|• FORM 10-Q • EX-31.1 • EX-31.2 • EX-32 • XBRL INSTANCE DOCUMENT • XBRL TAXONOMY EXTENSION SCHEMA • XBRL TAXONOMY EXTENSION CALCULATION LINKBASE • XBRL TAXONOMY EXTENSION DEFINITION LINKBASE • XBRL TAXONOMY EXTENSION LABEL LINKBASE • XBRL TAXONOMY EXTENSION PRESENTATION LINKBASE|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the quarterly period ended June 30, 2012
Commission File Number 1-11263
(Exact Name of Registrant as Specified in Its Charter)
(Registrants telephone number, including area code)
Indicate by a 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. Yes x 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 x 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 Exchange Act. (Check one):
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date:
As of July 27, 2012, 78,376,428 shares of common stock were outstanding.
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share data)
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands)
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share data)
The accompanying notes are an integral part of these statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
The accompanying notes are an integral part of these statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2012
(1) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of Exide Technologies (referred to together with its subsidiaries, unless the context requires otherwise, as Exide or the Company) and all of its majority-owned subsidiaries. These statements are presented in accordance with the requirements of Form 10-Q and consequently do not include all of the disclosures normally required by generally accepted accounting principles in the United States (GAAP), or those disclosures normally made in the Companys annual report on Form 10-K. Accordingly, the reader of this Form 10-Q should refer to the Companys annual report on Form 10-K for the fiscal year ended March 31, 2012 for further information.
The financial information has been prepared in accordance with the Companys customary accounting practices. In the Companys opinion, the accompanying Condensed Consolidated Financial Statements include all adjustments of a normal recurring nature necessary for a fair statement of the results of operations, comprehensive (loss) income, financial position, and cash flows for the periods presented. This includes accounting and disclosures related to any subsequent events occurring from the balance sheet date through the date the financial statements were issued.
Unless otherwise indicated or unless the context otherwise requires, references to fiscal year refer to the period ended March 31 of that year (e.g., fiscal 2013 refers to the period beginning April 1, 2012 and ending March 31, 2013).
(2) STOCKHOLDERS EQUITY
The stockholders equity accounts for both the Company and noncontrolling interests consist of:
(3) ACCOUNTING FOR DERIVATIVES
The Company uses derivative contracts to hedge the volatility arising from changes in the fair value of certain assets and liabilities that are subject to market risk, such as interest rates on debt instruments, foreign currency exchange rates, and certain commodities. The Company does not enter into derivative contracts for trading or speculative purposes.
The Company recognizes outstanding derivative instruments as assets or liabilities, based on measurements of their fair values. If a derivative qualifies for hedge accounting, gains or losses in its fair value that offset changes in the fair value of the asset or liability being hedged (effective gains or losses) are reported in accumulated other comprehensive income, and subsequently recorded to earnings only as the related variability on the hedged transaction is recorded in earnings. If a derivative does not qualify for hedge accounting, changes in its fair value are reported in earnings immediately upon occurrence, and the classification of cash flows from these instruments is consistent with that of the transactions being hedged. Derivatives qualify for hedge accounting if they are designated as hedging instruments at their inception, and if they are highly effective in achieving changes in fair value that offset the fair value changes in the assets or liabilities being hedged. Regardless of a derivatives accounting designation, changes in its fair value that are not offset by changes in the fair value of the asset or liability being hedged are considered ineffective, and are recognized in earnings immediately.
The Company enters into foreign currency forward contracts for various time periods ranging from one month to several years. The Company uses these contracts to mitigate the effect of its exposure to foreign currency remeasurement gains and losses on selected transactions that will be settled in a currency other than the functional currency of the transacting entity. These contracts include economic hedges on which fair value changes are recorded in earnings immediately, as well as instruments designated as hedging instruments. At June 30, 2012, the Company held foreign currency forward contracts with a total notional value of approximately $76.0 million.
The Company also enters into commodity swap and forward contracts for various time periods usually not exceeding one year. The Company uses these contracts to mitigate the effects of its exposure to price variability on certain raw materials and other costs included in the delivered cost of its products. These contracts include economic hedges on which fair value changes are recorded in earnings immediately, as well as instruments designated as cash flow hedging instruments.
The following tables set forth information on the presentation of these derivative instruments in the Companys Condensed Consolidated Financial Statements:
(4) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of:
Amortization of intangible assets for the first three months of fiscal 2013 and 2012 was $1.8 million and $2.1 million, respectively. Excluding the impact of future acquisitions (if any), the Company anticipates annual amortization of intangible assets for each of the next five years to be approximately $7.0 million. Intangible assets have been recorded at the legal entity level and are subject to foreign currency fluctuation.
Inventories, valued using the first-in, first-out (FIFO) method, consist of:
(6) OTHER NONCURRENT ASSETS
At June 30, 2012 and March 31, 2012, short-term borrowings of $17.9 million and $20.0 million, respectively, consisted of borrowings under various operating lines of credit and working capital facilities maintained by certain of the Companys non-U.S. subsidiaries. Certain of these borrowings are collateralized by receivables, inventories and/or other property. These borrowing facilities, which are typically for one-year renewable terms, generally bear interest at current local market rates. The weighted average interest rate on short-term borrowings was approximately 5.3% and 5.4% at June 30, 2012 and March 31, 2012, respectively.
Total long-term debt consists of:
Total debt at June 30, 2012 and March 31, 2012 was $773.2 million and $776.7 million, respectively.
(8) INTEREST EXPENSE, NET
Interest income of $0.3 million and $0.7 million is included in interest expense, net for the three months ended June 30, 2012 and 2011, respectively.
(9) OTHER EXPENSE, NET
Other expense, net consist of:
(10) EMPLOYEE BENEFITS
The components of the Companys net periodic pension and other post-retirement benefit costs are as follows:
The estimated fiscal 2013 pension plan contributions are $33.8 million and other post-retirement contributions are $1.9 million. Payments aggregating $8.2 million were made during the three months ended June 30, 2012.
(11) COMMITMENTS AND CONTINGENCIES
On April 15, 2002, the Petition Date, Exide Technologies, together with certain of its subsidiaries (the Debtors), filed voluntary petitions for reorganization under Chapter 11 of the federal bankruptcy laws (Bankruptcy Code or Chapter 11) in the United States Bankruptcy Court for the District of Delaware (Bankruptcy Court). The Debtors continued to operate their businesses and manage their properties as debtors-in-possession throughout the course of the bankruptcy case. The Debtors, along with the Official Committee of Unsecured Creditors, filed a Joint Plan of Reorganization (the Plan) with the Bankruptcy Court on February 27, 2004 and, on April 21, 2004, the Bankruptcy Court confirmed the Plan.
