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Enersys (ENS) SEC Filing 10-Q Quarterly report for the period ending Sunday, December 29, 2019

Enersys

CIK: 1289308 Ticker: ENS
Cover Page - shares
9 Months Ended
Dec. 31, 2019
Jan. 31, 2020
Cover page.  
Document Type10-Q 
Document Quarterly Reporttrue 
Document Period End DateDec. 29, 2019 
Document Transition Reportfalse 
Entity File Number001-32253 
Entity Registrant NameEnerSys 
Entity Incorporation, State or Country CodeDE 
Entity Tax Identification Number23-3058564 
Entity Address, Address Line One2366 Bernville Road 
Entity Address, City or TownReading 
Entity Address, State or ProvincePA 
Entity Address, Postal Zip Code19605 
City Area Code610 
Local Phone Number208-1991 
Title of 12(b) SecurityCommon Stock, $0.01 par value per share 
Trading SymbolENS 
Security Exchange NameNYSE 
Entity Current Reporting StatusYes 
Entity Interactive Data CurrentYes 
Entity Filer CategoryLarge Accelerated Filer 
Entity Small Businessfalse 
Entity Emerging Growth Companyfalse 
Entity Shell Companyfalse 
Entity Common Stock, Shares Outstanding 42,308,899
Entity Central Index Key0001289308 
Current Fiscal Year End Date--03-31 
Document Fiscal Year Focus2020 
Document Fiscal Period FocusQ3 
Amendment Flagfalse 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
FORM 10-Q
 
 
 
 
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 29, 2019
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number: 001-32253 
 
 
 
 EnerSys
(Exact name of registrant as specified in its charter) 
 
 
 
Delaware
 
23-3058564
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
2366 Bernville Road
Reading, Pennsylvania 19605
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code: 610-208-1991 

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
ENS
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ý  Yes    ¨  No.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. 
Large Accelerated Filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
  
Smaller reporting company
 
 
 
 
 
 
 
 
Emerging growth company  
 
 
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934).      Yes    ý  No.

Common Stock outstanding at January 31, 2020: 42,308,899 shares

1


ENERSYS
INDEX – FORM 10-Q
 
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
 
Item 3.
 
 
 
 
Item 4.
 
 
 
 
 
 
 
Item 1.
 
 
 
 
Item 1A.
 
 
 
 
Item 2.
 
 
 
 
Item 4.
 
 
 
 
Item 6.
 
 


2


PART I –
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS

ENERSYS
Consolidated Condensed Balance Sheets (Unaudited)
(In Thousands, Except Share and Per Share Data) 
 
 
December 29, 2019
 
March 31, 2019
Assets
 
 
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
272,510

 
$
299,212

Accounts receivable, net of allowance for doubtful accounts: December 29, 2019 - $13,887; March 31, 2019 - $10,813
 
578,440

 
624,136

Inventories, net
 
557,513

 
503,869

Prepaid and other current assets
 
113,982

 
109,431

Total current assets
 
1,522,445

 
1,536,648

Property, plant, and equipment, net
 
473,030

 
409,439

Goodwill
 
679,051

 
656,399

Other intangible assets, net
 
522,356

 
462,316

Deferred taxes
 
56,368

 
40,466

Other assets
 
88,181

 
12,925

Total assets
 
$
3,341,431

 
$
3,118,193

Liabilities and Equity
 
 
 
 
Current liabilities:
 
 
 
 
Short-term debt
 
$
36,727

 
$
54,490

Accounts payable
 
278,821

 
292,449

Accrued expenses
 
278,467

 
265,994

Total current liabilities
 
594,015

 
612,933

Long-term debt, net of unamortized debt issuance costs
 
1,088,254

 
971,756

Deferred taxes
 
75,231

 
82,112

Other liabilities
 
214,256

 
165,375

Total liabilities
 
1,971,756

 
1,832,176

Commitments and contingencies
 


 


Equity:
 
 
 
 
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 29, 2019 and at March 31, 2019
 

 

Common Stock, 0.01 par value per share, 135,000,000 shares authorized, 55,098,313 shares issued and 42,298,716 shares outstanding at December 29, 2019; 54,848,523 shares issued and 42,620,750 shares outstanding at March 31, 2019
 
551

 
548

Additional paid-in capital
 
522,146

 
512,696

Treasury stock at cost, 12,799,597 shares held as of December 29, 2019 and 12,227,773 shares held as of March 31, 2019
 
(564,877
)
 
(530,760
)
Retained earnings
 
1,566,115

 
1,450,325

Contra equity - indemnification receivable
 
(6,607
)
 
(7,840
)
Accumulated other comprehensive loss
 
(151,233
)
 
(142,682
)
Total EnerSys stockholders’ equity
 
1,366,095

 
1,282,287

Nonredeemable noncontrolling interests
 
3,580

 
3,730

Total equity
 
1,369,675

 
1,286,017

Total liabilities and equity
 
$
3,341,431

 
$
3,118,193

See accompanying notes.

3

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

 
 
Quarter ended
 
 
December 29, 2019
 
December 30, 2018
Net sales
 
$
763,698

 
$
680,022

Cost of goods sold
 
574,612

 
511,729

Inventory step up to fair value relating to acquisitions
 
3,845

 
3,747

Gross profit
 
185,241

 
164,546

Operating expenses
 
132,740

 
112,046

Restructuring, exit and other charges
 
9,417

 
5,392

Legal proceedings settlement income
 

 
(2,843
)
Operating earnings
 
43,084

 
49,951

Interest expense
 
11,089

 
7,082

Other (income) expense, net
 
(606
)
 
(55
)
Earnings before income taxes
 
32,601

 
42,924

Income tax expense (benefit)
 
5,296

 
(5,690
)
Net earnings
 
27,305

 
48,614

Net earnings attributable to noncontrolling interests
 

 
197

Net earnings attributable to EnerSys stockholders
 
$
27,305

 
$
48,417

Net earnings per common share attributable to EnerSys stockholders:
 
 
 
 
Basic
 
$
0.65

 
$
1.14

Diluted
 
$
0.64

 
$
1.12

Dividends per common share
 
$
0.175

 
$
0.175

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
42,286,641

 
42,337,459

Diluted
 
42,838,969

 
43,102,598

See accompanying notes.




4

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

 
 
Nine Months Ended
 
 
December 29, 2019
 
December 30, 2018
Net sales
 
$
2,306,065

 
$
2,011,414

Cost of goods sold
 
1,718,150

 
1,516,381

Inventory step up to fair value relating to acquisitions and exit activities
 
3,845

 
4,273

Gross profit
 
584,070

 
490,760

Operating expenses
 
395,869

 
307,864

Restructuring, exit and other charges
 
18,071

 
8,252

Legal proceedings settlement income
 

 
(2,843
)
Operating earnings
 
170,130

 
177,487

Interest expense
 
32,084

 
20,011

Other (income) expense, net
 
(1,559
)
 
(1,052
)
Earnings before income taxes
 
139,605

 
158,528

Income tax expense
 
966

 
16,447

Net earnings
 
138,639

 
142,081

Net earnings attributable to noncontrolling interests
 

 
380

Net earnings attributable to EnerSys stockholders
 
$
138,639

 
$
141,701

Net earnings per common share attributable to EnerSys stockholders:
 
 
 
 
Basic
 
$
3.27

 
$
3.36

Diluted
 
$
3.23

 
$
3.31

Dividends per common share
 
$
0.525

 
$
0.525

Weighted-average number of common shares outstanding:
 
 
 
 
Basic
 
42,445,006

 
42,161,163

Diluted
 
42,888,495

 
42,816,762

See accompanying notes.

