2014 and March 31, 2014 were as follows:
 
 
 
December 28, 2014
 
 
 
March 31, 2014
 
 
 
 
Carrying
Amount
 
 
 
Fair Value
 
 
 
Carrying
Amount
 
 
 
Fair Value
 
 
Financial assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives (1)
 
$
168

 
  
 
$
168

 
  
 
$
113

 
  
 
$
113

 
  
Financial liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Convertible Notes
 
$
168,800

 
(2) 
 
$
265,290

 
(3) 
 
$
162,887

 
(2) 
 
$
301,875

 
(3) 
Derivatives (1)
 
6,437

 
  
 
6,437

 
  
 
2,371

 
  
 
2,371

 
  
(1)
Represents lead and foreign currency hedges.
(2)
The carrying amounts of the Convertible Notes at December 28, 2014 and March 31, 2014 represent the $172,266 and $172,500 principal balance, less the unamortized debt discount (see Note 11 for further details).
(3)
The fair value amounts of the Convertible Notes at December 28, 2014 and March 31, 2014 represent the trading values of the Convertible Notes with a principal balance of $172,266 and $172,500, respectively.

6. 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 Hedge Forward Contracts
The Company enters into lead hedge forward contracts to fix the price for a portion of its lead purchases. Management considers the lead hedge 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 and the notional amounts at December 28, 2014 and March 31, 2014 were 102.9 million pounds and 89.9 million pounds, 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 December 28, 2014 and March 31, 2014, the Company had entered into a total of $86,599 and $70,332, respectively, of such contracts.
In the coming twelve months, the Company anticipates that $7,812 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 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 December 28, 2014 and March 31, 2014, the notional amount of these contracts was $31,888 and $22,461, respectively.

10
Table of Contents

Presented below in tabular form is information on the location and amounts of derivative fair values in the Consolidated Condensed Balance Sheets and derivative gains and losses in the Consolidated Condensed Statements of Income:
Fair Value of Derivative Instruments
December 28, 2014 and March 31, 2014
 
 
 
Derivatives and Hedging Activities Designated as Cash Flow Hedges
 
Derivatives and Hedging Activities Not Designated as Hedging Instruments
 
 
December 28, 2014
 
March 31, 2014
 
December 28, 2014
 
March 31, 2014
Prepaid and other current assets
 
 
 
 
 
 
 
 
Foreign currency forward contracts
 
$
396

 
$
12

 
$
—

 
$
101

Total assets
 
$
396

 
$
12

 
$
—

 
$
101

Accrued expenses
 
 
 
 
 
 
 
 
Lead hedge forward contracts
 
$
6,437

 
$
2,371

 
$
—

 
$
—

Foreign currency forward contracts
 
—

 
—

 
228

 
—

Total liabilities
 
$
6,437

 
$
2,371

 
$
228

 
$
—


The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 28, 2014

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 hedge contracts
 
$
(5,898
)
 
Cost of goods sold
 
$
1,554

Foreign currency forward contracts
 
32

 
Cost of goods sold
 
920

Total
 
$
(5,866
)
 
 
 
$
2,474

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
 
$
(232
)
Total
 
 
$
(232
)

The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 29, 2013

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 hedge contracts
 
$
2,657

 
Cost of goods sold
 
$
1,293

Foreign currency forward contracts
 
644

 
Cost of goods sold
 
225

Total
 
$
3,301

 
 
 
$
1,518

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
 
$
124

Total
 
 
$
124



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The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 28, 2014
 
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 hedge contracts
 
$
(6,158
)
 
Cost of goods sold
 
$
(121
)
Foreign currency forward contracts
 
2,756

 
Cost of goods sold
 
992

Total
 
$
(3,402
)
 
 
 
$
871

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
 
$
132

Total
 
 
$
132

The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 29, 2013
 
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 hedge contracts
 
$
4,781

 
Cost of goods sold
 
$
(322
)
Foreign currency forward contracts
 
(454
)
 
Cost of goods sold
 
(777
)
Total
 
$
4,327

 
 
 
$
(1,099
)
 
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
 
$
(56
)
Total
 
 
$
(56
)