Under the Plan, holders of general unsecured claims were eligible to receive collectively 2.5 million shares of common stock and warrants to purchase up to approximately 6.7 million shares of common stock at $29.84 per share. Approximately 13.4% of such common stock and warrants were initially reserved for distribution for disputed claims. The Official Committee of Unsecured Creditors, in consultation with the Company, established such reserve to provide for a pro rata distribution of new common stock and warrants to holders of disputed claims as they become allowed. As claims are evaluated and processed, the Company will object to some claims or portions thereof, and upward adjustments (to the extent common stock and warrants not previously distributed remain) or downward adjustments to the reserve will be made pending or following adjudication of such objections. Predictions regarding the allowance and classification of claims are difficult to make. With respect to environmental claims in particular, it is difficult to assess the Companys potential liability due to the large number of other potentially responsible parties.
For example, a demand for the total cleanup costs of a landfill used by many entities may be asserted by the government using joint and several liability theories. Although the Company believes that there is a reasonable basis to believe that it will ultimately be responsible for only its proportional share of these remediation costs, there can be no assurance that the Company will prevail on these claims. In addition, the scope of remedial costs, or other environmental injuries, is highly variable and estimating these costs involves complex legal, scientific and technical judgments. Many of the claimants who have filed disputed claims, particularly environmental and personal injury claims, produce little or no proof of fault on which the Company can assess its potential liability. Such claimants often either fail to specify a determinate amount of damages or provide little or no basis for the alleged damages. In some cases, the Company is still seeking additional information needed for a claims assessment and information that is unknown to the Company at the current time may significantly affect the Companys assessment regarding the adequacy of the reserve amounts in the future.
As general unsecured claims have been allowed in the Bankruptcy Court, the Company has distributed approximately one share of common stock per $383.00 in allowed claim amount and approximately one warrant per $153.00 in allowed claim amount. These rates were established based upon the assumption that the common stock and warrants allocated to holders of general unsecured claims on the effective date, including the reserve established for disputed claims, would be fully distributed so that the recovery rates for all allowed unsecured claims would comply with the Plan without the need for any redistribution or supplemental issuance of securities. Effective May 6, 2011, all outstanding warrants expired and were cancelled. No more warrants will be issued to resolve any remaining pre-petition claims. If the amount of general unsecured claims that is eventually allowed exceeds the amount of claims anticipated in the setting of the reserve, additional common stock will be issued for the excess claim amounts at the same rates as used for the other general unsecured claims. If this were to occur, additional common stock would also be issued to the holders of pre-petition secured claims to maintain the ratio of their distribution in common stock at nine times the amount of common stock distributed for all unsecured claims.
Based on information available as of July 27, 2012, approximately 72.0% of common stock and warrants reserved for this purpose has been distributed. The Company also continues to resolve certain non-objected claims.
Private Party Lawsuits and other Legal Proceedings
In 2003, the Company served notices in the U.S. Bankruptcy Court of the District of Deleware to reject certain executory contracts with EnerSys, which the Company contended were executory, including a 1991 Trademark and Trade Name License Agreement (the Trademark License), pursuant to which the Company had licensed to EnerSys use of the Exide trademark on certain industrial battery products in the United States and 80 foreign countries. EnerSys objected to the rejection of certain of those contracts, including the Trademark License. In 2006, the Bankruptcy Court granted the Companys request to reject certain of the contracts, including the Trademark License. EnerSys appealed those rulings. On June 1, 2010, the Third Circuit Court of Appeals reversed the Bankruptcy Court ruling, and remanded to the lower courts, holding that certain of the contracts, including the Trademark License, were not executory contracts and, therefore, were not subject to rejection. On August 27, 2010, acting on the Third Circuits mandate, the Bankruptcy Court vacated its prior orders and denied the Companys motion to reject the contracts on the grounds that the agreements are not executory. On September 20, 2010, the Company filed a complaint in the Bankruptcy Court seeking a declaratory judgment that EnerSys does not have enforceable rights under the Trademark License under Bankruptcy Code provisions which the Company believes are relevant to non-executory contracts. EnerSys has filed a motion to dismiss that complaint, which the Company has opposed, and the motion remains pending. Additionally, on September 27, 2010, the Company filed a Petition for Certiorari, requesting that the U.S. Supreme Court issue a writ of certiorari to the Third Circuit Court of Appeals to review that courts judgment. The Petition for Certiorari was denied by the Supreme Court on February 22, 2011.
As a result of its multinational manufacturing, distribution and recycling operations, the Company is subject to numerous federal, state, and local environmental, occupational health, and safety laws and regulations, as well as similar laws and regulations in other countries in which the Company operates (collectively, EH&S laws).
The Company received a number of notices of violation issued by the South Coast Air Quality Management District (SCAOMD) for alleged violations of relevant air rules at its Vernon California recycling facility. On May 22, 2012 the Company agreed to a settlement including payment of monetary sanctions of $0.12 million to SCAOMD to resolve these notices of violation.
The Company received a Notice of Proposed Assessment of Civil Penalty issued by the United States Environmental Protection Agency (EPA) for an alleged violation related to its Frisco. Texas recycling facilitys National Pollutant Discharge Elimination System (NPDES) permit. Effective July 3, 2012, the Company and EPA entered into a consent agreement for the Company to pay a penalty of $0.14 million to EPA to resolve the matter.
The Company received an administrative enforcement order and first amendment to enforcement order issued by the Department of Toxic Substances Control (DTSC) for alleged violations of relevant health and safety rules related to the operation and management of the storm water retention pond at its Vernon. California recycling facility. On July 9, 2012, the Company agreed to a payment of monetary sanctions of $0.2 million to DTSC to resolve the administrative order.
The Company is exposed to liabilities under such EH&S laws arising from its past handling, release, storage and disposal of materials now designated as hazardous substances and hazardous wastes. The Company previously has received notification from the U.S. Environmental Protection Agency (EPA), equivalent state and local agencies or others alleging or indicating that the Company is or may be responsible for performing and/or investigating environmental remediation, or seeking the repayment of the costs spent by governmental entities or others performing investigations and/or remediation at certain U.S. sites under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws.
The Company monitors and responds to inquiries from the EPA, equivalent state and local agencies and others at approximately 50 federally defined Superfund or state equivalent sites. While the ultimate outcome of the environmental matters described in this paragraph is uncertain due to several factors, including the number of other parties that may also be responsible, the scope of
investigation performed at such sites and the remediation alternatives pursued by such federal and equivalent state and local agencies, the Company presently believes any liability for these matters, individually and in the aggregate, will not have a material adverse effect on the Companys financial condition, cash flows or results of operations.
