10-Q 1 fy2013-20121231q3.htm 10-Q FY 2013 - 2012.12.31 Q3
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549 
 __________________________________________________
FORM 10-Q
 __________________________________________________
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2012
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-11263
 __________________________________________________
EXIDE TECHNOLOGIES
(Exact name of registrant as specified in its charter)
 __________________________________________________ 
Delaware
 
23-0552730
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
13000 Deerfield Parkway,
Building 200
Milton, Georgia
 
30004
(Address of principal executive offices)
 
(Zip Code)
(678) 566-9000
(Registrant’s telephone number, including area code)
 __________________________________________________
 
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.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer
  
¨
  
Accelerated filer
  
ý
 
 
 
 
 
 
Non-accelerated filer
  
¨
  
Smaller reporting company
  
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
As of January 28, 2013, 79,334,230 shares of common stock were outstanding.



EXIDE TECHNOLOGIES AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
 
Page
 
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME FOR THE THREE AND NINE MONTHS ENDED DECEMBER 31, 2012 AND 2011
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
OTHER INFORMATION
 
 
 
Item 6.
 
 


2


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share data)
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
Net sales
 
$
804,879

 
$
784,051

 
$
2,210,009

 
$
2,302,099

Cost of sales
 
684,809

 
657,540

 
1,892,025

 
1,940,325

Gross profit
 
120,070

 
126,511

 
317,984

 
361,774

Selling and administrative expenses
 
99,568

 
96,182

 
288,968

 
295,058

Restructuring and impairments, net
 
15,776

 
2,145

 
16,400

 
3,722

Operating income
 
4,726

 
28,184

 
12,616

 
62,994

Other (income) expense, net
 
(2,001
)
 
3,403

 
(903
)
 
9,273

Interest expense, net
 
18,366

 
17,194

 
49,692

 
52,929

(Loss) income before income taxes
 
(11,639
)
 
7,587

 
(36,173
)
 
792

Income tax provision (benefit)
 
3,644

 
(60,313
)
 
99,343

 
(57,685
)
Net (loss) income
 
(15,283
)
 
67,900

 
(135,516
)
 
58,477

Net income (loss) attributable to noncontrolling interests
 
160

 
(315
)
 
300

 
(958
)
Net (loss) income attributable to Exide Technologies
 
$
(15,443
)
 
$
68,215

 
$
(135,816
)
 
$
59,435

(Loss) earnings per share
 
 
 
 
 
 
 
 
Basic
 
(0.20
)
 
0.88

 
(1.76
)
 
0.77

       Diluted
 
(0.20
)
 
0.84

 
(1.76
)
 
0.72

Weighted average shares
 
 
 
 
 
 
 
 
Basic
 
77,344

 
77,738

 
77,234

 
77,628

Diluted
 
77,344

 
81,610

 
77,234

 
82,198

The accompanying notes are an integral part of these statements.

3


EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(Unaudited, in thousands) 

 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
Consolidated net (loss) income
 
$
(15,283
)
 
$
67,900

 
$
(135,516
)
 
$
58,477

Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Foreign currency translation adjustment
 
10,389

 
(7,600
)
 
(3,094
)
 
(41,281
)
(Loss) gain on derivatives qualifying as hedges, net
 
(975
)
 
2,283

 
291

 
(1,451
)
Change in defined benefit liabilities, net
 
(185
)
 
(236
)
 
96

 
(306
)
Total comprehensive (loss) income
 
(6,054
)
 
62,347

 
(138,223
)
 
15,439

Comprehensive income (loss) attributable to noncontrolling interests
 
172

 
(279
)
 
312

 
(730
)
Comprehensive (loss) income attributable to Exide Technologies
 
$
(6,226
)
 
$
62,626

 
$
(138,535
)
 
$
16,169

The accompanying notes are an integral part of these statements.