7. Income Taxes
The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarters of fiscal 2015 and 2014 were based on the estimated effective tax rates applicable for the full years ending March 31, 2015 and March 31, 2014, respectively, after giving effect to items specifically related to the interim periods. The Company’s corporate 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.
The worldwide effective income tax rates for the third quarters of fiscal 2015 and 2014 were 23.6% and (13.5)%, respectively, and 26.0% and 15.5%, respectively, for the nine months of fiscal 2015 and 2014. The rate increase in the third quarter and the nine months of fiscal 2015 compared to the prior year periods is primarily due to the reversal in the third quarter of fiscal 2014 of a previously recognized deferred tax valuation allowance related to one of the Company's foreign subsidiaries of $24,925 and changes in the mix of earnings among tax jurisdictions. The valuation allowance was reversed as a direct result of a restructuring of manufacturing operations in EMEA that resulted in a change in the jurisdictions in which future taxable income would be earned and recognized. Specifically, the Company analyzed its European operations and capacity compared to expected market demands and considered the possibility of shutting down or reducing manufacturing operations in various European subsidiaries. In connection with the preparation and review of the financial statements for the third quarter of fiscal 2014, the Company approved a restructuring of its Bulgarian manufacturing operations. As part of the Bulgarian restructuring, motive power and certain reserve power battery manufacturing operations were transferred to other European subsidiaries, including one subsidiary for which a valuation allowance was recorded against its deferred tax assets. As a result of the planned expansion of manufacturing operations at this European subsidiary, the Company concluded that future forecasted taxable income was now sufficient to reverse the valuation allowance.
Foreign income as a percentage of worldwide income is estimated to be 56% for the nine months of fiscal 2015 compared to 45% for the nine months of fiscal 2014. The foreign effective income tax rate for the nine months of fiscal 2015 and 2014 were 14.7% and (6.8)%, respectively. The rate increase compared to the prior year period is primarily due to the reversal of a previously recognized deferred tax valuation allowance referred to above and changes in the mix of earnings among tax jurisdictions. Income from the Company's Swiss

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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%.

8. Warranties
The Company provides for estimated product warranty expenses when the related products are sold, with related liabilities included within accrued expenses and other liabilities. 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:
 
 
Quarter ended
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Balance at beginning of period
 
$
40,518

 
$
41,524

 
$
40,426

 
$
42,591

Current period provisions
 
4,083

 
4,326

 
13,700

 
14,057

Costs incurred
 
(3,706
)
 
(5,132
)
 
(12,171
)
 
(17,448
)
Warranty reserves of acquired businesses
 
—

 
2,339

 
—

 
2,339

Foreign currency translation adjustment
 
(612
)
 
107

 
(1,672
)
 
1,625

Balance at end of period
 
$
40,283

 
$
43,164

 
$
40,283

 
$
43,164


9. Commitments, Contingencies and Litigation
Litigation and Other Legal Matters
The Company is involved in litigation incidental to the conduct of its business, the results of which, in the opinion of management, are not likely to be material to the Company’s financial position, results of operations, or cash flows.

Altergy
In the fourth quarter of fiscal 2014, the Company recorded a $58,184 legal proceedings charge in connection with an adverse arbitration result involving disputes between the Company's wholly-owned subsidiary, EnerSys Delaware Inc. (“EDI”), and Altergy Systems (“Altergy”). EDI and Altergy were parties to a Supply and Distribution Agreement (the “SDA”) pursuant to which EDI was, among other things, granted the exclusive right to distribute and sell certain fuel cell products manufactured by Altergy for various applications throughout the United States. Commencing in 2011, various disputes arose and, because of the mandatory arbitration provision in the SDA, the parties moved forward with arbitration in August 2013.
After discovery, a hearing and post-hearing submissions by each party, on May 13, 2014, the arbitration panel issued an award in favor of Altergy. As a result, the arbitration panel concluded that Altergy should recover $58,184 in net money damages from EDI.
 On August 12, 2014, EDI, on behalf of itself and its affiliates, entered into a binding term sheet with Altergy that resolved the outstanding legal challenges related to this award. In accordance with the term sheet, in September 2014, EDI and Altergy entered into (a) a settlement agreement and release of claims pursuant to which EDI paid Altergy $40,000 in settlement of this award, a separate proceeding related to certain rights of EDI as a shareholder of Altergy and related litigations and the parties granted the other a release and (b) a stock purchase agreement pursuant to which Altergy paid EDI $2,000 to purchase EDI’s entire equity interest in Altergy. On September 16, 2014, courts in the respective jurisdictions had issued orders ending all of the ongoing litigation between EDI and Altergy. Since the full amount of the initial award of $58,184 was recorded in the fourth quarter of fiscal 2014, the Company reversed approximately $16,233, net of professional fees, from this previously recorded legal proceedings charge during the second quarter of fiscal 2015. The Company also included the $2,000 received in exchange for its equity interest in Altergy in the Consolidated Condensed Statements of Income in Other (income) expense, net during the second quarter of fiscal 2015. The Company had previously written off the carrying value of the investment of $5,000 in the third quarter of fiscal 2014.
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 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 is separate from the Company’s current metal fabrication facility in Sumter. The Company has established a reserve for this facility. As of December 28, 2014 and March 31, 2014, the reserves related to this facility were $2,902 and $2,915, respectively. Based on current information, the Company’s management believes these reserves are adequate to satisfy the Company’s environmental liabilities at this facility.