5

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

 
 
Quarter ended
 
Nine months ended
 
 
December 29, 2019
 
December 30, 2018
 
December 29, 2019
 
December 30, 2018
Net earnings
 
$
27,305

 
$
48,614

 
$
138,639

 
$
142,081

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Net unrealized (loss) gain on derivative instruments, net of tax
 
(3,409
)
 
4,732

 
(2,152
)
 
(442
)
Pension funded status adjustment, net of tax
 
220

 
204

 
694

 
804

Foreign currency translation adjustment
 
28,167

 
(15,777
)
 
(7,243
)
 
(102,090
)
Total other comprehensive gain (loss), net of tax
 
24,978

 
(10,841
)
 
(8,701
)
 
(101,728
)
Total comprehensive income
 
52,283

 
37,773

 
129,938

 
40,353

Comprehensive gain (loss) attributable to noncontrolling interests
 
64

 
281

 
(150
)
 
(258
)
Comprehensive income attributable to EnerSys stockholders
 
$
52,219

 
$
37,492

 
$
130,088

 
$
40,611

See accompanying notes.


6

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

 
 
Nine months ended
 
 
December 29, 2019
 
December 30, 2018
Cash flows from operating activities
 
 
 
 
Net earnings
 
$
138,639

 
$
142,081

Adjustments to reconcile net earnings to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
65,788

 
42,511

Write-off of assets relating to exit activities and other
 
10,024

 
4,498

Derivatives not designated in hedging relationships:
 
 
 
 
Net losses
 
517

 
390

Cash settlements
 
(599
)
 
(865
)
Provision for doubtful accounts
 
2,922

 
849

Deferred income taxes
 
(20,948
)
 
(222
)
Non-cash interest expense
 
1,160

 
953

Stock-based compensation
 
14,759

 
14,587

Gain on disposal of property, plant, and equipment
 
(112
)
 
(157
)
Changes in assets and liabilities, net of effects of acquisitions:
 
 
 
 
Accounts receivable
 
58,779

 
21,860

Inventories
 
(24,888
)
 
(36,440
)
Prepaid and other current assets
 
(6,977
)
 
(12,507
)
Other assets
 
3,686

 
(1,260
)
Accounts payable
 
(44,885
)
 
(649
)
Accrued expenses
 
(7,295
)
 
14,306

Other liabilities
 
(14,738
)
 
(23,511
)
Net cash provided by operating activities
 
175,832

 
166,424

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Capital expenditures
 
(60,936
)
 
(52,672
)
Purchase of businesses
 
(176,548
)
 
(650,000
)
Insurance proceeds relating to property, plant and equipment
 
403

 

Proceeds from disposal of property, plant, and equipment
 
2,718

 
549

Net cash used in investing activities
 
(234,363
)
 
(702,123
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Net repayments on short-term debt
 
(17,632
)
 
(13,564
)
Proceeds from 2017 Revolver borrowings
 
326,700

 
454,500

Proceeds from 2027 Notes
 
300,000

 

Repayments of 2017 Revolver borrowings
 
(497,700
)
 
(246,000
)
Proceeds from 2017 Term Loan
 

 
299,105

Repayments of 2017 Term Loan
 
(11,276
)
 

Debt issuance costs
 
(4,607
)
 
(1,235
)
Option proceeds
 
505

 
9,044

Payment of taxes related to net share settlement of equity awards
 
(6,281
)
 
(3,384
)
Purchase of treasury stock
 
(34,561
)
 
(25,000
)
Dividends paid to stockholders
 
(22,299
)
 
(22,280
)
Other
 
586

 
29

Net cash provided by financing activities
 
33,435

 
451,215

Effect of exchange rate changes on cash and cash equivalents
 
(1,606
)
 
(40,476
)
Net decrease in cash and cash equivalents
 
(26,702
)
 
(124,960
)
Cash and cash equivalents at beginning of period
 
299,212

 
522,118

Cash and cash equivalents at end of period
 
$
272,510

 
$
397,158

 
 
 
 
 
Supplemental disclosures:
 
 
 
 
 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Common stock issued as partial consideration for Alpha acquisition
 
$

 
$
100,000

See accompanying notes.

7


ENERSYS
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)
(In Thousands, Except Share and Per Share Data)


1. Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments except those otherwise described herein) considered necessary for a fair presentation have been included, unless otherwise disclosed. Operating results for the three months and nine months ended December 29, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020.

The Consolidated Condensed Balance Sheet at March 31, 2019 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s 2019 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 29, 2019 (the “2019 Annual Report”).

EnerSys (the “Company,”) reports interim financial information for 13-week periods, except for the first quarter, which always begins on April 1, and the fourth quarter, which always ends on March 31. The four quarters in fiscal 2020 end on June 30, 2019, September 29, 2019, December 29, 2019, and March 31, 2020, respectively. The four quarters in fiscal 2019 ended on July 1, 2018, September 30, 2018, December 30, 2018, and March 31, 2019, respectively.

The consolidated condensed financial statements include the accounts of the Company and its wholly-owned subsidiaries and any partially owned subsidiaries that the Company has the ability to control. All intercompany transactions and balances have been eliminated in consolidation.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). This update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. Effective April 1, 2019, the Company adopted the new standard under the modified retrospective approach, which resulted in no adjustment to the April 1, 2019 beginning Retained Earnings. There are optional practical expedients and policy elections made available to simplify the transition to the new standard. The Company has elected the following:

to adopt the optional transition method defined within ASU 2018-11 and not restate comparative prior periods but instead recognize a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption;
the package of three practical expedients addressing whether a contract contains a lease, lease classification and initial direct costs;
to combine lease and non-lease components as a single component for all asset classes;
to use a portfolio approach to determine the incremental borrowing rate; and
to apply the short-term lease exception to leases that, at the commencement date, has a lease term of 12 months or less and does not include an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
 
Upon adoption, the Company recorded Right-of-use (“ROU”) assets and lease liabilities of approximately $84,878 and $87,248, respectively. In addition, capital lease assets and liabilities are now classified as finance lease right-of-use assets and liabilities. The difference between the operating lease assets and lease liabilities primarily relates to unamortized lease incentives and deferred rent recorded in accordance with the previous lease guidance.

Apart from the aforementioned changes, the adoption of this standard did not have a significant impact on the Company's operating results, financial position or cash flows. The discount rates used to calculate the ROU assets and lease liabilities as of the effective date were based on the remaining lease terms as of the effective date. See Note 3, Leases for additional information.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)”: Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income

8


statement line as the hedged item. The Company adopted the standard effective April 1, 2019 and the adoption did not have any impact on the Company's operating results, financial position or cash flows.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220)”. The new standard will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statements users. However, because the amendment only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The Company adopted this standard effective April 1, 2019 with the election not to reclassify $478 of stranded tax effects, primarily related to the Company's pension plans, from accumulated other comprehensive income (“AOCI”) to retained earnings, as the amount was not material.

Accounting Pronouncements Issued But Not Adopted as of December 29, 2019

In June 2016, the FASB, issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326)”: Measurement of Credit Losses on Financial Instruments, which changes the recognition model for the impairment of financial instruments, including accounts receivable, loans and held-to-maturity debt securities, among others. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. In contrast to current guidance, which considers current information and events and utilizes a probable threshold, (an “incurred loss” model), ASU 2016–13 mandates an “expected loss” model. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. In order to evaluate the impact of ASU No. 2016-13, the Company has formed a project team and initiated the process of assessing critical components of this new guidance and the potential impact that the guidance may have on its financial position, results of operations and cash flows.

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740)”: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.

2. Revenue Recognition

The Company adopted ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” on April 1, 2018 using the modified retrospective transition method. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings.

The Company's revenues by reportable segments are presented in Note 17.

Service revenues related to the work performed for the Company’s customers by its maintenance technicians generally represent a separate and distinct performance obligation. Control for these services passes to the customer as the services are performed. Service revenues for the third quarter of fiscal 2020 and fiscal 2019 amounted to $78,907 and $37,472, respectively. Service revenues for the nine months of fiscal 2020 and fiscal 2019 amounted to $200,907 and $106,672, respectively.