The Company is also involved in the assessment and remediation of various other properties, including certain currently and formerly owned or operating facilities. Such assessment and remedial work is being conducted pursuant to applicable EH&S laws with varying degrees of involvement by appropriate regulatory authorities. In addition, certain environmental matters concerning the Company are pending in various courts or with certain environmental regulatory agencies with respect to these currently or formerly owned or operating locations. While the ultimate outcome of the environmental matters described in this paragraph is uncertain, the Company presently believes the resolution of these known environmental matters, individually and in the aggregate, will not have a material adverse effect on the Companys financial condition, cash flows or results of operations.
The Company has established liabilities for on-site and off-site environmental remediation costs where such costs are probable and reasonably estimable and believes that such liabilities are adequate. As of June 30, 2012 and March 31, 2012, the amount of such liabilities on the Companys Condensed Consolidated Balance Sheet was approximately $27.0 million and $27.7 million, respectively. Because environmental liabilities are not accrued until a liability is determined to be probable and reasonably estimable, not all potential future environmental liabilities have been included in the Companys environmental liabilities and, therefore, additional earnings charges are possible. Also, future findings or changes in estimates could have a material adverse effect on the recorded reserves and cash flows.
The sites that currently have the largest reserves include the following:
The Tampa site is a former secondary lead recycling plant, lead oxide production facility, and sheet lead-rolling mill that operated from 1943 to 1989. Under a RCRA Part B Closure Permit and a Consent Decree with the State of Florida, Exide is required to investigate and remediate certain historic environmental impacts to the site. Cost estimates for remediation (closure and post-closure) are expected to range from $13.2 million to $20.0 million depending on final State of Florida requirements. The remediation activities are expected to occur over the course of several years.
The Columbus site is a former secondary lead recycling plant that was taken out of service in 1999, but remains part of a larger facility that includes an operating lead-acid battery manufacturing facility. Groundwater remediation activities began in 1988. Costs for supplemental investigations, remediation and site closure are currently estimated at $5.7 million to $8.5 million.
At June 30, 2012, the Company had outstanding letters of credit with a face value of $47.1 million and surety bonds with a face value of $42.2 million. The majority of the letters of credit and surety bonds have been issued as collateral or financial assurance with respect to certain liabilities the Company has recorded including, but not limited to, environmental remediation obligations and self-insured workers compensation reserves. Failure of the Company to satisfy its obligations with respect to the primary obligations secured by the letters of credit or surety bonds could entitle the beneficiary of the related letter of credit or surety bond to demand payments pursuant to such instruments. The letters of credit generally have terms up to one year. Collateral held by the sureties in the form of letters of credit at June 30, 2012, pursuant to the terms of the agreement, totaled approximately $2.2 million.
Certain of the Companys European and Asia Pacific subsidiaries have issued bank guarantees as collateral or financial assurance in connection with environmental obligations, income tax claims and customer contract requirements. June 30, 2012, bank guarantees with an aggregate face value of $19.5 million were outstanding.
Sales Returns and Allowances
The Company provides for an allowance for product returns and/or allowances. Based upon product examination in the manufacturing re-work process, the Company believes that the majority of its product returns are not the result of product defects. The Company recognizes the estimated cost of product returns as a reduction of net sales in the period in which the related revenue is recognized. The product return estimates are based upon historical trends and claims experience, and include assessment of the anticipated lag between the date of sale and claim/return date.
Changes in the Companys sales returns and allowances liability (in thousands) are as follows:
(12) INCOME TAXES
The effective tax rate for the first quarter of fiscal year 2013 and fiscal year 2012 is (626.4%) and (39.2%) respectively. The effective tax rate for the first quarter of fiscal 2013 included the recognition of taxes on income and losses in almost all to the Companys jurisdictions with the primary exception of the United States, Spain and the United Kingdom, on which full valuation allowances are recorded. The Company established a full valuation allowance for the United States in the first quarter of fiscal 2013 after determining that it was not more likely than not that the Company would realize all deductible temporary differences and carryforwards in the foreseeable future.
The effective tax rate for the first quarter of fiscal 2013 was primarily affected by the discrete item of establishing a valuation allowance in the United States of $87.6 million.
Each quarter, the Company reviews the need to report the future realization of tax benefits of deductible temporary differences or loss carryforwards on its financial statements. All available evidence is considered to determine whether a valuation allowance should be established against these future tax benefits or previously established valuation allowances should be released. This review is performed on a jurisdiction by jurisdiction basis. As global market conditions and the Companys financial results in certain jurisdictions change, the continued release and establishment of related valuation allowances may occur.
The Company files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdiction. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before March 31, 2009.
With respect to state and local jurisdictions and countries outside of the United States, with limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for years ended before March 31,2006. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for any adjustments that could result from these years.
The Companys unrecognized tax benefits decreased from $41.5 million to $40.5 million during the first three months of fiscal 2013 due primarily to the effects of foreign currency translation plus unrecognized tax benefits established during the period less unrecognized tax benefits released during the period due to expiration of statute of limitations. The amount, if recognized, that would affect the Companys effective tax rate at June 30, 2012 is $36.8 million.
The Company classifies interest and penalties on uncertain tax benefits as income tax expense. At June 30, 2012 and March 31, 2012, before any tax benefits, the Company had $2.4 million and $3.0 million, respectively, of accrued interest and penalties on unrecognized tax benefits.
During the next twelve months, the Company does not expect the resolution of any tax audits which could potentially reduce unrecognized tax benefits by a material amount. However, expiration of the statute of limitations for a tax year in which the Company has recorded an uncertain tax benefit will occur in the next twelve months. The removal of this uncertain tax benefit would affect the Companys forecasted annual effective tax rate by $0.3 million.
During the first three months of fiscal 2013, the Company has continued to implement operational changes to streamline and rationalize its structure in an effort to simplify the organization and eliminate redundant and/or unnecessary costs.
Summarized restructuring reserve activity:
Remaining expenditures principally represent (i) severance and related benefits payable per employee agreements and/or regulatory requirements, (ii) lease commitments for certain closed facilities, branches and offices, as well as leases for excess and permanently idle equipment payable in accordance with contractual terms, and (iii) certain other closure costs including dismantlement and costs associated with removal obligations incurred in connection with the exit of facilities.