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Table of Contents

Lead Contracts
To stabilize its costs, the Company has entered into contracts with financial institutions to fix the price of lead. The vast majority of such contracts are for a period not extending beyond one year. Under these contracts, at December 28, 2014 and March 31, 2014, the Company has hedged the price to purchase 102.9 million pounds and 89.9 million pounds of lead, respectively, for a total purchase price of $94,206 and $86,494, respectively.
Foreign Currency Forward Contracts
The Company quantifies and monitors its global foreign currency exposures. On a selective basis, the Company will enter into foreign currency forward and purchased option contracts to reduce the volatility from currency movements that affect the Company. The vast majority of such contracts are for a period not extending beyond one year. The Company’s largest exposure is from the purchase and conversion of U.S. dollar based lead costs into local currencies in EMEA. Additionally, the Company has currency exposures from intercompany and third party trade transactions. To hedge these exposures, the Company has entered into a total of $118,487 and $92,793, respectively, of foreign currency forward and purchased option contracts with financial institutions as of December 28, 2014 and March 31, 2014.

10. Restructuring and Other Exit Charges

Restructuring Plans
During fiscal 2013, the Company announced a restructuring related to improving the efficiency of its manufacturing operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $7,000, primarily from cash expenses for employee severance-related payments and non-cash expenses associated with the write-off of certain fixed assets and inventory. The Company estimates that these actions will result in the reduction of approximately 140 employees upon completion. The Company recorded restructuring charges of $6,463 through fiscal 2014, consisting of non-cash charges of $1,399 and cash charges of $5,064 and recorded an additional charge of $286 during the nine months of fiscal 2015. The Company incurred $3,700 of costs against the accrual through fiscal 2014, and incurred $1,466 in costs against the accrual during the nine months of fiscal 2015. As of December 28, 2014, the reserve balance associated with these actions is $202. The Company expects to be committed to an additional $300 of restructuring charges in fiscal 2015 related to these actions, and expects to complete the program during fiscal 2015.
During fiscal 2014, the Company announced further restructuring programs to improve the efficiency of its manufacturing, sales and engineering operations in EMEA including the restructuring of its manufacturing operations in Bulgaria. The restructuring of the Bulgaria operations was announced during the third quarter of fiscal 2014 and consists of the transfer of motive power and a portion of reserve power battery manufacturing to the Company's facilities in Western Europe. The Company estimates that the total charges for all actions announced during fiscal 2014 will amount to approximately $23,700, primarily from non-cash charges related to the write-off of fixed assets and inventory of $11,000, along with cash charges for employee severance-related payments and other charges of $12,700. The Company estimates that these actions will result in the reduction of approximately 500 employees upon completion. During fiscal 2014, the Company recorded restructuring charges of $19,039 consisting of non-cash charges of $10,089 related to the write-off of fixed assets and inventory, and cash charges of $8,950 related to employee severance. During the nine months of fiscal 2015, the Company recorded an additional charge of $2,812 consisting of non-cash charges of $644 related to the write-off of inventory, and $2,168 related to other cash charges. During fiscal 2014, the Company incurred $2,130 in costs against the accrual and incurred an additional $7,167 against the accrual during the nine months of fiscal 2015. As of December 28, 2014, the reserve balance associated with these actions is $1,742. The Company expects to be committed to an additional $600 of restructuring charges in fiscal 2015 related to these actions, comprising of $300 in severance and other charges and $300 in non-cash charges. The Company expects to be committed to an additional $1,200 of cash severance and other charges in fiscal 2016 when it expects to complete the program.

During the third quarter of fiscal 2015, the Company announced a restructuring related to its manufacturing facility located in Jiangdu, the People’s Republic of China ("PRC"), pursuant to which the Company transferred a significant portion of the manufacturing at that location to its other facilities in PRC, as part of an expected closure of the Jiangdu facility in fiscal 2016. The remaining production at Jiangdu is expected to be transferred to other facilities in the PRC. The Company recorded restructuring charges of $1,874 during the third quarter of fiscal 2015 consisting of cash charges for employee severance-related payments associated with approximately 200 employees, all of which were paid in the third quarter of fiscal 2015.


14
Table of Contents

A roll-forward of the restructuring reserve is as follows:
 
 
 
Employee
Severance
 
Other
 
Total
Balance as of March 31, 2014
 
$
7,312

 
$
1,102

 
$
8,414

Accrued
 
3,618

 
710

 
4,328

Costs incurred
 
(9,857
)
 
(650
)
 
(10,507
)
Foreign currency impact and other
 
(119
)
 
(172
)
 
(291
)
Balance as of December 28, 2014
 
$
954

 
$
990

 
$
1,944


Other Exit Charges

During the nine months of fiscal 2015, the Company recorded cash exit charges of $1,104 related to certain operations in Europe.