A small portion of the Company's customer arrangements oblige the Company to create customized products for its customers that require the bundling of both products and services into a single performance obligation because the individual products and services that are required to fulfill the customer requirements do not meet the definition for a distinct performance obligation. These customized products generally have no alternative use to the Company and the terms and conditions of these arrangements give the Company the enforceable right to payment for performance completed to date, including a reasonable profit margin. For these arrangements, control transfers over time and the Company measures progress towards completion by selecting the input or output method that best depicts the transfer of control of the underlying goods and services to the customer for each respective arrangement. Methods used by the Company to measure progress toward completion include labor hours, costs incurred and units of production. Revenues recognized over time for the third quarter of fiscal 2020 and fiscal 2019 amounted to $35,306 and $19,421, respectively. Revenues recognized over time for the nine months of fiscal 2020 and fiscal 2019 amounted to $110,396 and $54,316, respectively.

On December 29, 2019, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $89,580, of which, the Company estimates that approximately $38,389 will be recognized as revenue in fiscal 2020, $37,940 in fiscal 2021, $13,126 in fiscal 2022, $17 in fiscal 2023 and $108 in fiscal 2024.

Any payments that are received from a customer in advance, prior to the satisfaction of a related performance obligation and billings in excess of revenue recognized, are deferred and treated as a contract liability. Advance payments and billings in excess of revenue recognized are classified as current or non-current based on the timing of when recognition of revenue is expected. As of December 29, 2019, the current and non-current portion of contract liabilities were $18,792 and $7,239, respectively. As of March 31, 2019, the current and non-current portion of contract liabilities were $15,162 and $6,360, respectively. Revenues recognized during the third quarter of fiscal 2020 and fiscal 2019, that were included in the contract liability at the beginning of the quarter, amounted to $5,494 and $1,950, respectively. Revenues

9


recognized during the nine months of fiscal 2020 and fiscal 2019, that were included in the contract liability at the beginning of the year, amounted to $13,901 and $2,695, respectively.

Amounts representing work completed and not billed to customers represent contract assets and were $42,624 and $38,778 as of December 29, 2019 and March 31, 2019, respectively.

The Company uses historic customer product return data as a basis of estimation for customer returns and records the reduction of sales at the time revenue is recognized. At December 29, 2019, the right of return asset related to the value of inventory anticipated to be returned from customers was $2,667 and refund liability representing amounts estimated to be refunded to customers was $5,243.

3. Leases

The Company leases manufacturing facilities, distribution centers, office space, vehicles and other equipment under non-cancellable leases with initial terms typically ranging from 1 to 17 years. At contract inception, the Company reviews the terms of the arrangement to determine if the contract is or contains a lease. Guidance in Topic 842 is used to evaluate whether the contract has an identified asset; if the Company has the right to obtain substantially all economic benefits from the asset; and if it has the right to direct the use of the underlying asset. When determining if a contract has an identified asset, the Company considers both explicit and implicit assets, and whether the supplier has the right to substitute the asset. When determining if the Company has the right to obtain substantially all economic benefits from the asset, the Company considers the primary outputs of the identified asset throughout the period of use and determines if it receives greater than 90% of those benefits. When determining if it has the right to direct the use of an underlying asset, the Company considers if it has the right to direct how and for what purpose the asset is used throughout the period of use and if it controls the decision-making rights over the asset.

Lease terms may include options to extend or terminate the lease. The Company exercises its judgment to determine the term of those leases when extension or termination options are present and include such options in the calculation of the lease term when it is reasonably certain that the Company will exercise those options.

The Company has elected to include both lease and non-lease components in the determination of lease payments for all asset classes. Payments made to a lessor for items such as taxes, insurance, common area maintenance, or other costs commonly referred to as executory costs, are also included in lease payments if they are fixed. The fixed portion of these payments are included in the calculation of the lease liability, while any variable portion would be recognized as variable lease expenses, when incurred. Variable payments made to third parties for these, or similar costs, such as utilities, are not included in the calculation of lease payments.

Both finance and operating leases are reflected as liabilities on the commencement date of the lease based on the present value of the lease payments to be made over the lease term. As most of the leases do not provide an implicit rate, the Company has exercised judgment in electing the incremental borrowing rate based on the information available when the lease commences to determine the present value of future payments. Right-of-use assets are valued at the initial measurement of the lease liability, plus any initial direct costs or rent prepayments and reduced by any lease incentives and any deferred lease payments.

Operating lease expense is recognized on a straight-line basis over the lease term. Finance lease expense includes depreciation, which is recognized on a straight-line basis over the expected life of the leased asset, and interest expense, which is recognized following an effective interest rate method.

Short term leases with an initial term of 12 months or less are not presented on the balance sheet and expense is recognized as incurred.

The following table presents lease assets and liabilities and their balance sheet classification:
 
 
Classification
 
As of December 29, 2019
Operating Leases:
 
 
 
 
Right-of-use assets
 
Other assets
 
$
75,015

Operating lease current liabilities
 
Accrued expenses
 
22,091

Operating lease non-current liabilities
 
Other liabilities
 
55,508

Finance Leases:
 
 
 
 
Right-of-use assets
 
Property, plant, and equipment, net
 
$
10,602

Finance lease current liabilities
 
Current portion of debt
 
10,168

Finance lease non-current liabilities
 
Non-current portion of debt
 
463




10


The components of lease expense for the third quarter and nine months ended December 29, 2019 were as follows:
 
 
Classification
 
Quarter ended
December 29, 2019
 
Nine months ended
December 29, 2019
Operating Leases:
 
 
 
 
 
 
Operating lease cost
 
Operating expenses
 
$
7,263

 
$
21,818

Variable lease cost
 
Operating expenses
 
2,130

 
5,958

Short term lease cost
 
Operating expenses
 
1,640

 
5,751

Finance Leases:
 
 
 
 
 
 
Depreciation
 
Operating expenses
 
$
138

 
$
419

Interest expense
 
Interest expense
 
8

 
30

Total
 
 
 
$
11,179

 
$
33,976



The following table presents the weighted average lease term and discount rates for leases as of December 29, 2019:
Operating Leases:
 
 
Weighted average remaining lease term (years)
 
5 years
Weighted average discount rate
 
5.33%
Finance Leases:
 
 
Weighted average remaining lease term (years)
 
3.7 years
Weighted average discount rate
 
4.92%


The following table presents future payments due under leases reconciled to lease liabilities as of December 29, 2019:
 
 
Finance Leases
 
Operating Leases
Three months ended March 31, 2020
 
$
10,049

 
$
7,187

Year ended March 31,
 
 
 
 
2021
 
200

 
24,028

2022
 
203

 
18,820

2023
 
158

 
13,205

2024
 
107

 
8,448

Thereafter
 
26

 
18,675

Total undiscounted lease payments
 
10,743

 
90,363

Present value discount
 
112

 
12,764

Lease liability
 
$
10,631

 
$
77,599



The following table presents supplemental disclosures of cash flow information related to leases for the third quarter and nine months ended December 29, 2019:
 
 
Quarter ended
December 29, 2019
 
Nine months ended
December 29, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
 
 
 
Operating cash flows from finance leases
 
$
8

 
$
30

Operating cash flows from operating leases
 
7,176

 
21,559

Financing cash flows from finance leases
 
140

 
421

Supplemental non-cash information on lease liabilities arising from right-of-use assets:
 
 
 
 
Right-of-use assets obtained in exchange for new finance lease liabilities
 
$

 
$

Right-of-use assets obtained in exchange for new operating lease liabilities
 
2,876

 
7,822



11



4. Acquisitions

Alpha

On December 7, 2018, the Company completed the acquisition of all of the issued and outstanding common stock of Alpha Technologies Services, Inc. (“ATS”) and Alpha Technologies Ltd. (“ATL”), resulting in ATS and ATL becoming wholly-owned subsidiaries of the Company (the “ Alpha share purchase”). Additionally, the Company acquired substantially all of the assets of Alpha Technologies Inc. and certain assets of Altair Advanced Industries, Inc. and other affiliates of ATS and ATL (all such sellers, together with ATS and ATL, “Alpha”), in each case in accordance with the terms and conditions of certain restructuring agreements (collectively, the “Alpha asset acquisition” and together with the Alpha share purchase, the “Alpha acquisition”). Based in Bellingham, Washington, Alpha is a global industry leader in comprehensive commercial-grade energy solutions for broadband, telecom, renewable, industrial and traffic customers around the world. The initial purchase consideration for the Alpha acquisition was $750,000, of which $650,000 was paid in cash and the balance was settled by issuing 1,177,630 shares of EnerSys common stock. These shares were issued out of the Company's treasury stock and were valued at $84.92 per share, which was based on the thirty-day volume weighted average stock price of the Company’s common stock at closing, in accordance with the purchase agreement. The 1,177,630 shares had a closing date fair value of $93,268, based upon the December 7, 2018 closing date spot rate of $79.20. The total purchase consideration, consisting of cash paid of $650,000, shares valued at $93,268 and an adjustment for working capital (due post - closing from seller of $766), was $742,502. The Company funded the cash portion of the Alpha acquisition with borrowings from the Amended Credit Facility as defined in Note 12. See Note 12 for additional information.