Summarized restructuring and asset sale and impairment expenses by segment:
(14) LOSS PER SHARE
The Company computes basic loss per share by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing net loss, after adding back the after-tax amount of interest recognized in the period associated with the Companys Floating Rate Convertible Senior Subordinated Notes, by diluted weighted average shares outstanding. Potentially dilutive shares include the assumed exercise of stock options and the assumed vesting of restricted stock and stock unit awards (using the treasury stock method) as well as the assumed conversion of the convertible debt, if dilutive (using the if-converted method). Shares which are contingently issuable under the Companys plan of reorganization have been included as outstanding common shares for purposes of calculating basic loss per share.
Due to a net loss for the three month periods ended June 30, 2012 and June 30, 2011, certain potentially dilutive shares were excluded from the diluted loss per share calculation because their effect would be antidilutive:
(15) FAIR VALUE MEASUREMENTS
The Company uses available market information and appropriate methodologies to estimate the fair value of its financial instruments. Considerable judgment is required in interpreting market data to develop these estimates. Accordingly, the estimates presented herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange. Certain of these financial instruments are with major financial institutions and expose the Company to market and credit risks and may at times be concentrated with certain counterparties or groups of counterparties. The creditworthiness of counterparties is continually reviewed, and full performance is currently anticipated.
The Companys cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings all have carrying amounts that are a reasonable estimate of their fair values. The carrying values and estimated fair values of the Companys long-term obligations and other financial instruments are as follows:
(a) These financial instruments are required to be measured at fair value, and are based on inputs as described in the three-tier hierarchy that prioritizes inputs used in measuring fair value as of the reported date:
The following table represents our financial instruments that are measured at fair value on a recurring basis, and the basis for that measurement:
The Company uses a market approach to determine the fair values of all of its derivative instruments subject to recurring fair value measurements. The fair value of each financial instrument was determined based upon observable forward prices for the related underlying financial index or commodity price, and each has been classified as Level 2 based on the nature of the underlying markets in which those derivatives are traded. For additional discussion of the Companys derivative instruments and hedging activities, see Note 3
(16) SEGMENT INFORMATION
The Company reports its results in four business segments: Transportation Americas, Transportation Europe and ROW, Industrial Energy Americas and Industrial Energy Europe and ROW. The Company is a global producer and recycler of lead-acid batteries. The Companys four business segments provide a comprehensive range of stored electrical energy products and services for transportation and industrial applications.
Transportation markets include original-equipment and aftermarket batteries for cars, trucks, off-road vehicles, agricultural and construction vehicles, motorcycles, recreational vehicles, marine, and other applications. Industrial markets include batteries for motive power and network power applications. Motive power batteries are used in the materials handling industry for electric forklift trucks, and in other industries, including floor cleaning machinery, powered wheelchairs, railroad locomotives, mining and the electric road vehicles market. Network power batteries are used for backup power for use with telecommunications systems, computer installations or date centers, hospitals, air traffic control, security systems, utility, railway and military applications.
The Companys four reportable segments are determined based upon the nature of the markets served and the geographic regions in which they operate. The Companys chief operating decision-maker monitors and manages the financial performance of these four business groups. Costs of shared services and other corporate costs are not allocated or charged to the business groups.
Selected financial information concerning the Companys reportable segments is as follows:
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Companys consolidated results of operation and financial condition. The discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto contained in this Quarterly Report on Form 10-Q.
Some of the statements contained in the following discussion of the Companys financial condition and results of operations refer to future expectations or include other forward-looking information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these statements. The forward-looking information is based on various factors and was derived from numerous assumptions. See Cautionary Statement for Purposes of the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995, and Item 1A Risk Factors in Part I included in this Report on Form 10-Q as well as the risk factors included in Item 1A to Part I of the Companys Annual Report on Form 10-K for the fiscal year ended March 31, 2012 for a discussion of factors to be considered when evaluating forward-looking information detailed below. These factors could cause our actual results to differ materially from the forward looking statements. For a discussion of certain legal contingencies, see Note 11 to the Condensed Consolidated Financial Statements.
The Company is a global producer and recycler of lead-acid batteries. The Companys four business segments, Transportation Americas, Transportation Europe and Rest of World (ROW), Industrial Energy Americas, and Industrial Energy Europe and ROW provide a comprehensive range of stored electrical energy products and services for transportation and industrial applications.
Transportation markets include Original Equipment (OE) and aftermarket automotive, heavy-duty truck, agricultural and marine applications, and new technologies for hybrid vehicles and other automotive applications. Industrial markets include batteries for telecommunications systems, electric utilities, railroads, uninterruptible power supply (UPS), lift trucks, mining, and other commercial vehicles.
The Companys four reportable segments are determined based upon the nature of the markets served and the geographic regions in which they operate. The Companys chief operating decision-maker monitors and manages the financial performance of these four business groups.
Factors Which Affect the Companys Financial Performance
Lead and Other Raw Materials. Lead represents approximately 50.1% of the Companys cost of goods sold for the fiscal quarter ended June 30, 2012. The market price of lead fluctuates. Generally, when lead prices decrease, customers may seek disproportionate price reductions from the Company, and when lead prices increase, customers may resist price increases. Either of these situations may cause customer demand for the Companys products to be reduced and the Companys net sales and gross margins to decline. The average price of lead as quoted on the London Metals Exchange (LME) has decreased 22.6% from $2,548 per metric ton for the three months ended June 30, 2011 to $1,973 per metric ton for the three months ended June 30, 2012. During the first fiscal quarter, the LME lead price has decreased from $2,020 per metric ton at March 31, 2012 to $1,796 per metric ton at June 30, 2012. At July 27, 2012, the quoted price on the LME was $1,908 per metric ton. In addition, the price of spent batteries increased approximately 4.3% versus the prior year quarter, resulting in additional compression of profit margins. To the extent that lead prices continue to be volatile and the Company is unable to maintain existing pricing or pass higher material costs resulting from this volatility to its customers, its financial performance will be adversely impacted.
Energy Costs. The Company relies on various sources of energy to support its manufacturing and distribution process, principally natural gas at its recycling facilities, electricity at its battery plants, and diesel fuel for distribution of its products. The Company seeks to recoup increases in energy costs through price increases or surcharges. To the extent the Company is unable to pass on higher energy costs to its customers, its financial performance will be adversely impacted.
Competition. The global transportation and industrial energy battery markets are highly competitive. In recent years, competition has continued to intensify and has affected the Companys ability to pass along increased prices to keep pace with rising production costs. The effects of this competition have been exacerbated by excess capacity in certain of the Companys markets, fluctuating lead and spent battery prices and low-priced Asian imports in certain of the Companys markets.