4


EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share data)
 
 
 
December 31, 2012
 
March 31, 2012
ASSETS
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
80,015

 
$
155,368

Accounts receivable, net
 
553,804

 
500,375

Inventories
 
548,459

 
479,467

Prepaid expenses and other current assets
 
25,976

 
21,840

Deferred income taxes
 
10,368

 
30,804

Total current assets
 
1,218,622

 
1,187,854

Property, plant and equipment, net
 
633,022

 
622,975

Other assets:
 
 
 
 
Goodwill and intangibles, net
 
150,783

 
164,039

Deferred income taxes
 
97,753

 
174,601

Other noncurrent assets
 
46,502

 
45,517

 
 
295,038

 
384,157

Total assets
 
$
2,146,682

 
$
2,194,986

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
 
Current liabilities:
 
 
 
 
Short-term borrowings
 
$
61,056

 
$
20,014

Current maturities of long-term debt
 
59,151

 
3,787

Accounts payable
 
440,830

 
390,549

Accrued expenses
 
293,887

 
276,809

Total current liabilities
 
854,924

 
691,159

Long-term debt
 
690,215

 
752,930

Noncurrent retirement obligations
 
223,748

 
236,312

Deferred income taxes
 
14,671

 
17,158

Other noncurrent liabilities
 
95,846

 
95,075

Total liabilities
 
1,879,404

 
1,792,634

STOCKHOLDERS’ EQUITY
 
 
 
 
Preferred stock, $0.01 par value, 1,000 shares authorized, 0 shares issued and outstanding
 

 

Common stock, $0.01 par value, 200,000 shares authorized, 79,298 and 78,351 shares issued and outstanding
 
793

 
783

Additional paid-in capital
 
1,136,544

 
1,133,417

Accumulated deficit
 
(851,729
)
 
(715,913
)
Accumulated other comprehensive loss
 
(19,200
)
 
(16,493
)
Total stockholders’ equity attributable to Exide Technologies
 
266,408

 
401,794

Noncontrolling interests
 
870

 
558

Total stockholders’ equity
 
267,278

 
402,352

Total liabilities and stockholders’ equity
 
$
2,146,682

 
$
2,194,986

The accompanying notes are an integral part of these statements.


5


EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
 
 
 
For the Nine Months Ended
 
 
December 31, 2012
 
December 31, 2011
Cash Flows From Operating Activities:
 
 
 
 
Net (loss) income
 
$
(135,516
)
 
$
58,477

Adjustments to reconcile net (loss) income to net cash used in operating activities
 
 
 
 
Depreciation and amortization
 
58,873

 
63,990

Net loss on asset sales / impairments
 
9,534

 
1,618

Deferred income taxes
 
93,523

 
(78,340
)
Provision for doubtful accounts
 
948

 
986

Non-cash stock compensation
 
3,916

 
3,684

Amortization of deferred financing costs
 
3,202

 
3,233

Currency remeasurement (gain) loss
 
(1,616
)
 
12,949

Changes in assets and liabilities
 
 
 
 
Receivables
 
(44,221
)
 
(10,804
)
Inventories
 
(70,861
)
 
(32,200
)
Other current assets
 
(6,619
)
 
1,219

Payables
 
52,814

 
(24,326
)
Accrued expenses
 
9,645

 
(886
)
Other noncurrent liabilities
 
(10,214
)
 
(11,447
)
Other, net
 
(1,582
)
 
10,159

Net cash used in operating activities
 
(38,174
)
 
(1,688
)
Cash Flows From Investing Activities:
 
 
 
 
Capital expenditures
 
(74,838
)
 
(71,931
)
Proceeds from asset sales
 
4,359

 
563

Net cash used in investing activities
 
(70,479
)
 
(71,368
)
Cash Flows From Financing Activities:
 
 
 
 
Increase in short-term borrowings
 
41,137

 
13,722

(Decrease) increase in other debt
 
(6,810
)
 
5,439

Other
 
(779
)
 
(486
)
Net cash provided by financing activities
 
33,548

 
18,675

Effect of exchange rate changes on cash and cash equivalents
 
(248
)
 
(4,314
)
Net decrease in cash and cash equivalents
 
(75,353
)
 
(58,695
)
Cash and cash equivalents, beginning of period
 
155,368

 
161,363

Cash and cash equivalents, end of period
 
$
80,015

 
$
102,668

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information:
 
 
 
 
Cash paid during the period
 
 
 
 
Interest
 
$
35,423

 
$
37,357

Income taxes (net of refunds)
 
$
7,350

 
$
21,698

The accompanying notes are an integral part of these statements.