The Alpha acquisition expands the Company's footprint in broadband and telecom markets. The goodwill recognized in connection with this transaction reflects the benefits the Company expects to realize from being able to provide a one-stop, fully integrated power solutions offering to its customers, as well as the benefit of cost synergies from alignment of the Alpha group within its own organizational structure.

The results of operations of Alpha have been included in the Company’s Americas segment.

During the current quarter, the Company finalized the measurement of all provisional amounts recognized for the Alpha business combination. The final amounts recognized in connection with the Alpha business combination are in the table below. The purchase accounting adjustments resulted in a decrease to goodwill during the current quarter, by $1,390 as a result of finalizing deferred taxes.


Accounts receivable
 
$
115,467

Inventories
 
84,297

Other current assets
 
6,822

Other intangible assets
 
332,000

Property, plant and equipment
 
20,987

Other assets
 
9,005

Total assets acquired
 
$
568,578

Accounts payable
 
35,803

Accrued liabilities
 
41,918

Deferred income taxes
 
54,941

Other liabilities
 
12,642

Total liabilities assumed
 
$
145,304

Net assets acquired
 
$
423,274

 
 
 
Purchase price:
 
 
Cash paid for net assets acquired
 
$
650,000

Fair value of shares issued for net assets acquired
 
93,268

Working capital adjustment
 
(766
)
Total purchase consideration
 
742,502

Less: Fair value of acquired identifiable assets and liabilities
 
423,274

Goodwill
 
$
319,228




12


The following table summarizes the fair value of Alpha's identifiable intangible assets and their respective lives:
 
 
Type
 
Life in Years
 
Fair Value
Trademarks
 
Indefinite-lived
 
Indefinite
 
$
56,000

Customer relationships
 
Finite-lived
 
14
 
221,000

Technology
 
Finite-lived
 
10
 
55,000

Total identifiable intangible assets
 
 
 
 
 
$
332,000



Goodwill deductible for tax purposes is $41,852.

The following unaudited summary information is presented on a consolidated pro forma basis as if the Alpha acquisition had occurred on April 1, 2017:
 
Quarter ended
Nine Months Ended
 
 
December 30, 2018
 
December 30, 2018
Net sales
 
$
800,118

 
$
2,453,729

Net earnings attributable to EnerSys stockholders
 
47,343

 
163,327

Net earnings per share attributable to EnerSys stockholders - basic
 
1.10

 
3.78

Net earnings per share attributable to EnerSys stockholders - assuming dilution
 
1.08

 
3.72



The pro forma amounts include additional interest expense on the debt issued to finance the purchases, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and plant assets, and related tax effects. The pro forma results are not necessarily indicative of the combined results had the Alpha acquisition been completed on April 1, 2017, nor are they indicative of future combined results. The remeasurement of Alpha's deferred taxes due to the Tax Act are being excluded in arriving at these pro forma results.

Contra Equity - Indemnification Receivable

The Company recorded an unrecognized tax benefit and related indemnification receivable in connection with the Alpha acquisition. The indemnification receivable represents the Seller’s obligation to indemnify the Company for the outcome of potential contingent liabilities, including those associated with uncertain tax positions which have various statutes of limitations that are expected to expire by fiscal 2027. As of December 29, 2019 and March 31, 2019, the balance was $6,607 and $7,840, respectively. The expiration of certain statutes of limitations and the finalization of purchase accounting resulted in a net decrease in the indemnification receivable during the third quarter and nine months of fiscal 2020.
 
NorthStar

On September 30, 2019, the Company completed the acquisition of NorthStar, headquartered in Stockholm, Sweden, for $77,777 in cash consideration and the assumption of $107,018 in debt, which was funded using existing cash and credit facilities. NorthStar, through its direct and indirect subsidiaries, manufactures and distributes thin plate pure lead (TPPL) batteries and battery enclosures. The Company acquired tangible and intangible assets, including trademarks, technology, customer relationships and goodwill. Based on preliminary valuations performed, trademarks were valued at $13,937, technology at $13,689, customer relationships at $55,003, and goodwill was recorded at $23,242. The useful lives of technology were estimated at 10 years, customer relationships were estimated at 14 years and trademarks were estimated at 3 years. The Company is in the process of evaluating whether or not it will make a tax election which determines if the Company will have tax deductible goodwill.

The results of the NorthStar acquisition have been included in the Company’s results of operations from the date of acquisition. Pro forma earnings and earnings per share computations have not been presented as this acquisition is not considered material.

The North American and European results of operations of NorthStar have been included in the Company’s Americas segment and EMEA segment, respectively.




13


Other Intangible Assets

Information regarding the Company’s other intangible assets are as follows:

 
 
Balance as of
 
 
December 29, 2019
 
March 31, 2019
 
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
 
Gross Amount
 
Accumulated Amortization
 
Net Amount
Indefinite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
$
152,465

 
$
(953
)
 
$
151,512

 
$
152,484

 
$
(953
)
 
$
151,531

Finite-lived intangible assets:
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
343,110

 
(60,181
)
 
282,929

 
286,664

 
(42,704
)
 
243,960

Non-compete
 
3,142

 
(2,811
)
 
331

 
3,025

 
(2,807
)
 
218

Technology
 
91,844

 
(17,940
)
 
73,904

 
77,779

 
(12,229
)
 
65,550

Trademarks
 
16,151

 
(2,471
)
 
13,680

 
2,003

 
(1,236
)
 
767

Licenses
 
1,196

 
(1,196
)
 

 
1,477

 
(1,187
)
 
290

Total
 
$
607,908

 
$
(85,552
)
 
$
522,356

 
$
523,432

 
$
(61,116
)
 
$
462,316



The Company’s amortization expense related to finite-lived intangible assets was $9,843 and $24,468, for the third quarter and nine months of fiscal 2020, respectively, compared to $3,105 and $7,220 for the third quarter and nine months of fiscal 2019, respectively. The expected amortization expense based on the finite-lived intangible assets as of December 29, 2019, is $10,055 for the remainder of fiscal 2020, $39,336 in fiscal 2021, $39,092 in fiscal 2022, $35,434 in fiscal 2023 and $29,668 in fiscal 2024.

5. Inventories

Inventories, net consist of:
 
 
December 29, 2019
 
March 31, 2019
Raw materials
 
$
140,533

 
$
138,718

Work-in-process
 
101,414

 
129,736

Finished goods
 
315,566

 
235,415

Total
 
$
557,513

 
$
503,869



6. Fair Value of Financial Instruments

Recurring Fair Value Measurements

The following tables represent the financial assets and (liabilities) measured at fair value on a recurring basis as of December 29, 2019 and March 31, 2019, and the basis for that measurement:
 
 
 
Total Fair Value Measurement December 29, 2019
 
Quoted Price in
Active  Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Lead forward contracts
 
$
(3,729
)
 
$

 
$
(3,729
)
 
$

Foreign currency forward contracts
 
(219
)
 

 
(219
)
 

Total derivatives
 
$
(3,948
)
 
$

 
$
(3,948
)
 
$

 

14


 
 
Total Fair Value
Measurement
March 31, 2019
 
Quoted Price in
Active Markets
for Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Lead forward contracts
 
$
(902
)
 
$

 
$
(902
)
 
$

Foreign currency forward contracts
 
(249
)
 

 
(249
)
 

Total derivatives
 
$
(1,151
)
 
$

 
$
(1,151
)
 
$



The fair values of lead forward contracts are calculated using observable prices for lead as quoted on the London Metal Exchange (“LME”) and, therefore, were classified as Level 2 within the fair value hierarchy, as described in Note 1, Summary of Significant Accounting Policies to the Company's consolidated financial statements included in its 2019 Annual Report.