11. Debt
The following summarizes the Company’s long-term debt including capital lease obligations as of December 28, 2014 and March 31, 2014:
 
 
 
December 28, 2014
 
March 31, 2014
3.375% Convertible Notes, net of discount, due 2038
 
$
168,800

 
$
162,887

2011 Credit Facility, due 2018
 
330,000

 
125,000

Capital lease obligations and other
 
364

 
599

 
 
499,164

 
288,486

Less current portion
 
303

 
354

Total long-term debt and capital lease obligations
 
$
498,861

 
$
288,132

3.375% Convertible Notes
The Convertible Notes will mature on June 1, 2038, unless earlier converted, redeemed or repurchased. When issued, the initial conversion rate was 24.6305 shares of the Company's common stock per one thousand dollars in principal amount of Convertible Notes, which was equivalent to an initial conversion price of $40.60 per share.
At any time, on or after June 6, 2015, the Company may at its option redeem the Convertible Notes, in whole or in part, in cash, at a redemption price equal to 100% of the principal amount of Convertible Notes to be redeemed, plus any accrued and unpaid interest.
The Convertible Notes will continue to be convertible from January 1, 2015 through February 27, 2015 as provided in the indenture under which the Convertible Notes were issued because the last sale price of EnerSys’ common stock price for at least 20 trading days in a period of 30 consecutive trading days ending on the last trading day of the calendar quarter ended December 31, 2014 exceeded 130% of the conversion price per share of EnerSys’ common stock on such trading day. Thereafter, holders of the Convertible Notes shall have the right to convert all or any portion of the Convertible Notes at the applicable conversion rate at any time prior to the close of business on the scheduled trading day immediately preceding the maturity date of June 1, 2038. The Company notified the trustee and the holders of the Convertible Notes that the conversion rate as of January 1, 2015 was 25.0416 shares of the Company's common stock per one thousand dollars in principal amount of the Convertible Notes due to the cumulative impact of cash dividends paid on the Company's common stock, which conversion rate may be adjusted in accordance with the terms of the Convertible Notes and the indenture under which the Convertible Notes were issued.
Upon conversion of the Convertible Notes, as permitted by the terms of the Convertible Notes and the indenture under which the Convertible Notes were issued, the Company may settle conversions (i) entirely in shares of its common stock, (ii) entirely in cash, or (iii) (a) in cash for the accreted principal amount of the Convertible Notes and (b) shares of its common stock, or cash and shares of its common stock, for the excess, if any, of the conversion value above the accreted principal amount.
It is the Company’s current intent to settle the principal amount of any conversions in cash, and any additional conversion consideration in cash, shares of the Company's common stock or a combination of cash and shares.
The carrying value of the Convertible Notes of $168,800 continues to be reported as long-term debt on the Consolidated Condensed Balance Sheet as of December 28, 2014 as the Company intends to draw on the 2011 Credit Facility to settle, at a minimum, the principal amount of any such conversions in cash. No gain or loss was recognized when the Convertible Notes became convertible.
In addition, upon becoming convertible, a portion of the equity component that was recorded upon the issuance of the Convertible Notes was considered redeemable and that portion of the equity was reclassified to temporary equity in the Consolidated Condensed Balance Sheet. Such amount was determined based on the cash consideration to be paid upon conversion and the carrying amount of the debt. As the holders of the Convertible Notes will be paid in cash for the principal amount and issued shares or a combination of cash and shares for the remaining

15
Table of Contents

value of the Convertible Notes, the reclassification into temporary equity as of December 28, 2014 was $3,466 based on the Convertible Notes principal of $172,266 and the carrying value of $168,800. If the Convertible Notes are settled during the fourth quarter of fiscal 2015, an amount equal to the fair value of the liability component immediately prior to the settlement will be deducted from the fair value of the total settlement consideration transferred and allocated to the liability component. Any difference between the amount allocated to the liability and the net carrying amount of the Convertible Notes (including any unamortized debt issue costs and discount) will be recognized in earnings as a gain or loss on debt extinguishment. Any remaining consideration is allocated to the reacquisition of the equity component and will be recognized as a reduction of EnerSys stockholders’ equity, including the amount classified as temporary equity.
 