6


EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2012
(Unaudited)

(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 U.S. generally accepted accounting principles (“GAAP”), or those disclosures normally made in the Company’s annual report on Form 10-K. Accordingly, the reader of this Form 10-Q should refer to the Company’s 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 Company’s customary accounting practices. In the Company’s 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 income (loss), 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:
 
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Noncontrolling
Interests
 
Total
Stockholders’
Equity
 
 
(In thousands)
Balance at April 1, 2012
 
$
783

 
$
1,133,417

 
$
(715,913
)
 
$
(16,493
)
 
$
558

 
$
402,352

Net (loss) income
 

 

 
(135,816
)
 

 
300

 
(135,516
)
Defined benefit plans, net of tax of ($30)
 

 

 

 
96

 

 
96

Translation adjustment
 

 

 

 
(3,094
)
 
12

 
(3,082
)
Net recognition of unrealized gain on derivatives, net of tax of ($114)
 

 

 

 
291

 

 
291

Common stock issuance/other
 
10

 
(10
)
 

 

 

 

Stock compensation (equity-based)
 

 
3,137

 

 

 

 
3,137

Balance at December 31, 2012
 
$
793

 
$
1,136,544

 
$
(851,729
)
 
$
(19,200
)
 
$
870

 
$
267,278


(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 derivative’s 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.

7



The following tables set forth information on the presentation of the derivative instruments in the Company’s Condensed Consolidated Financial Statements:
 
 

 

Fair Value As of
 

Balance Sheet Location

December 31, 2012

March 31, 2012
 

 

(In thousands)
Asset Derivatives:

 




Foreign exchange forwards

Current assets

$


$
104

Commodity swaps / forwards

Current assets

563


320

Interest rate swaps

Current assets



1,755

Interest rate swaps

Noncurrent assets



2,323

Liability Derivatives:






Foreign exchange forwards

Current liabilities

1


5,725

Commodity swaps / forwards

Current liabilities



697

 
 

 

For the Three Months Ended

For the Nine Months Ended
 

Statement of Operations Location

December 31, 2012
 
December 31, 2011

December 31, 2012
 
December 31, 2011
 

 

(In thousands)
Foreign Exchange Forwards










Loss (gain)

Other (income) expense, net

$
163


$
(3,124
)

$
(2,678
)

$
(9,287
)
Commodity Swaps / Forwards










(Gain) loss

Cost of sales

(962
)

2,998


1,580


3,808

Interest Rate Swaps










Gain

Interest expense, net

(142
)

(1,028
)

(1,912
)

(1,546
)
At December 31, 2012, an approximately $0.2 million gain is expected to be reclassified from accumulated other comprehensive income ("OCI") to cost of sales during the remainder of fiscal 2013.

(4) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of:
 


Goodwill
(not subject to
amortization)

Trademarks
and
Tradenames
(not subject to
amortization)

Trademarks
and
Tradenames

Customer
Relationships

Technology

Total
 

(In thousands)
As of December 31, 2012

 
 
 








Gross amount

$
1,001


$
61,232


$
13,915


$
107,671


$
30,883


$
214,702

Accumulated amortization





(9,524
)

(38,241
)

(16,154
)

(63,919
)
Net

$
1,001


$
61,232


$
4,391


$
69,430


$
14,729


$
150,783

As of March 31, 2012












Gross amount

$
4,000


$
61,470


$
13,971


$
115,520


$
30,958


$
225,919

Accumulated amortization





(8,734
)

(37,936
)

(15,210
)

(61,880
)
Net

$
4,000


$
61,470


$
5,237


$
77,584


$
15,748


$
164,039


8


Amortization of intangible assets for the first nine months of fiscal 2013 and 2012 was $5.3 million and $6.5 million, respectively. Excluding the impact of any future acquisitions, the Company anticipates annual amortization of intangible assets for each of the next five years will be approximately $7.0 million. Intangible assets have been recorded at the legal entity level and are subject to foreign currency fluctuation.