Exchange Rates. The Company is exposed to foreign currency risk in most European countries, principally from fluctuations in the Euro. For the first quarter of fiscal 2013, the exchange rate of the Euro to the U.S. Dollar decreased 11.1% on average to $1.28 compared to $1.44 for the first quarter of fiscal 2012. At June 30, 2012, the Euro was $1.26 or 5.3% lower as compared to $1.33 at March 31, 2012. Fluctuations in foreign currencies impacted the Companys results for the periods presented herein. For the first quarter ended June 30, 2012, approximately 56.5% of the Companys net sales were generated in Europe and ROW. Further, approximately 64.0% of the Companys aggregate accounts receivable and inventory as of June 30, 2012 were held by its European and ROW subsidiaries.
The Company is also exposed, although to a lesser extent, to foreign currency risk in Canada, Mexico, the U.K., Poland, Australia, and various countries in the Pacific Rim. Fluctuations of exchange rates against the U.S. Dollar can result in variations in the U.S. Dollar value of non-U.S. sales, expenses, assets, and liabilities. In some instances, gains in one currency may be offset by losses in another.
Markets. The Company is subject to concentrations of customers and sales in a few geographic locations and is dependent on customers in certain industries, including the automotive, communications and data and material handling markets. Economic difficulties experienced in these markets and geographic locations impact the Companys financial results. OE volumes in the transportation and motive power channels remain below pre-recession demand levels, reflecting global economic conditions. In addition, capital spending by major customers in our network power channels continues to be below historic levels, particularly in Europe. These trends could continue or possibly accelerate which may adversely impact the Companys financial performance.
Seasonality and Weather. The Company sells a disproportionate share of its transportation aftermarket batteries during the fall and early winter (the Companys third and a portion of its fourth fiscal quarters). Retailers and distributors buy automotive batteries during these periods so they will have sufficient inventory for cold weather periods. The impact of seasonality on sales has the effect of increasing the Companys working capital requirements and also makes the Company more sensitive to fluctuations in the availability of liquidity.
Unusually cold winters or hot summers may accelerate battery failure and increase demand for transportation replacement batteries. Mild winters and cool summers may have the opposite effect. As a result, if the Companys sales are reduced by an unusually warm winter or cool summer, the Company typically does not recover these sales in later periods. Further, if the Companys sales are adversely affected by the weather, the Company typically cannot make offsetting cost reductions to protect its liquidity and gross margins in the short-term because a large portion of the Companys manufacturing and distribution costs are fixed.
First quarter of Fiscal 2013 Highlights and Outlook
In the Americas, the Company obtains the vast majority of its lead requirements from five Company-owned and operated secondary lead recycling plants. These facilities reclaim lead by recycling spent lead-acid batteries, which are obtained for recycling from the Companys customers and outside spent-battery collectors. Recycling helps the Company in the Americas control the cost of its principal raw material as compared to purchasing lead at prevailing market prices. Similar to the fluctuation in lead prices, however, the cost of spent batteries has also fluctuated. The average cost of purchased spent batteries increased approximately 4.3% in the first quarter of fiscal 2013 versus the first quarter of fiscal 2012 while the price of lead on the LME declined by more than 22%. This combination of factors served to compress margins in advance of the notification to customers of pricing actions. In response, the Company has taken pricing actions as allowed by the market and is continuing to seek higher captive spent battery return rates to help mitigate the risks associated with this price volatility.
In Europe, the Companys lead requirements are mainly fulfilled by third-party suppliers. Because of the Companys exposure to the historically volatile lead market prices in Europe, the Company has implemented several measures to offset changes in lead prices, including selective pricing actions and lead price escalators. The Company has automatic lead price escalators with virtually all OEM customers. The Company currently obtains a small portion of its lead requirements from recycling in its European facilities.
The Company expects that volatility in lead and other commodity costs, which affect all business segments, will continue to put pressure on the Companys financial performance. However, selective pricing actions, lead price escalators in certain contracts and fuel surcharges have been implemented to help mitigate these risks. The implementation of selective pricing actions and price escalators generally lag the rise in market prices of lead and other commodities. Both lead price escalators and fuel surcharges may not be accepted by our customers, and if the price of lead decreases, our customers may seek disproportionate price reductions.
In addition to managing the impact of fluctuations in lead and other commodity costs on the Companys results, the key elements of the Companys underlying business plans and continued strategies are:
(i) Successful execution and completion of the Companys restructuring plan and organizational realignment of divisional and corporate functions intended to result in further targeted headcount reductions.
(ii) Actions designed to improve the Companys liquidity and operating cash flow through working capital reduction plans, the sale of non-strategic assets and businesses, streamlining cash management processes, implementing plans to minimize the cash costs of the Companys restructuring initiatives, and closely managing capital expenditures.
(iii) Continued factory and distribution productivity improvements through the Companys established EXCELL program as well as the Value Analysis Value Engineering (VAVE) and Take Charge! initiatives.
(iv) Continued review and rationalization of the various brand offerings of products in its markets to gain efficiencies in manufacturing and distribution, and better leverage the Companys marketing spending.
(v) Continued investment in production capacity to meet evolving needs for enhanced batteries absorbed glass mat (AGM and Micro-Hybrid Flooded) required for the increasing numbers of Stop & Start and Micro-Hybrid vehicles.
(vi) Continued research and development and engineering investments designed to develop enhanced lead-acid products as well as products utilizing alternative chemistries. In this regard, the Company continues to identify government funding opportunities to support near and long-term technological improvements in energy storage applications.
Critical Accounting Policies and Estimates
The Companys discussion and analysis of its financial condition and results of operations is based upon the Companys Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates based on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions.
The Company believes that the critical accounting policies and estimates disclosed in the Companys annual report on Form 10-K for the fiscal year ended March 31, 2012 affect the preparation of its Condensed Consolidated Financial Statements. The reader of this report should refer to the Companys annual report for further information.
Results of Operations
Three months ended June 30, 2012 compared with three months ended June 30, 2011
Net sales were $693.4 million for the first quarter of fiscal 2013 versus $745.1 million in the first quarter of fiscal 2012. Foreign currency translation (primarily the weakening of the Euro against the U.S. dollar) unfavorably impacted net sales in the first quarter of fiscal 2013 by approximately $45.8 million. Excluding the foreign currency translation impact, net sales decreased by approximately $5.9 million, or 0.8%, primarily due to an estimated $26.8 million unfavorable lead related pricing impact, partially offset by a slight increase in unit sales in certain of the Companys markets.
Transportation Americas net sales, excluding the foreign currency translation impact, decreased 0.2% primarily due to a 3.3% decrease in aftermarket unit sales and $2.0 million of unfavorable lead related pricing actions, partially offset by 96.5% increase in OEM unit sales. Third-party lead sales for the first quarter of fiscal 2013 were approximately $9.7 million lower than such third-party sales in the first quarter of fiscal 2012.