The following represents the principal amount of the liability component, the unamortized discount, and the net carrying amount of the Convertible Notes as of December 28, 2014 and March 31, 2014:
 
 
 
December 28, 2014
 
March 31, 2014
Principal
 
$
172,266

 
$
172,500

Unamortized discount
 
(3,466
)
 
(9,613
)
Net carrying amount
 
$
168,800

 
$
162,887

As of December 28, 2014, the remaining discount will be amortized over a period of 5 months. The conversion price of the $172,266 in aggregate principal amount of the Convertible Notes as of January 1, 2015, equated to $39.93 per share and the number of shares on which the aggregate consideration is to be delivered upon conversion is 4,314,200.
The effective interest rate on the liability component of the Convertible Notes is 8.50%. The amount of interest cost recognized for the amortization of the discount on the liability component of the Convertible Notes was $2,092 and $1,923, respectively, during the quarters ended December 28, 2014 and December 29, 2013 and was $6,147 and $5,650, respectively, during the nine months ended December 28, 2014 and December 29, 2013.
2011 Credit Facility
The Company is party to a $350,000 senior secured revolving credit facility (as amended, “2011 Credit Facility”) and, on July 8, 2014, amended the credit facility while also entering into an Incremental Commitment Agreement pursuant to which certain banks agreed to provide incremental term loan commitments of $150,000 and incremental revolving commitments of $150,000. Pursuant to these changes, the 2011 Credit Facility is now comprised of a $500,000 senior secured revolving credit facility and a $150,000 senior secured incremental term loan (the "Term Loan") which matures on September 30, 2018. The Term Loan is payable in quarterly installments of $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 revolving loans and the Term loan under the 2011 Credit Facility will 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% (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).
As of December 28, 2014, the Company had $180,000 outstanding in revolver borrowings and $150,000 under its term loan borrowings.
Short-Term Debt
As of December 28, 2014 and March 31, 2014, the Company had $14,375 and $33,814, respectively, of short-term borrowings. The weighted-average interest rates on these borrowings were approximately 15% and 7%, respectively.
Available Lines of Credit
As of December 28, 2014 and March 31, 2014, the Company had available and undrawn, under all its lines of credit, $472,325 and $360,275, respectively, including $154,125 and $136,525, of uncommitted lines of credit as of December 28, 2014 and March 31, 2014, respectively.
As of December 28, 2014 and March 31, 2014, the Company had $3,965 and $1,653, respectively, of standby letters of credit.


16
Table of Contents

12. Retirement Plans
The following tables present the components of the Company’s net periodic benefit cost related to its defined benefit pension plans: 
 
 
United States Plans
 
International Plans
Quarter ended
 
Quarter ended
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Service cost
 
$
96

 
$
84

 
$
189

 
$
211

Interest cost
 
168

 
153

 
624

 
614

Expected return on plan assets
 
(223
)
 
(200
)
 
(551
)
 
(544
)
Amortization and deferral
 
64

 
106

 
166

 
109

Net periodic benefit cost
 
$
105

 
$
143

 
$
428

 
$
390


 
 
United States Plans
 
International Plans
Nine months ended
 
Nine months ended
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Service cost
 
$
300

 
$
265

 
$
602

 
$
617

Interest cost
 
505

 
465

 
1,966

 
1,790

Expected return on plan assets
 
(666
)
 
(597
)
 
(1,724
)
 
(1,580
)
Amortization and deferral
 
238

 
373

 
518

 
320

Net periodic benefit cost
 
$
377

 
$
506

 
$
1,362

 
$
1,147


13. Stock-Based Compensation
As of December 28, 2014, the Company maintains the EnerSys 2010 Equity Incentive Plan, as amended (“2010 EIP”). The 2010 EIP reserved 3,177,477 shares of common stock for the grant of various types of equity awards including nonqualified stock options, restricted stock, restricted stock units, market share units and other forms of stock-based compensation.
The Company recognized stock-based compensation expense associated with its equity incentive plans of $4,280 for the third quarter of fiscal 2015 and $4,594 for the third quarter of fiscal 2014. Stock-based compensation expense was $21,339 for the nine months of fiscal 2015 and $12,186 for the nine months of fiscal 2014. The Company recognizes compensation expense using the straight-line method over the vesting period of the awards, except for awards issued to certain retirement-eligible participants, which are expensed on an accelerated basis.
During the nine months ended December 28, 2014, the Company granted to non-employee directors 17,356 restricted stock units, pursuant to the EnerSys Deferred Compensation Plan for Non-Employee Directors.
During the nine months ended December 28, 2014, the Company granted to management and other key employees 76,512 non-qualified stock options that vest three years from the date of grant, 118,312 restricted stock units that vest 25% each year over four years from the date of grant, and 152,300 performance-based market share units that vest three years from the date of grant.
Common stock activity during the nine months ended December 28, 2014 included the vesting of 184,222 restricted stock units and 384,448 market share units and exercise of 23,368 stock options.
As of December 28, 2014, there were 119,317 non-qualified stock options, 511,909 restricted stock units and 614,539 market share units outstanding.