The fair values for foreign currency forward contracts are based upon current quoted market prices and are classified as Level 2 based on the nature of the underlying market in which these derivatives are traded.

Financial Instruments

The fair values of the Company’s cash and cash equivalents approximate carrying value due to their short maturities.

The fair value of the Company’s short-term debt and borrowings under the Amended Credit Facility (as defined in Note 12), approximate their respective carrying value, as they are variable rate debt and the terms are comparable to market terms as of the balance sheet dates and are classified as Level 2.

During the current quarter, the Company issued its 4.375% Senior Notes due 2027 (the “2027 Notes”), with an original face value of $300,000. The Company's 5.00% Senior Notes due 2023 (the “2023 Notes”), with an original face value of $300,000, were issued in April 2015. The fair value of the 2027 Notes and 2023 Notes, (collectively, the “Senior Notes”) represent the trading values based upon quoted market prices and are classified as Level 2. The 2027 Notes were trading at approximately 99% on December 29, 2019. The 2023 Notes were trading at approximately 103% and 99% of face value on December 29, 2019 and March 31, 2019, respectively.

The carrying amounts and estimated fair values of the Company’s derivatives and Senior Notes at December 29, 2019 and March 31, 2019 were as follows:
 
 
December 29, 2019
 
March 31, 2019
 
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
Financial assets:
 
 
 
 
 
 
 
 
Derivatives (1)
 
$

 
$

 
$

 
$

Financial liabilities:
 
 
 
 
 
 
 
 
 Senior Notes (2)
 
$
600,000

 
$
606,000

 
$
300,000

 
$
297,000

Derivatives (1)
 
3,948

 
3,948

 
1,151

 
1,151


(1)
Represents lead and foreign currency forward contracts (see Note 7 for asset and liability positions of the lead and foreign currency forward contracts at December 29, 2019 and March 31, 2019).
(2)
The fair value amount of the Senior Notes at December 29, 2019 and March 31, 2019 represent the trading value of the instruments.

7. Derivative Financial Instruments

The Company utilizes derivative instruments to reduce its exposure to fluctuations in commodity prices and foreign exchange rates under established procedures and controls. The Company does not enter into derivative contracts for speculative purposes. The Company’s agreements are with creditworthy financial institutions and the Company anticipates performance by counterparties to these contracts and therefore no material loss is expected.

Derivatives in Cash Flow Hedging Relationships

Lead Forward Contracts

The Company enters into lead forward contracts to fix the price for a portion of its lead purchases. Management considers the lead forward contracts to be effective against changes in the cash flows of the underlying lead purchases. The vast majority of such contracts are for a period not extending beyond one year. At December 29, 2019 and March 31, 2019, the Company has hedged the price to purchase approximately 61.0 million pounds and 42.0 million pounds of lead, respectively, for a total purchase price of $57,084 and $39,218, respectively.


15


Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts and options to hedge a portion of the Company’s foreign currency exposures for lead, as well as other foreign currency exposures so that gains and losses on these contracts offset changes in the underlying foreign currency denominated exposures. The vast majority of such contracts are for a period not extending beyond one year. As of December 29, 2019 and March 31, 2019, the Company had entered into a total of $41,379 and $42,318, respectively, of such contracts.

In the coming twelve months, the Company anticipates that $2,864 of pretax loss relating to lead and foreign currency forward contracts will be reclassified from AOCI as part of cost of goods sold. This amount represents the current net unrealized impact of hedging lead and foreign exchange rates, which will change as market rates change in the future, and will ultimately be realized in the Consolidated Condensed Statements of Income as an offset to the corresponding actual changes in lead costs to be realized in connection with the variable lead cost and foreign exchange rates being hedged.

Derivatives not Designated in Hedging Relationships

Foreign Currency Forward Contracts

The Company also enters into foreign currency forward contracts to economically hedge foreign currency fluctuations on intercompany loans and foreign currency denominated receivables and payables. These are not designated as hedging instruments and changes in fair value of these instruments are recorded directly in the Consolidated Condensed Statements of Income. As of December 29, 2019 and March 31, 2019, the notional amount of these contracts was $22,233 and $22,201, respectively.

Presented below in tabular form is information on the location and amounts of derivative fair values in the Consolidated Condensed Balance Sheets and derivative gains and losses in the Consolidated Condensed Statements of Income:

Fair Value of Derivative Instruments
December 29, 2019 and March 31, 2019
 
 
 
Derivatives and Hedging Activities Designated as Cash Flow Hedges
 
Derivatives and Hedging Activities Not Designated as Hedging Instruments
 
 
December 29, 2019
 
March 31, 2019
 
December 29, 2019
 
March 31, 2019
Accrued expenses:
 
 
 
 
 
 
 
 
Lead forward contracts
 
$
3,729

 
$
902

 
$

 
$

Foreign currency forward contracts
 
59

 
8

 
160

 
241

Total liabilities
 
$
3,788

 
$
910

 
$
160

 
$
241




The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 29, 2019
Derivatives Designated as Cash Flow Hedges
 
Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)
 
Location of Gain (Loss)  Reclassified from AOCI into Income (Effective Portion)
 
Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts
 
$
(5,267
)
 
Cost of goods sold
 
$
(1,034
)
Foreign currency forward contracts
 
(767
)
 
Cost of goods sold
 
(536
)
Total
 
$
(6,034
)
 
 
 
$
(1,570
)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives
 
Pretax Gain (Loss)
Foreign currency forward contracts
Other (income) expense, net
 
$
179

Total
 
 
$
179



16



The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the quarter ended December 30, 2018
Derivatives Designated as Cash Flow Hedges
 
Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)
 
Location of Gain (Loss)  Reclassified from AOCI into Income (Effective Portion)
 
Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts
 
$
(501
)
 
Cost of goods sold
 
$
(6,892
)
Foreign currency forward contracts
 
583

 
Cost of goods sold
 
789

Total
 
$
82

 
 
 
$
(6,103
)
Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivatives
 
Pretax Gain (Loss)
Foreign currency forward contracts
Other (income) expense, net
 
$
232

Total
 
 
$
232




The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 29, 2019

Derivatives Designated as Cash Flow Hedges
 
Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Location of Gain (Loss)  Reclassified from AOCI into Income (Effective Portion)
 
Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts
 
$
(771
)
 
Cost of goods sold
 
$
1,698

Foreign currency forward contracts
 
(1,162
)
 
Cost of goods sold
 
(816
)
Total
 
$
(1,933
)
 
 
 
$
882

Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivative
 
Pretax Gain (Loss)
Foreign currency forward contracts
Other (income) expense, net
 
$
(517
)
Total
 
 
$
(517
)

The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income
For the nine months ended December 30, 2018

Derivatives Designated as Cash Flow Hedges
 
Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)
 
Location of Gain (Loss)  Reclassified from AOCI into Income (Effective Portion)
 
Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts
 
$
(11,510
)
 
Cost of goods sold
 
$
(9,611
)
Foreign currency forward contracts
 
1,303

 
Cost of goods sold
 
(14
)
Total
 
$
(10,207
)
 
 
 
$
(9,625
)

Derivatives Not Designated as Hedging Instruments
Location of Gain (Loss) Recognized in Income on Derivative
 
Pretax Gain (Loss)
Foreign currency forward contracts
Other (income) expense, net
 
$
(390
)
Total
 
 
$
(390
)








17


8. Income Taxes

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarter of fiscal 2020 and 2019 was based on the estimated effective tax rates applicable for the full years ending March 31, 2020 and March 31, 2019, respectively, after giving effect to items specifically related to the interim periods. The Company’s effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which the Company operates, change in tax laws and the amount of the Company's consolidated income before taxes.