Transportation Europe and ROW net sales, excluding foreign currency translation, decreased 4.2% mainly due to $16.3 million of unfavorable lead related pricing actions, partially offset by 8.0% higher unit sales in the aftermarket channel and 4.5% higher units sales to OEMs.
Industrial Energy Americas net sales, excluding the foreign currency translation impact, decreased 1.7% primarily due to lower sales in both the Motive Power and Network Power markets.
Industrial Energy Europe and ROW net sales decreased in the first quarter of fiscal 2013 by $14.3 million. Excluding the unfavorable foreign currency translation impact of $20.0 million, net sales increased 2.7% primarily due to higher sales in the Network Power market, partially offset by $7.9 million of unfavorable lead-related pricing actions.
Gross profit was $94.3 million in the first quarter of fiscal 2013 versus $116.7 million in the first quarter of fiscal 2012. Gross margin decreased to 13.6% from 15.7% in the first quarter of fiscal 2012. Foreign currency translation unfavorably impacted gross profit in the first quarter of fiscal 2013 by $5.7 million. Higher core costs in the Americas impacted results by approximately $15.0 million. See further discussion below.
Operating (Loss) Income
Operating income was $1.1 million in the first quarter of fiscal 2013 versus $13.6 million in the first quarter of fiscal 2012. Operating income by segment:
Gross margins by segment:
The increased operating loss in Transportation Americas is driven by compressed margins on third-party lead sales, the result of higher recycled lead input cost and much lower LME lead prices. The result was further impacted by a higher percentage of lower margin OE business, combined with lead escalator driven price reductions. The impact of higher core costs combined with lower third-party lead margins was approximately $13.0 million, partially offset by improved manufacturing performance and favorable pricing actions taken late in the prior year quarter.
Transportation Europe and ROW operating income declined due to the approximate $3.0 million impact of competitive pricing in
the aftermarket business, which began during the second half of fiscal 2012, combined with an approximate $3.4 million unfavorable mark-to-market adjustment on certain lead forward contracts. Lastly, the closure of the Companys New Zealand recycling plant had an approximate $1.0 million unfavorable impact in the quarter.
The Industrial Energy Americas segment also experienced compressed margins as a result of lead input costs and lower LME lead pricing, as well as start-up related costs in the Companys Columbus, Ga. facility associated with a new AGM production line. The impact of higher core costs was approximately $2.0 million.
Industrial Energy Europe and ROW operating income, excluding foreign currency translation, improved in the first quarter of fiscal 2013 due to lower selling expenses resulting from cost cutting initiatives and lower headcount.
Other (Income) Expenses
Other expense was $1.6 million in the first quarter of fiscal 2013 versus $0.1 million in the first quarter of fiscal 2012. The unfavorable change primarily relates to a prior year interest rate swap gain of approximately $2.9 million, offset by an approximate $1.4 million decrease in currency remeasurement loss.
Interest expense decreased $3.6 million, to $14.1 million in the first quarter of fiscal 2013 from $17.7 million in the first quarter of fiscal 2012 primarily due to a gain on interest rate swap of $1.6 million which settled in the first quarter of fiscal 2013 as well as a $2.0 million favorable adjustment to non-cash accretion expense.
The effective tax rate for the first quarter of fiscal 2013 included the recognition of taxes on income and losses in almost all of the Companys jurisdictions with the primary exception of the United States, Spain and the United Kingdom, on which full valuation allowances are recorded. The Company established a full valuation allowance for the United States in the quarter after determining that it was not more likely than not that the Company would realize all deductible temporary differences and carryforwards in the foreseeable future. This discrete item resulted in an $87.6 million charge to expense. In addition, the effective tax rate for the quarter was affected by the recognition of $10.8 million in valuation allowances on current period tax benefits generated primarily in the United States, Spain and the United Kingdom.
The effective tax rate for the first quarter of fiscal 2012 included the recognition of taxes on income and losses in almost all of the Companys jurisdictions with the primary exception of Spain, France and the United Kingdom, on which full valuation allowances are recorded. The effective tax rate for the quarter was primarily affected by the recognition of $1.5 million in valuation allowances on current period tax benefits generated in the United Kingdom, France and Spain. The quarter was also impacted by miscellaneous discrete items of $0.2 million.
Liquidity and Capital Resources
As of June 30, 2012, the Company had cash and cash equivalents of $130.1 million and availability under the Companys senior secured asset-backed revolving credit facility (the ABL facility) of $152.5 million. This compared to cash and cash equivalents of $155.4 million and availability under the ABL facility of $152.8 million as of March 31, 2012.
In January 2011, the Company issued $675.0 million in aggregate principal amount of 8 5/8% senior secured notes (Senior Secured Notes or Notes) due 2018. The proceeds of the Senior Secured Notes were used to (1) repay outstanding borrowings under the Companys credit facilities existing prior to that offering; (2) fund the tender offer and consent solicitation and subsequent redemption by the Company of all of the then-outstanding 10 1/2% Senior Secured Notes due 2013 after the completion of the tender offer; and (3) fund ongoing working capital and other general corporate purposes. Concurrently with the issuance of the Senior Secured Notes, the Company entered into a senior secured asset-backed revolving credit facility (the ABL facility) with commitments of an aggregate borrowing capacity of $200.0 million.
The Senior Secured Notes
Borrowings under the Senior Secured Notes bear interest at a rate of 8 5/8% per annum, payable semi-annually in arrears in February and August, and mature on February 1, 2018.
The Notes are secured by (i) a first-priority lien on the notes priority collateral, which includes the Companys existing and after-acquired equipment, stock of the Companys direct subsidiaries, certain intercompany loans, certain real property, and substantially all of the Companys other assets that do not secure the ABL facility on a first-priority basis, and (ii) a second-priority lien on the ABL priority collateral, which includes the Companys assets that secure the ABL facility on a first-priority basis, including the Companys receivables, inventory, intellectual property rights, deposit accounts, tax refunds, certain intercompany loans and certain other related assets and proceeds thereof. The ABL facility will be secured by a first-priority lien on the ABL priority collateral and a second-priority lien on the notes priority collateral. The value of the collateral at any time will depend on market and other economic conditions, including the availability of suitable buyers for the collateral.
The Notes contain provisions by which the Company may elect to repay some or all of the principal balance prior to its 2018 maturity date:
Upon a change of control the Company will be required to make an offer to repurchase the Notes at a price equal to 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase.
The indenture for these Notes contains certain covenants which limit the ability of the Company and its subsidiaries ability to, among other things, incur debt, pay dividends, make investments, create liens or use assets as security, and sell assets including the capital stock of subsidiaries.