14. Stockholders’ Equity and Noncontrolling Interests
Common Stock
The following demonstrates the change in the number of shares of common stock outstanding during the nine months ended December 28, 2014:
 
Shares outstanding as of March 31, 2014
 
46,942,126

Purchase of treasury stock
 
(2,788,597
)
Shares issued as part of equity-based compensation plans, net of equity awards surrendered for option price and taxes
 
382,541

 
 
 
Shares outstanding as of December 28, 2014
 
44,536,070


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Treasury Stock
During the nine months ended December 28, 2014, the Company purchased 2,788,597 shares of its common stock for $176,028. At December 28, 2014 and March 31, 2014, the Company held 9,109,819 shares and 6,321,222 shares as treasury stock, respectively.
Accumulated Other Comprehensive Income ("AOCI")
The components of AOCI, net of tax, as of December 28, 2014 and March 31, 2014, are as follows:
 
 
 
March 31, 2014
 
Before Reclassifications
 
Amounts Reclassified from AOCI
 
December 28, 2014
Pension funded status adjustment
 
$
(15,207
)
 
$
—

 
$
521

 
$
(14,686
)
Net unrealized (loss) gain on derivative instruments
 
(2,253
)
 
(2,150
)
 
(551
)
 
(4,954
)
Foreign currency translation adjustment
 
85,305

 
(94,946
)
 
—

 
(9,641
)
Accumulated other comprehensive income (loss)
 
$
67,845

 
$
(97,096
)
 
$
(30
)
 
$
(29,281
)


The following table presents reclassifications from AOCI during the third quarter ended December 28, 2014:

Components of AOCI
 
Amounts Reclassified from AOCI
 
Location of (Gain) Loss Recognized on Income Statement
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Net unrealized gain on derivative instruments
 
$
(2,474
)
 
Cost of goods sold
Tax expense
 
912

 
 
Net unrealized gain on derivative instruments, net of tax
 
$
(1,562
)
 
 
 
 
 
 
 
Defined benefit pension costs:
 
 
 
 
Prior service costs and deferrals
 
$
230

 
Net periodic benefit cost, included in cost of goods sold and Operating expenses - See Note 12
Tax benefit
 
(75
)
 
 
Net periodic benefit cost, net of tax
 
$
155

 
 

The following table presents reclassifications from AOCI during the nine months ended December 28, 2014:

Components of AOCI
 
Amounts Reclassified from AOCI
 
Location of (Gain) Loss Recognized on Income Statement
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Net unrealized gain on derivative instruments
 
$
(871
)
 
Cost of goods sold
Tax expense
 
320

 
 
Net unrealized gain on derivative instruments, net of tax
 
$
(551
)
 
 
 
 
 
 
 
Defined benefit pension costs:
 
 
 
 
Prior service costs and deferrals
 
$
756

 
Net periodic benefit cost, included in cost of goods sold and Operating expenses - See Note 12
Tax benefit
 
(235
)
 
 
Net periodic benefit cost, net of tax
 
$
521

 
 

18
Table of Contents

The following table presents reclassifications from AOCI during the third quarter ended December 29, 2013:

Components of AOCI
 
Amounts Reclassified from AOCI
 
Location of (Gain) Loss
 Recognized on Income Statement
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Net unrealized gain on derivative instruments
 
$
(1,518
)
 
Cost of goods sold
Tax expense
 
563

 
 
Net unrealized gain on derivative instruments, net of tax
 
$
(955
)
 
 
 
 
 
 
 
Defined benefit pension costs:
 
 
 
 
Prior service costs and deferrals
 
$
215

 
Net periodic benefit cost, included in cost of goods sold and Operating expenses - See Note 12
Tax benefit
 
(63
)
 
 
Net periodic benefit cost, net of tax
 
$
152

 
 

The following table presents reclassifications from AOCI during the nine months ended December 29, 2013:

Components of AOCI
 
Amounts Reclassified from AOCI
 
Location of (Gain) Loss
 Recognized on Income Statement
Derivatives in Cash Flow Hedging Relationships:
 
 
 
 
Net unrealized loss on derivative instruments
 
$
1,099

 
Cost of goods sold
Tax benefit
 
(408
)
 
 
Net unrealized loss on derivative instruments, net of tax
 
$
691

 
 
 
 
 
 
 
Defined benefit pension costs:
 
 
 
 
Prior service costs and deferrals
 
$
693

 
Net periodic benefit cost, included in cost of goods sold and Operating expenses - See Note 12
Tax benefit
 
(225
)
 
 
Net periodic benefit cost, net of tax
 
$
468

 
 