(5) INVENTORIES
Inventories, valued using the first-in, first-out (“FIFO”) method, consist of:
 


December 31, 2012
 
March 31, 2012
 

(In thousands)
Raw materials

$
104,607

 
$
85,116

Work-in-process

135,971

 
123,723

Finished goods

307,881

 
270,628



$
548,459

 
$
479,467


(6) OTHER NONCURRENT ASSETS
Other noncurrent assets consist of the following:
 


December 31, 2012

March 31, 2012
 

(In thousands)
Deposits (a)

$
4,271


$
4,566

Deferred financing costs

17,143


20,326

Investment in affiliates

1,892


1,963

Capitalized software, net

2,553


2,003

Loan to affiliate

1,005


1,005

Retirement plans

13,005


7,474

Financial instruments



2,323

Other

6,633


5,857



$
46,502


$
45,517

 
(a)
Deposits principally represent amounts held by beneficiaries as cash collateral for the Company’s contingent obligations with respect to certain environmental matters, workers compensation insurance, and operating lease commitments.

(7) DEBT
At December 31, 2012 and March 31, 2012, short-term borrowings of $61.1 million and $20.0 million, respectively, consisted of borrowings under various operating lines of credit, the Company’s senior secured asset-backed revolving credit facility (the “ABL facility”), and working capital facilities maintained by certain of the Company’s non-U.S. subsidiaries. Certain of these borrowings are collateralized by receivables, inventories and/or property. Excluding the ABL facility, these borrowing facilities are typically for one-year renewable terms and generally bear interest at current local market rates plus up to one percent per annum. The weighted average interest rate on short-term borrowings was approximately 5.5% and 5.4% at December 31, 2012 and March 31, 2012, respectively.
Total long-term debt consists of:
 

9




December 31, 2012

March 31, 2012
 

(In thousands)
8 5/8% Senior Secured Notes due 2018

$
675,000


$
675,000

Floating Rate Convertible Senior Subordinated Notes due 2013 (a)

55,750


60,000

Other, including capital lease obligations and other loans at interest rates generally ranging up to 6.2% due in installments through 2018

15,686


18,363



746,436


753,363

Fair value adjustments on hedged debt

2,930


3,354

Total

749,366


756,717

Less-current maturities (a)

59,151


3,787

Total long-term debt

$
690,215


$
752,930

Total debt, including short-term borrowings, at December 31, 2012 and March 31, 2012 was $810.4 million and $776.7 million, respectively.
 
(a)
Included in current maturities at December 31, 2012 are the Company’s floating rate Convertible Senior Subordinated Notes, which mature on September 18, 2013.

(8) INTEREST EXPENSE, NET
Interest income is included in interest expense, net. Such interest income amounted to $0.2 million for both the three months ended December 31, 2012 and 2011 and $0.8 million and $1.1 million for the nine months ended December 31, 2012 and 2011, respectively.

(9) OTHER (INCOME) EXPENSE, NET

Other (income) expense net consist of:
 
 

For the Three Months Ended

For the Nine Months Ended
 

December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 

(In thousands)
Currency remeasurement (gain) loss (a)

$
(1,868
)

$
3,566


$
(1,616
)

$
12,949

Reorganization items (b)

267


204


1,068


1,069

Gain on interest rate swap



(208
)



(4,503
)
Other

(400
)

(159
)

(355
)

(242
)


$
(2,001
)

$
3,403


$
(903
)

$
9,273

 
(a)
The currency remeasurement loss (gain) relates primarily to intercompany loans to foreign subsidiaries denominated in Euros, the Australian dollar, Belarusian ruble, and various other foreign currencies.
(b)
Reorganization items primarily consist of professional fees and claim settlements related to the Company’s prior bankruptcy filing from which the successor Company emerged in May 2004.

















10


(10) EMPLOYEE BENEFITS
The components of the Company’s net periodic pension and other post-retirement benefit costs are as follows:
 
 

Pension Benefits
 

For the Three Months Ended

For the Nine Months Ended
 

December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 

(In thousands)
Components of net periodic benefit cost:








Service cost

$
603


$
618


$
1,776


$
1,847

Interest cost

7,423


8,182


22,112


24,509

Expected return on plan assets

(7,252
)

(7,727
)

(21,621
)

(23,139
)
Amortization of:








Prior service cost

15


21


46


64

Actuarial loss

504


168


1,508


503

Net periodic benefit cost

$
1,293


$
1,262


$
3,821


$
3,784

 
 

Other Post-Retirement Benefits
 

For the Three Months Ended

For the Nine Months Ended
 

December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 

(In thousands)
Components of net periodic benefit cost:








Service cost

$
175


$
126


$
522


$
381

Interest cost

262


278


782


837

Amortization of:








Prior service cost

(122
)

(122
)

(367
)

(367
)
Actuarial loss

161


123


481


371

Net periodic benefit cost

$
476


$
405


$
1,418


$
1,222

The fiscal 2013 pension plan contributions are estimated to be $25.4 million and other post-retirement contributions are $1.9 million, which the Company has funded $21.5 million of during the nine months ended December 31, 2012.