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures are effective January 1, 2020. Certain provisions of the TRAF were enacted during the second quarter of fiscal 2020. Significant changes in the tax reform include the abolishment of preferential tax regimes for holding companies, domicile companies and mixed companies at the cantonal level. The transitional provisions of the TRAF allow companies to elect tax basis adjustments to fair value, which is used for tax depreciation and amortization purposes resulting in a deduction over the transitional period. The Company recorded a deferred tax asset of $21,000 during the second quarter of fiscal 2020, related to the amortizable goodwill, subject to final negotiations with the Swiss federal and cantonal tax authority.

The consolidated effective income tax rates for the third quarter of fiscal 2020 and 2019 were 16.2% and (13.3)%, respectively and for the nine months of fiscal 2020 and 2019 were 0.7% and 10.4%, respectively. The rate increase in the third quarter of fiscal 2020 compared to the comparable prior year quarter is primarily due to changes in mix of earnings among tax jurisdictions and items related to the Tax Cuts and Jobs Act (“Tax Act”), including a $13,483 benefit in fiscal 2019. The rate decrease in the nine months of fiscal 2020 compared to the comparable prior year period is primarily due to changes in mix of earnings among tax jurisdictions, Swiss tax reform and items related to the Tax Act in fiscal 2019.

Foreign income as a percentage of worldwide income is estimated to be 76% for fiscal 2020 compared to 74% for fiscal 2019. The foreign effective income tax rates for the nine months of fiscal 2020 and 2019 were (3.9)% and 11.8%, respectively. The rate decrease compared to the prior year period is primarily due to Swiss tax reform and changes in the mix of earnings among tax jurisdictions. Income from the Company's Swiss subsidiary comprised a substantial portion of the Company's overall foreign mix of income and was taxed at an effective income tax rate of approximately 6% in both the current and prior year quarter of fiscal 2020 and fiscal 2019.

9. Warranty

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

 
 
Quarter ended
 
Nine months ended
 
 
December 29, 2019
 
December 30, 2018
 
December 29, 2019
 
December 30, 2018
Balance at beginning of period
 
$
54,936

 
$
47,733

 
$
54,568

 
$
50,602

Current period provisions
 
7,234

 
5,603

 
21,228

 
16,620

Costs incurred
 
(7,764
)
 
(6,272
)
 
(20,939
)
 
(18,573
)
Warranty reserves of acquired businesses
 
4,967

 
7,535

 
4,967

 
7,535

Foreign currency translation adjustment
 
1,946

 
(240
)
 
1,495

 
(1,825
)
Balance at end of period
 
$
61,319

 
$
54,359

 
$
61,319

 
$
54,359



18


10. Commitments, Contingencies and Litigation

Litigation and Other Legal Matters

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. These actions and proceedings are generally based on alleged violations of environmental, anticompetition, employment, contract and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. In the ordinary course of business, the Company and its subsidiaries are also subject to regulatory and governmental examinations, information gathering requests, inquiries, investigations, and threatened legal actions and proceedings. In connection with formal and informal inquiries by federal, state, local and foreign agencies, the Company and its subsidiaries receive numerous requests, subpoenas and orders for documents, testimony and information in connection with various aspects of their activities.

European Competition Investigations

Certain of the Company’s European subsidiaries had received subpoenas and requests for documents and, in some cases, interviews from, and have had on-site inspections conducted by, the competition authorities of Belgium, Germany and the Netherlands relating to conduct and anticompetitive practices of certain industrial battery participants.

The Company settled the Belgian regulatory proceeding in February 2016 by acknowledging certain anticompetitive practices and conduct and agreeing to pay a fine of $1,962, which was paid in March 2016. During the third quarter of fiscal 2019, the Company also paid $2,402 towards certain aspects related to this matter, which are under appeal. As of December 29, 2019 and March 31, 2019, the Company did not have a reserve balance for these matters.

In June 2017, the Company settled a portion of its previously disclosed proceeding involving the German competition authority relating to conduct involving the Company's motive power battery business and agreed to pay a fine of $14,811, which was paid in July 2017. As of December 29, 2019 and March 31, 2019, the Company did not have a reserve balance relating to this matter. Also, in March 2019, the Company settled the remaining portion of its previously disclosed proceeding involving the German competition authority relating to conduct involving the Company’s reserve power battery business and agreed to pay a fine of $7,258, which was paid in April 2019. As of December 29, 2019 and March 31, 2019, the Company had a reserve balance of $0 and $7,258, respectively.

The foregoing estimate of losses is based upon currently available information for these proceedings. However, the precise scope, timing and time period at issue, as well as the final outcome of the investigations or customer claims, remain uncertain. Accordingly, the Company’s estimate may change from time to time, and actual losses could vary.

Environmental Issues

As a result of its operations, the Company is subject to various federal, state, and local, as well as international environmental laws and regulations and is exposed to the costs and risks of registering, handling, processing, storing, transporting, and disposing of hazardous substances, especially lead and acid. The Company’s operations are also subject to federal, state, local and international occupational safety and health regulations, including laws and regulations relating to exposure to lead in the workplace.

The Company is responsible for certain cleanup obligations at the former Yuasa battery facility in Sumter, South Carolina, that predates its ownership of this facility. This manufacturing facility was closed in 2001 and the Company established a reserve for this facility, which was $1,060 and $1,081 as of December 29, 2019 and March 31, 2019, respectively. Based on current information, the Company’s management believes this reserve is adequate to satisfy the Company’s environmental liabilities at this facility. This facility is separate from the Company’s current metal fabrication facility in Sumter.

Lead and Foreign Currency Forward Contracts

To stabilize its lead costs and reduce volatility from currency movements, the Company enters into contracts with financial institutions. The vast majority of such contracts are for a period not extending beyond one year. Please refer to Note 7 - Derivative Financial Instruments for more details.


19


11. Restructuring, Exit and Other Charges

Restructuring Plans

During fiscal 2018, the Company announced restructuring programs to improve efficiencies primarily related to supply chain and general operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $7,500, primarily from cash charges for employee severance-related payments and other charges. The Company estimates that these actions will result in the reduction of approximately 80 employees upon completion. During fiscal 2018, the Company recorded non-cash restructuring charges of $69 and cash charges of $2,260 and an additional $3,104 during fiscal 2019. The Company incurred $1,350 in costs against the accrual in fiscal 2018 and an additional $2,844 in fiscal 2019. During the nine months of fiscal 2020, the Company recorded restructuring charges of $711 and incurred $594 in costs against the accrual. As of December 29, 2019, the reserve balance associated with these actions is $1,173. The Company expects to be committed to an additional $1,300 in restructuring charges related to this action, which it expects to complete in fiscal 2021.

During fiscal 2019, the Company announced restructuring programs to improve efficiencies of its operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $2,500, from charges primarily for employee severance-related payments to approximately 35 employees. During fiscal 2019, the Company recorded restructuring charges of $347 and incurred $83 in costs against the accrual. During the nine months of fiscal 2020, the Company recorded restructuring charges of $507 and incurred $687 in costs against the accrual. As of December 29, 2019, the reserve balance associated with these actions is $78. The Company expects to complete these actions in fiscal 2021.

During fiscal 2019, the Company announced restructuring programs to improve efficiencies of its operations in the Americas. The Company estimates that the total charges for these actions will amount to approximately $4,100, from cash and non-cash charges primarily for employee severance-related payments to approximately 85 employees. During fiscal 2019, the Company recorded cash restructuring charges of $1,970, non-cash charges of $2,095 and incurred $1,480 in costs against the accrual. During the nine months of fiscal 2020, the Company incurred $479 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $11. The Company expects to complete these actions in fiscal 2020.