Asset-Backed Revolving Credit Facility
The ABL facility has a borrowing capacity of $200 million, and includes a letter of credit sub-facility of $75.0 million, a swingline sub-facility of $25.0 million and an accordion feature that permits the Company to increase the revolving credit commitments by an amount up to $50.0 million (for an aggregate revolving credit commitment of up to $250.0 million) if the Company obtains commitments from existing or new lenders for such increase. Revolving loans and letters of credit under the ABL facility will be available in U.S. Dollars and Euros. The ABL facility will mature January 25, 2016. The ABL facility (not including the swingline sub-facility) bears interest at a rate equal to (1) the base rate plus an interest margin or (2) LIBOR (for U.S. Dollar or Euro denominated revolving loans, as applicable) plus an interest margin. The base rate will be a rate per annum equal to the greatest of (a) the U.S. Federal Funds Rate plus 0.50%, (b) the prime commercial lending rate of the administrative agent, and (c) a rate equal to LIBOR for a one-month interest period plus 1.00%. The swingline sub-facility will bear interest at a rate per annum equal to the applicable floating rate (base rate or LIBOR for a one-month interest period) plus an interest margin. The interest margin will be adjusted quarterly based on the average amount available for drawing under the ABL facility and will range between 2.75% and 3.25% per annum for LIBOR borrowings and 1.75% and 2.25% per annum for base rate borrowings.
The Companys ability to obtain revolving loans and letters of credit under the ABL facility will be subject to a borrowing base comprising the following: (1) a domestic borrowing base comprising 85% of the Companys eligible accounts receivable and those of the Companys domestic subsidiaries, plus 85% of the net orderly liquidation value of the Companys eligible inventory and such domestic subsidiaries less, in each case, certain reserves and subject to certain limitations, and (2) a foreign borrowing base comprising 85% of the combined eligible accounts receivable of the Companys foreign subsidiaries, plus 85% of the net orderly liquidation value of eligible inventory of the Companys Canadian subsidiaries less, in each case, certain reserves and subject to certain limitations. The maximum amount of credit that will be available to the Company under the foreign borrowing base will be limited to the U.S. Dollar equivalent of $40.0 million plus the availability generated by the eligible accounts receivable and inventory of our Canadian subsidiaries.
The obligations under the ABL facility are guaranteed by certain of the Companys domestic subsidiaries. The obligations of Exide C.V. under the ABL facility will be guaranteed by the Companys domestic subsidiary and certain foreign subsidiaries.
The obligations under the ABL facility will be secured by a lien on substantially all of the assets of Exide Technologies and domestic subsidiaries, and the obligations of Exide C.V. and the foreign subsidiaries under the ABL facility will be secured by a lien on substantially all of the assets of Exide Technologies and domestic subsidiaries, and on substantially all of the personal property of Exide C.V. and the foreign subsidiaries. Subject to certain permitted liens, the liens securing the obligations under the ABL facility will be first priority liens on all assets other than notes priority collateral and will be second priority liens on all notes priority collateral.
The ABL facility contains customary conditions including restrictions on, among other things, the incurrence of indebtedness and liens, dividends and other distributions, consolidations and mergers, the purchase and sale of assets, the issuance or redemption of equity interests, loans and investments, acquisitions, intercompany transactions, a change of control, voluntary payments and modifications of indebtedness, modification of organizational documents and material contracts, affiliate transactions, and changes in lines of business. The ABL facility also contains a financial covenant requiring the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00, tested monthly on a trailing twelve-month basis, if at any time the Companys excess availability under the ABL facility is less than the greater of $30.0 million and 15% of the aggregate commitments of the lenders.
The Convertible Notes
In March 2005, the Company issued floating rate convertible senior subordinated notes due September 18, 2013, with an aggregate principal amount of $60.0 million. The convertible notes bear interest at a per annum rate equal to the 3-month LIBOR, adjusted quarterly, minus a spread of 1.5%. The interest rate at June 30, 2012 and March 31, 2012 was 0.0%. Interest is payable quarterly. The notes are convertible into the Companys common stock at a conversion rate of 61.6143 shares per one thousand dollars principal amount at maturity, subject to adjustments for any common stock splits, dividends on the common stock, tender and exchange offers by the Company for the common stock and third-party tender offers, and in the case of a change in control in which 10% or more of the consideration for the common stock is cash or non-traded securities, the conversion rate increases, depending on the value offered and timing of the transaction, to as much as 70.2247 shares per one thousand dollars principal amount.
At June 30, 2012, the Company was in compliance with covenants contained in the ABL facility and indenture governing the Notes and convertible notes.
At June 30, 2012, the Company had outstanding letters of credit with a face value of $47.1 million and surety bonds with a face value of $42.2 million. The majority of the letters of credit and surety bonds have been issued as collateral or financial assurance with respect to certain liabilities that the Company has recorded, including but not limited to environmental remediation obligations
and self-insured workers compensation reserves. Failure of the Company to satisfy its obligations with respect to the primary obligations secured by the letters of credit or surety bonds could entitle the beneficiary of the related letter of credit or surety bond to demand payments pursuant to such instruments. The letters of credit generally have terms up to one year. Collateral held by the surety in the form of letters of credit at June 30, 2012, pursuant to the terms of the agreement, was $2.2 million.
Risks and uncertainties could cause the Companys performance to differ from managements estimates. As discussed above under Factors Which Affect the Companys Financial Performance Seasonality and Weather, the Companys business is seasonal. During the Companys first and second fiscal quarters, the Company builds inventory in anticipation of increased sales in the winter months. This inventory build increases the Companys working capital needs. During these quarters, because working capital needs are already high, unexpected costs or increases in costs beyond predicted levels would place a strain on the Companys liquidity.
Sources and Uses of Cash
The Companys liquidity requirements have been met historically through cash provided by operations, borrowed funds and the proceeds of sales of accounts receivable. Additional cash has been generated in recent years through rights offerings, common stock issuances, and the sale of non-core businesses and assets.
Total debt at June 30, 2012 was $773.2 million, as compared to $776.7 million at March 31, 2012. See Note 7 to the Condensed Consolidated Financial Statements for the composition of such debt.
Cash provided by (used in) operating activities was $3.1 million and ($12.6) million in the first quarter of fiscal 2013 and fiscal 2012, respectively. The improvement primarily relates to lower working capital usage versus the prior year period, principally in inventory and accounts payable.
Capital expenditures were $24.1 million and $18.7 million in the first quarter of fiscal 2013 and 2012, respectively. Cash used in financing activities increased by approximately $1.6 million due to slight reductions in short term borrowings and other debt.