(11) COMMITMENTS AND CONTINGENCIES
Claims Reconciliation
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 Company’s 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

11


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 Company’s 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 may 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 the Company’s assessment of remaining claims and the disputed claims reserve, the Company believes that the existing share reserve is sufficient to satisfy the remaining disputed claims. Accordingly, the Company does not expect to issue additional shares in excess of the existing reserve to resolve all of the remaining disputed claims.
Based on information available as of January 28, 2013, approximately 83.6% 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 for the District of Delaware 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 Company’s 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 Circuit’s mandate, the Bankruptcy Court vacated its prior orders and denied the Company’s 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 certain Bankruptcy Code provisions. EnerSys filed a motion to dismiss that complaint, which the Bankruptcy Court granted on January 8, 2013.
Environmental Matters
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”).
On December 7, 2012, the Company entered into an Agreed Order with the Texas Commission on Environmental Quality (“TCEQ") that includes a penalty of $0.6 million to resolve a notice of enforcement issued by TCEQ for alleged air and waste rule violations at the Company's now closed Frisco, Texas recycling facility.
Effective December 17, 2012, the Company and the United States Environmental Protection Agency (“EPA”) entered into a consent agreement that includes a penalty of $0.2 million to resolve alleged air and waste rule violations at the Frisco, Texas recycling facility.
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 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.

12


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 Company’s 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 Company’s financial condition, cash flows, or results of operations.
The Company has established liabilities for environmental remediation costs where such costs are probable and reasonably estimable and believes that such liabilities are adequate. As of December 31, 2012 and March 31, 2012, the amount of such liabilities on the Company’s Condensed Consolidated Balance Sheet was approximately $25.6 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 Company’s environmental liabilities. Therefore, changes in estimates or future findings could have a material adverse effect on the Company’s financial condition, cash flows, or results of operations.
The sites that currently have the largest reserves include the following:
Tampa, Florida
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 $13.0 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.
Columbus, Georgia
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 $6.0 million to $8.5 million.
Guarantees
At December 31, 2012, the Company had outstanding letters of credit with a face value of $48.3 million and surety bonds with a face value of $42.8 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 December 31, 2012, pursuant to the terms of the agreement, totaled approximately $40.6 million.
Certain of the Company’s 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. At December 31, 2012, bank guarantees with an aggregate face value of $21.2 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

13


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 Company’s sales returns and allowances liability (in thousands) are as follows:
 


Balance at March 31, 2012
$
36,811

 
 
Accrual for sales returns and allowances
28,119

Settlements made (in cash or credit) and currency translation
(29,270
)
 
 
Balance at December 31, 2012
$
35,660

 
 

(12) INCOME TAXES
The effective tax rate for the first nine months of fiscal year 2013 and fiscal year 2012 is (274.6%) and (7,283.5%) respectively. The effective tax rate for the first nine months of fiscal 2013 included the recognition of taxes on income and losses in almost all of the Company's jurisdictions except for the United States, Spain and the United Kingdom, on which full valuation allowances are recorded. The effective tax rate for the first nine months of fiscal 2013 was primarily affected by the discrete item of establishing a valuation allowance in the United States of $86.7 million 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.
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 Company's 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 jurisdictions. The Company is no longer subject to U.S. federal income tax examinations by tax authorities for years ended before March 31, 2010.
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 Company's unrecognized tax benefits decreased from $41.5 million to $41.0 million during the first nine months of fiscal 2013 due primarily to the effects of foreign currency translation less unrecognized tax benefits released during the period due to expiration of statute of limitations and settlements with taxing jurisdictions. The amount, if recognized, that would affect the Company's effective tax rate at December 31, 2012 is $36.0 million.
The Company classifies interest and penalties on uncertain tax benefits as income tax expense. At December 31, 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 Company's forecasted annual effective tax rate by $0.3 million.