During fiscal 2019, the Company announced a restructuring program to improve efficiencies of its operations in Asia and to convert its India operations from mainly reserve power production to motive power production. The Company estimates that the total charges for these actions will amount to approximately $4,400, from cash charges primarily for employee severance-related payments to approximately 160 employees and non-cash charges related to the write-off of fixed assets. During fiscal 2019, the Company recorded cash restructuring charges of $2,772 and non-cash charges of $771 and incurred $1,683 in costs against the accrual. During the nine months of fiscal 2020, the Company recorded restructuring charges of $714, non-cash charges of $130 and incurred $1,847 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $3. The Company expects to complete this action in fiscal 2020.

During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in EMEA. The Company estimates that the total charges for these actions will amount to approximately $5,500, from cash charges primarily for employee severance-related payments to approximately 25 employees. During the nine months of fiscal 2020, the Company recorded restructuring charges of $4,843 and incurred $1,487 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $3,321. The Company expects to complete this action in fiscal 2021.

During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in the Americas. The Company estimates that the total charges for these actions will amount to approximately $2,900, from cash charges primarily for employee severance-related payments to approximately 50 employees. During the nine months of fiscal 2020, the Company recorded restructuring charges of $2,451 and incurred $1,720 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $731. The Company expects to complete this action in fiscal 2020.

During fiscal 2020, the Company announced a restructuring program to improve efficiencies of its operations in Asia. The Company estimates that the total charges for these actions will amount to approximately $600, from cash charges primarily for employee severance-related payments to approximately 30 employees. During the nine months of fiscal 2020, the Company recorded cash restructuring charges of $250, non-cash charges of $55 and incurred $250 in costs against the accrual. As of December 29, 2019, the reserve balance associated with this action is $0. The Company expects to complete this action in fiscal 2020.


A roll-forward of the restructuring reserve is as follows:
 
 
Employee
Severance
 
Other
 
Total
Balance as of March 31, 2019
 
$
2,356

 
$
596

 
$
2,952

Accrued
 
9,236

 
240

 
9,476

Costs incurred
 
(6,234
)
 
(830
)
 
(7,064
)
Foreign currency impact
 
(44
)
 
(3
)
 
(47
)
Balance as of December 29, 2019
 
$
5,314

 
$
3

 
$
5,317



20



Exit Charges

During fiscal 2019, the Company committed to a plan to close its facility in Targovishte, Bulgaria, which produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. Of the estimated total charges of $30,000 for all these actions, the Company had recorded charges amounting to $20,242 in fiscal 2019, relating to severance and inventory and fixed asset write-offs. The Company recorded an additional $3,576 relating to cash and non-cash charges during the nine months of fiscal 2020.

In keeping with its strategy of exiting the manufacture of batteries for diesel-electric submarines, during the second quarter of fiscal 2020, the Company also sold certain licenses and assets for $2,031 and recorded a net gain of $892, which is reported in exit charges.

During the second quarter of fiscal 2020, the Company wrote off $5,441 of assets at its Kentucky and Tennessee plants, as a result of its strategic product mix shift from traditional flooded batteries to maintenance free lead acid and lithium batteries.

During the nine months of fiscal 2019, as part of the aforementioned program to convert its India operations from mainly reserve power production to motive power production, the Company also recorded a non-cash write-off of reserve power inventories of $526, which was reported in cost of goods sold.

Richmond, Kentucky Plant Fire

On September 19, 2019, a fire broke out in the battery formation area of the Company's Richmond, Kentucky motive power production facility. The Company maintains insurance policies for both property damage and business interruption and is in the process of cleanup and repair. The Company estimates that the total claim, including the replacement of inventory and equipment, the cleanup and repairs to the building, as well as the claim for business interruption may exceed $50,000.

As of December 29, 2019, the Company incurred $10,030 of costs associated with the damage caused to its fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire. The Company also received $12,000 of advances related to its initial claims for recovery from its property and casualty insurance carriers, a substantial portion of which has been reflected as operating cash flows in the accompanying statement of cash flows for the nine months ended December 29, 2019.

12. Debt

The following summarizes the Company’s long-term debt as of December 29, 2019 and March 31, 2019:
 
 
 
December 29, 2019
 
March 31, 2019
 
 
Principal
 
Unamortized Issuance Costs
 
Principal
 
Unamortized Issuance Costs
Senior Notes
 
$
600,000

 
$
6,601

 
$
300,000

 
$
2,497

Amended Credit Facility, due 2022
 
497,260

 
2,405

 
677,315

 
3,062

 
 
$
1,097,260

 
$
9,006

 
$
977,315

 
$
5,559

Less: Unamortized issuance costs
 
9,006

 
 
 
5,559

 
 
Long-term debt, net of unamortized issuance costs
 
$
1,088,254

 
 
 
$
971,756

 
 


The Company's Senior Notes comprise the following:

4.375% Senior Notes due 2027

On December 11, 2019, the Company issued $300,000 in aggregate principal amount of its 4.375% Senior Notes due 2027 (the “2027 Notes”). Proceeds from this offering, net of debt issuance costs were $296,250 and were utilized to pay down the Amended 2017 Revolver (defined below). The 2027 Notes bear interest at a rate of 4.375% per annum accruing from December 11, 2019. Interest is payable semiannually in arrears on June 15 and December 15 of each year, commencing on June 15, 2020. The 2027 Notes mature on December 15, 2027, unless earlier redeemed or repurchased in full. The 2027 Notes are unsecured and unsubordinated obligations of the Company. The 2027 Notes are fully and unconditionally guaranteed, jointly and severally, by certain of its subsidiaries that are guarantors under the Amended Credit Facility. These guarantees are unsecured and unsubordinated obligations of such guarantors.

The Company may redeem, prior to September 15, 2027, all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of the 2027 Notes to be redeemed, plus accrued and unpaid interest and a “make whole” premium to, but excluding, the redemption date. The Company may redeem, on or after September 15, 2027, all or a portion of the 2027 Notes at a price equal to 100% of the principal amount of the 2027 Notes, plus accrued and unpaid interest to, but excluding, the redemption date. If a change of control triggering event occurs, the Company will be required to offer to repurchase the 2027 Notes at a price in cash equal to 101% of the aggregate principal amount of the 2027 Notes, plus accrued and unpaid interest to, but excluding, the date of repurchase. The 2027 Notes rank pari passu with the 2023 Notes.


21



5.00% Senior Notes due 2023

The 5% Senior Notes due April 30, 2023 (the “2023 Notes”) bear interest at a rate of 5.00% per annum and have an original face value of $300,000. Interest is payable semiannually in arrears on April 30 and October 30 of each year and commenced on October 30, 2015. The 2023 Notes will mature on April 30, 2023, unless earlier redeemed or repurchased in full. The 2023 Notes are unsecured and unsubordinated obligations of the Company. The 2023 Notes are fully and unconditionally guaranteed, jointly and severally, by certain of its subsidiaries that are guarantors under the Amended Credit Facility. These guarantees are unsecured and unsubordinated obligations of such guarantors.

2017 Credit Facility and Subsequent Amendment

In fiscal 2018, the Company entered into a credit facility (the “2017 Credit Facility”). The 2017 Credit Facility scheduled to mature on September 30, 2022, comprised a $600,000 senior secured revolving credit facility (“2017 Revolver”) and a $150,000 senior secured term loan (“2017 Term Loan”). The Company utilized the borrowings from the 2017 Credit Facility to repay its pre-existing credit facility.

In fiscal 2019, the Company amended the 2017 Credit Facility (as amended, the “Amended Credit Facility”) to fund the Alpha acquisition. The Amended Credit Facility consists of $449,105 senior secured term loans (the “Amended 2017 Term Loan”), including a CAD 133,050 ($99,105) term loan and a $700,000 senior secured revolving credit facility (the “Amended 2017 Revolver”). The amendment resulted in an increase of the 2017 Term Loan and the 2017 Revolver by $299,105 and $100,000, respectively.