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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the nine months ended December 28, 2014:

 
 
Equity Attributable to EnerSys Stockholders
 
Nonredeemable Noncontrolling Interests
 
Total Equity
Balance as of March 31, 2014
 
$
1,246,402

 
$
5,887

 
$
1,252,289

Total comprehensive income:
 
 
 
 
 
 
Net earnings
 
154,737

 
79

 
154,816

Net unrealized loss on derivative instruments, net of tax
 
(2,701
)
 
—

 
(2,701
)
Pension funded status adjustment, net of tax
 
521

 
—

 
521

Foreign currency translation adjustment
 
(94,946
)
 
(303
)
 
(95,249
)
     Total other comprehensive income (loss), net of tax
 
(97,126
)
 
(303
)
 
(97,429
)
Total comprehensive income (loss)
 
57,611

 
(224
)
 
57,387

Other changes in equity:
 
 
 
 
 
 
Purchase of treasury stock
 
(176,028
)
 
—

 
(176,028
)
Cash dividends - common stock ($0.525 per share)
 
(24,021
)
 
—

 
(24,021
)
Reclassification of redeemable equity component of Convertible Notes
 
6,147

 
—

 
6,147

Other, including activity related to equity awards
 
12,027

 
—

 
12,027

Balance as of December 28, 2014
 
$
1,122,138

 
$
5,663

 
$
1,127,801


The following demonstrates the change in redeemable noncontrolling interests during the nine months ended December 28, 2014:

 
 
Redeemable Noncontrolling Interests
Balance as of March 31, 2014
 
$
8,047

Net earnings
 
180

Foreign currency translation adjustment
 
(691
)
Balance as of December 28, 2014
 
$
7,536



20
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15. Earnings Per Share
The following table sets forth the reconciliation from basic to diluted weighted-average number of common shares outstanding and the calculations of net earnings per common share attributable to EnerSys stockholders.
 
 
 
Quarter ended
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Net earnings attributable to EnerSys stockholders
 
$
49,252

 
$
55,300

 
$
154,737

 
$
137,486

Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
 
Basic
 
45,188,942

 
47,351,750

 
46,073,961

 
47,598,076

Dilutive effect of:
 
 
 
 
 
 
 
 
Common shares from exercise and lapse of equity awards, net of shares assumed reacquired
 
791,739

 
1,190,816

 
898,436

 
940,721

Convertible Notes
 
1,387,492

 
1,672,216

 
1,571,499

 
1,103,051

Diluted weighted-average number of common shares outstanding
 
47,368,173

 
50,214,782

 
48,543,896

 
49,641,848

Basic earnings per common share attributable to EnerSys stockholders
 
$
1.09

 
$
1.17

 
$
3.36

 
$
2.89

Diluted earnings per common share attributable to EnerSys stockholders
 
$
1.04

 
$
1.10

 
$
3.19

 
$
2.77

Anti-dilutive equity awards not included in diluted weighted-average common shares
 
—

 
—

 
138

 
8,881

The aggregate number of common shares that the Company could be obligated to issue upon conversion of its Convertible Notes, as of December 28, 2014, is 4,314,200. It is the Company’s current intent to settle the principal amount of any conversions in cash, and any additional conversion consideration ("conversion premium") in cash, shares of the Company’s common stock or a combination of cash and shares. During the third quarter of fiscal 2015, the average price of the Company's common stock of $64.17 per share exceeded the conversion price of $39.93 per share on the Convertible Notes. For the current quarter and nine months ended December 28, 2014, 1,387,492 shares and 1,571,499 shares, respectively, relating to the conversion premium on the Convertible Notes were included in the diluted earnings per share using the "if converted" method.


21
Table of Contents

16. 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 Zurich, 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 quarters and nine months ended December 28, 2014 and December 29, 2013 is shown below:
 
 
 
Quarter ended
 
Nine months ended
 
 
December 28, 2014
 
December 29, 2013
 
December 28, 2014
 
December 29, 2013
Net sales by segment to unaffiliated customers
 
 
 
 
 
 
 
 
Americas
 
$
314,263

 
$
326,932

 
$
978,376

 
$
930,238

EMEA
 
242,345

 
251,273

 
717,620

 
705,614

Asia
 
54,970

 
64,826

 
179,619

 
173,323

Total net sales
 
$
611,578

 
$
643,031

 
$
1,875,615

 
$
1,809,175

Net sales by product line
 
 
 
 
 
 
 
 
Reserve power
 
$
306,989

 
$
328,787

 
$
933,888

 
$
901,100

Motive power
 
304,589

 
314,244

 
941,727

 
908,075

Total net sales
 
$
611,578

 
$
643,031

 
$
1,875,615

 
$
1,809,175

Intersegment sales
 
 
 