Going forward, the Companys principal sources of liquidity are expected to be cash on hand, cash from operations, borrowings under the ABL facility, and the sale of idled assets, principally closed facilities, in certain foreign countries.
The Companys liquidity needs arise primarily from the funding of working capital needs, and obligations on indebtedness and capital expenditures. Because of the seasonality of the Companys business, more cash has typically been generated in the third and fourth fiscal quarters than the first and second fiscal quarters. Greatest cash demands from operations have historically occurred during the months of June through October.
The Company believes that it will have sufficient ongoing liquidity to support its operations for the foreseeable future, including payment of remaining accrued restructuring costs of approximately $8.0 million as of June 30, 2012. For further discussion, see Note 13 to the Condensed Consolidated Financial Statements.
The estimated fiscal 2013 pension plan contributions are $33.8 million and other post-retirement contributions are $1.9 million. Payments aggregating $8.2 million were made during the three months ended June 30, 2012.
In June 2012, the Company announced an agreement to sell approximately 180 acres of undeveloped land surrounding the Companys Frisco, Texas recycling facility. The Company believes the sale, which is subject to certain pre-closing actions, will net cash proceeds after deducting closure related costs of approximately $37.0 million, $5.0 million of which has already been placed in escrow to be used for certain demolition and remediation activities. The Company believes that the remainder of the cash proceeds will be received during the first half of fiscal 2014, upon completion of certain pre-closing actions. The Company believes the transaction will have a net favorable impact on pre-tax income of approximately $25.0 to $27.0 million, which the Company currently expects to record in fiscal 2013.
Financial Instruments and Market Risk
From time to time, the Company has used forward contracts to hedge certain commodity price exposures, including lead. The forward contracts are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those exposures. The Company expects that it may increase the use of financial instruments, including fixed and variable rate debt as well as swaps, forward and option contracts to finance its operations and to hedge interest rate, currency and certain commodity purchasing requirements in the future. The swap, forward, and option contracts would be entered into for periods consistent with related underlying exposures and would not constitute positions independent of those exposures. The Company has not entered into, and does not intend to enter into, contracts for speculative purposes nor be a party to any leveraged instruments. See Note 3 to the Condensed Consolidated Financial Statements.
The Companys ability to utilize financial instruments may be restricted because of tightening, and/or elimination of unsecured credit availability with counter-parties. If the Company is unable to utilize such instruments, the Company may be exposed to greater risk with respect to its ability to manage exposures to fluctuations in foreign currencies, interest rates, lead prices, and other commodities.
Accounts Receivable Factoring Arrangements
In the ordinary course of business, the Company utilizes accounts receivable factoring arrangements in countries where programs of this type are typical. Under these arrangements, the Company may sell certain of its trade accounts receivable to financial institutions. The arrangements do not contain recourse provisions against the Company for its customers failure to pay. The Company sold approximately $67.4 million and $69.6 million of foreign currency trade accounts receivable as of June 30, 2012 and March 31, 2012, respectively. Changes in the level of receivables sold from year to year are included in the change in accounts receivable within cash flow from operations in the Condensed Consolidated Statements of Cash Flows.
Changes to the quantitative and qualitative market risks as of June 30, 2012 are described in Item 2 above, Managements Discussion and Analysis of Financial Condition and Results of OperationsFinancial Instruments and Market Risk. Also, see the Companys annual report on Form 10-K for the fiscal year ended March 31, 2012 for further information.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act, that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to the Companys management, including the Companys chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of senior management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Companys disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and 15d-15(b). Based upon, and as of the date of this evaluation, the chief executive officer and the chief financial officer concluded that the Companys disclosure controls and procedures were effective as of June 30, 2012.
Changes in Internal Control Over Financial Reporting
There have not been any changes in the Companys internal control over financial reporting during the fiscal quarter ended June 30, 2012 that have materially affected or are reasonably likely to materially affect the Companys internal control over financial reporting.
CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information, this report may be deemed to contain forward-looking statements. The Company desires to avail itself of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the Act) and is including this cautionary statement for the express purpose of availing itself of the protection afforded by the Act.
Examples of forward-looking statements include, but are not limited to (a) projections of revenues, cost of raw materials, income or loss, earnings or loss per share, capital expenditures, growth prospects, dividends, the effect of currency translations, capital structure, and other financial items, (b) statements of plans and objectives of the Company or its management or Board of Directors, including the introduction of new products, or estimates or predictions of actions by customers, suppliers, competitors or regulating authorities, (c) statements of future economic performance, and (d) statements of assumptions, such as the prevailing weather conditions in the Companys market areas, underlying other statements and statements about the Company or its business.
Factors that could cause actual results to differ materially from these forward looking statements include, but are not limited to, the following general factors such as: (i) the fact that lead, a major constituent in most of the Companys products, experiences significant fluctuations in market price and is a hazardous material that may give rise to costly environmental and safety claims, (ii) the Companys ability to implement and fund business strategies based on current liquidity, (iii) the Companys ability to realize anticipated efficiencies and avoid additional unanticipated costs related to its restructuring activities, (iv) the cyclical nature of the industries in which the Company operates and the impact of current adverse economic conditions on those industries, (v) unseasonable weather (warm winters and cool summers) which adversely affects demand for automotive and some industrial batteries, (vi) the Companys substantial debt and debt service requirements which may restrict the Companys operational and financial flexibility, as well as imposing significant interest and financing costs, (vii) the litigation proceedings to which the Company is subject, the results of which could have a material adverse effect on the Company and its business, (viii) the realization of the tax benefits of the Companys net operating loss carry forwards, which is dependent upon future taxable income, (ix) competitiveness of the battery markets in the Americas and Europe, (x) risks involved in foreign operations such as disruption of markets, changes in import and export laws, currency restrictions, currency exchange rate fluctuations and possible terrorist attacks against U.S. interests, (xi) the ability to acquire goods and services and/or fulfill later needs at budgeted costs, (xii) general economic conditions, (xiii) the Companys ability to successfully pass along increased material costs to its customers, and (xiv) recently adopted U.S. lead emissions standards and the implementation of such standards by applicable states, and (xv) those risk factors described in the Companys fiscal 2012 Form 10-K filed on June 7, 2012.
The Company cautions each reader of this report to carefully consider those factors set forth above. Such factors have, in some instances, affected and in the future could affect the ability of the Company to achieve its projected results and may cause actual results to differ materially from those expressed herein.
See Note 11 to the Condensed Consolidated Financial Statements in this document.
The risk factors which were disclosed in the Companys fiscal 2012 Form 10-K have not materially changed since we filed our fiscal 2012 Form 10-K. See Item 1A to Part I of the Companys fiscal 2012 Form 10-K for a complete discussion of these risk factors.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.