As of December 29, 2019, the Company had $68,000 outstanding under the Amended 2017 Revolver and $429,260 under the Amended 2017 Term Loan.

Subsequent to the amendment, the quarterly installments payable on the Amended 2017 Term Loan are $5,645 beginning December 31, 2018, $8,468 beginning December 31, 2019 and $11,290 beginning December 31, 2020 with a final payment of $320,000 on September 30, 2022. The Amended Credit Facility may be increased by an aggregate amount of $325,000 in revolving commitments and / or one or more new tranches of term loans, under certain conditions. Both the Amended 2017 Revolver and the Amended 2017 Term Loan bear interest, at the Company's option, at a rate per annum equal to either (i) the London Interbank Offered Rate (“LIBOR”) or Canadian Dollar Offered Rate (“CDOR”) plus (i) LIBOR plus between 1.25% and 2.00% (currently 1.50% and based on the Company's consolidated net leverage ratio) or (ii) the U.S. Dollar Base Rate (which equals, for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) Bank of America “Prime Rate” and (c) the Eurocurrency Base Rate plus 1%; provided that, if the Base Rate shall be less than zero, such rate shall be deemed zero) (iii) the CDOR Base Rate equal to the higher of (a) Bank of America “Prime Rate” and (b) average 30-day CDOR rate plus 0.50%. Obligations under the Amended Credit Facility are secured by substantially all of the Company’s existing and future acquired assets, including substantially all of the capital stock of the Company’s United States subsidiaries that are guarantors under the Amended Credit Facility and up to 65% of the capital stock of certain of the Company’s foreign subsidiaries that are owned by the Company’s United States subsidiaries.

The Amended Credit Facility allows for up to two temporary increases in the maximum leverage ratio from 3.50x to 4.00x for a four quarter period following an acquisition larger than $250,000. Effective December 7, 2018 through December 28, 2019, the maximum leverage ratio has been increased to 4.00x. On December 29, 2019, the maximum leverage ratio returned to 3.50x.

The current portion of the Amended 2017 Term Loan of $36,707 is classified as long-term debt as the Company expects to refinance the future quarterly payments with revolver borrowings under the Amended Credit Facility.

Short-Term Debt

As of December 29, 2019 and March 31, 2019, the Company had $36,727 and $54,490, respectively, of short-term borrowings. The weighted average interest rate on these borrowings was approximately 4% at December 29, 2019 and March 31, 2019.

Letters of Credit

As of December 29, 2019 and March 31, 2019, the Company had standby letters of credit of $4,306 and $3,955, respectively.

Debt Issuance Costs

In connection with the issuance of the 2027 Notes, the Company capitalized $4,607 of debt issuance costs. Amortization expense, relating to debt issuance costs, included in interest expense was $409 and $326, respectively, for the quarters ended December 29, 2019 and December 30, 2018 and $1,160 and $953, respectively, for the nine months ended December 29, 2019 and December 30, 2018. Debt issuance costs, net of accumulated amortization, totaled $9,006 and $5,559, respectively, at December 29, 2019 and March 31, 2019.

Available Lines of Credit

As of December 29, 2019 and March 31, 2019, the Company had available and undrawn, under all its lines of credit, $749,522 and $546,960, respectively, including $121,828 and $87,685, respectively, of uncommitted lines of credit as of December 29, 2019 and March 31, 2019.

13. Retirement Plans

The following tables present the components of the Company’s net periodic benefit cost related to its defined benefit pension plans: 

 
 
United States Plans
 
International Plans
Quarter ended
 
Quarter ended
December 29, 2019
 
December 30, 2018
 
December 29, 2019
 
December 30, 2018
Service cost
 
$

 
$

 
$
229

 
$
246

Interest cost
 
154

 
157

 
375

 
449

Expected return on plan assets
 
(110
)
 
(128
)
 
(542
)
 
(526
)
Amortization and deferral
 
38

 
46

 
253

 
299

Net periodic benefit cost
 
$
82

 
$
75

 
$
315

 
$
468


 
 
United States Plans
 
International Plans
Nine months ended
 
Nine months ended
December 29, 2019
 
December 30, 2018
 
December 29, 2019
 
December 30, 2018
Service cost
 
$

 
$

 
$
691

 
$
753

Interest cost
 
462

 
473

 
1,115

 
1,376

Expected return on plan assets
 
(336
)
 
(385
)
 
(1,598
)
 
(1,613
)
Amortization and deferral
 
141

 
138

 
751

 
915

Net periodic benefit cost
 
$
267

 
$
226

 
$
959

 
$
1,431




14. Stock-Based Compensation

As of December 29, 2019, the Company maintains the 2017 Equity Incentive Plan (“2017 EIP”). The 2017 EIP reserved 4,173,554 shares of common stock for the grant of various classes of nonqualified stock options, restricted stock units, market condition-based on total shareholder return (“TSR”) and performance condition-based share units (“PSU”) and other forms of equity-based compensation.

The Company recognized stock-based compensation expense associated with its equity incentive plans of $5,891 for the third quarter of fiscal 2020 and $5,458 for the third quarter of fiscal 2019. Stock-based compensation expense was $14,759 for the nine months of fiscal 2020 and $14,587 for the nine months of fiscal 2019. The Company recognizes compensation expense using the straight-line method over the vesting period of the awards.

During the nine months of fiscal 2020, the Company granted to non-employee directors 39,583 restricted stock units, pursuant to the 2017 EIP. The awards vest immediately upon the date of grant and are settled in shares of common stock, six months after termination of service as a director.

During the nine months of fiscal 2020, the Company granted to management and other key employees 284,109 non-qualified stock options that vest ratably over three years from the date of grant, 62,512 PSUs and 51,063 TSRs units that cliff vest three years from the date of grant, and 301,321 restricted stock units that vest ratably over four years from the date of grant.

Common stock activity during the nine months of fiscal 2020 included the vesting of 168,749 restricted stock units, 171,980 TSRs and the exercise of 8,999 stock options.

As of December 29, 2019, there were 816,815 non-qualified stock options, 881,637 restricted stock units, 207,834 TSRs and 102,248 PSUs outstanding.


22


15. Stockholders’ Equity and Noncontrolling Interests

Common Stock

The following demonstrates the change in the number of shares of common stock outstanding during the nine months ended December 29, 2019:
 
Shares outstanding as of March 31, 2019
 
42,620,750

Purchase of treasury stock
 
(581,140
)
Shares issued towards equity-based compensation plans, net of equity awards surrendered for option price and taxes
 
259,106

Shares outstanding as of December 29, 2019
 
42,298,716



Treasury Stock

During the nine months ended December 29, 2019, the Company purchased 581,140 shares for $34,561. At December 29, 2019 and March 31, 2019, the Company held 12,799,597 and 12,227,773 shares as treasury stock, respectively. During the nine months ended December 29, 2019, the Company also issued 9,316 shares out of its treasury stock, valued at $62.55 per share, on a LIFO basis, to participants under the Company's Employee Stock Purchase Plan.

Accumulated Other Comprehensive Income (AOCI )

The components of AOCI, net of tax, as of December 29, 2019 and March 31, 2019, are as follows:
 
 
March 31, 2019
 
Before Reclassifications
 
Amounts Reclassified from AOCI
 
December 29, 2019
Pension funded status adjustment
 
$
(20,791
)
 
$

 
$
694

 
$
(20,097
)
Net unrealized (loss) gain on derivative instruments
 
(130
)
 
(1,478
)
 
(674
)
 
(2,282
)
Foreign currency translation adjustment
 
(121,761
)
 
(7,093
)
 

 
(128,854
)
Accumulated other comprehensive (loss) income
 
$
(142,682
)
 
$
(8,571
)
 
$
20

 
$
(151,233
)



The following table presents reclassifications from AOCI during the third quarter ended December 29, 2019:

Components of AOCI
 
Amounts Reclassified from AOCI
 
Location of (Gain) Loss Recognized on Income Statement
Derivatives in cash flow hedging relationships:
 
 
 
 
Net unrealized loss on derivative instruments
 
$
1,570