 
 
 
 
 
Americas
 
$
11,657

 
$
7,360

 
$
31,552

 
$
25,629

EMEA
 
16,433

 
20,119

 
51,324

 
56,692

Asia
 
6,560

 
5,138

 
27,144

 
22,901

Total intersegment sales (1)
 
$
34,650

 
$
32,617

 
$
110,020

 
$
105,222

Operating earnings by segment
 
 
 
 
 
 
 
 
Americas
 
$
40,884

 
$
48,484

 
$
120,751

 
$
133,352

EMEA
 
27,805

 
21,367

 
79,845

 
52,693

Asia
 
2,431

 
7,188

 
9,672

 
16,147

Restructuring and other exit charges - EMEA
 
(563
)
 
(12,762
)
 
(4,202
)
 
(14,302
)
Restructuring charges - Asia
 
(1,874
)
 
(158
)
 
(1,874
)
 
(158
)
Reversal of legal accrual, net of fees - Americas
 
—

 
—

 
16,233

 
—

Goodwill impairment - Asia
 
—

 
(5,179
)
 
—

 
(5,179
)
Total operating earnings (2)
 
$
68,683

 
$
58,940

 
$
220,425

 
$
182,553


(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.

17. Subsequent Events
On January 29, 2015, the Company announced the declaration of a quarterly cash dividend of $0.175 per share of common stock to be paid on March 27, 2015, to stockholders of record as of March 13, 2015.




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Table of Contents

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 the Company’s 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 2014 Annual Report on Form 10-K (the "2014 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 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;
•
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;

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Table of Contents

•
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.
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 related products such as chargers, power equipment, outdoor cabinet enclosures and battery accessories, and we provide related after-market and customer-support services for industrial batteries. We market and sell 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 of the United States, and approximately 60% of our net sales were generated outside of the United States. The Company has three reportable 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 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 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 our different geographical regions. Economic activity continues to strengthen in North America while South America and EMEA are experiencing limited growth. Our Asia region is experiencing the fastest growth of any region in which we do business.
Volatility of Commodities and Foreign Currencies
Our most significant commodity and foreign currency exposures are related to lead and the euro. 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.

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Table of Contents

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 third quarter of fiscal 2015, our selling prices remained relatively flat, compared to the comparable prior year period.
Liquidity and Capital Resources
Our capital structure and liquidity remain strong. We amended our 2011 Credit Facility during the second quarter of fiscal 2015 to provide additional liquidity for flexibility in funding the expected conversion of the Convertible Notes in fiscal 2016. As of December 28, 2014, we had $280.0 million of cash and cash equivalents and $472 million undrawn and available under all our lines of credit, including approximately $154 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 and continue to remain convertible until the close of business on the scheduled trading day immediately preceding the maturity date of June 1, 2038, as described in Note 11. If the Convertible Notes holders elect to exercise their conversion rights, we expect to pay the principal amount by drawing on our 2011 Credit Facility and, at our election, issue shares or pay cash for any remaining value. Beginning on June 6, 2015, we may redeem any or all of the Convertible Notes in cash at a redemption price equal to 100% of the accreted principal amount of the Convertible Notes being redeemed, plus accrued and unpaid interest.
Other than the 2011 Credit Facility and the Convertible Notes, we have no other significant amount of long-term debt maturing in the near future.
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

 
 
Quarter ended  
 December 28, 2014
 
Quarter ended  
 December 29, 2013
 
Increase (Decrease)
Current quarter by segment
 
In
Millions
 
Percentage
of Total
Net Sales
 
In
Millions
 
Percentage
of Total
Net Sales
 
In
Millions
 
%
Americas
 
$
314.3

 
51.4
%
 
$
327.0

 
50.8
%
 
$
(12.7
)
 
(3.9
)%
EMEA
 
242.3

 
39.6

 
251.3

 
39.1

 
(9.0
)
 
(3.6
)
Asia
 
55.0

 
9.0

 
64.8

 
10.1

 
(9.8
)
 
(15.2
)
Total net sales
 
$
611.6

 
100.0
%
 
$
643.1

 
100.0
%
 
$
(31.5
)
 
(4.9
)%

 
 
Nine months ended 
 December 28, 2014
 
Nine months ended 
 December 29, 2013
 
Increase (Decrease)
Year to Date by segment
 
In
Millions
 
Percentage
of Total
Net Sales
 
In
Millions
 
Percentage
of Total
Net Sales
 
In
Millions
 
%
Americas
 
$
978.4

 
52.2
%
 
$
930.3

 
51.4
%
 
$
48.1

 
5.2
%
EMEA
 
717.6

 
38.3

 
705.6
<