(13) RESTRUCTURING AND IMPAIRMENTS, NET
During the first nine 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 and impairment expense are as follows:
 

14


 
 
Restructuring Reserve
 
 
 
 
 
 
Severance Costs
 
Closure Costs
 
Total Restructuring
 
Asset Sale and Impairments loss
 
Total Restructuring / Impairments, net
 
 
(In thousands)
Balance at March 31, 2012
 
$
10,401

 
$
3,347

 
$
13,748

 
 
 
 
Expenses
 
5,427

 
1,439

 
6,866

 
$
9,534

 
$
16,400

Payments and Currency Translation
 
(8,814
)
 
(2,380
)
 
(11,194
)
 
 
 
 
Balance at December 31, 2012
 
$
7,014

 
$
2,406

 
$
9,420

 
 
 
 
Remaining restructuring expenditures principally represent (i) severance and related benefits payable per employment 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 impairments, by segment, are as follows:
 
 
 
For the Three Months Ended
 
For the Nine Months Ended
 
 
December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 
 
(In thousands)
Transportation Americas
 
$
4,025

 
$
1,325

 
$
4,165

 
$
1,949

Transportation Europe & ROW
 
7,713

 
438

 
7,868

 
(16
)
Industrial Energy Americas
 
27

 
209

 
436

 
555

Industrial Energy Europe & ROW
 
3,927

 
331

 
3,890

 
1,014

Unallocated corporate
 
84

 
(158
)
 
41

 
220

TOTAL
 
$
15,776

 
$
2,145

 
$
16,400

 
$
3,722


(14) (LOSS) EARNINGS PER SHARE
The Company computes basic (loss) earnings per share by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted (loss) earnings per share is computed by dividing net (loss) earnings, after adding back the after-tax amount of interest recognized in the period associated with the Company’s Floating Rate Convertible Senior Subordinated Notes, by diluted weighted average shares outstanding. For the three and nine month periods ended December 31, 2012 and 2011, market rates were below the level at which interest payments for these notes are required.

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 Company’s plan of reorganization have been included as outstanding common shares for purposes of calculating basic (loss) earnings per share.

Basic and diluted (loss) earnings per share for the three and nine month periods ended December 31, 2012 and 2011 are summarized as follows:

15


 
For the Three Months Ended
 
For the Nine Months Ended
 
December 31,
 
December 31,
 
December 31,
 
December 31,
 
2012
 
2011
 
2012
 
2011
 
(In thousands, except per share amounts)
Net (loss) income attributable to
 
 
 
 
 
 
 
   Exide Technologies
$
(15,443
)
 
$
68,215

 
$
(135,816
)
 
$
59,435

 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
77,344

 
77,738

 
77,234

 
77,628

Effect of dilutive securities:

 

 

 

   Floating Rate Convertible

 

 

 

        Senior Subordinated Notes

 
3,697

 

 
3,697

   Employee stock options

 

 

 
380

   Employee restricted stock

 

 

 

        awards (non-vested)

 
175

 

 
493

 

 
3,872

 

 
4,570

Diluted weighted average

 

 

 

   shares outstanding
77,344

 
81,610

 
77,234

 
82,198

 

 

 

 

Basic (loss) earnings per share
$
(0.20
)
 
$
0.88

 
$
(1.76
)
 
$
0.77

 

 

 

 

Diluted (loss) earnings per share
$
(0.20
)
 
$
0.84

 
$
(1.76
)
 
$
0.72


Due to a net loss for the three and nine month periods ended December 31, 2012, certain potentially dilutive shares were excluded from the diluted loss per share calculation because their effect would be antidilutive:
 



December 31, 2012
 

 
(In thousands)
Shares associated with convertible debt (assumed conversion)


3,697

Employee stock options


2,872

Restricted stock awards (non-vested)


1,839

Total shares excluded


8,408


For the three and nine months ended December 31, 2011, approximately 3.0 million stock options were excluded from the diluted earnings per share calculation because their exercise prices were greater than the average market price of the related common stock for the periods, and their inclusion would be antidilutive. The remaining options, if any, were included in the treasury stock method calculation, and the resulting incremental shares were included in the calculation of diluted earnings per share.

(15) FAIR VALUE MEASUREMENTS
The Company uses available market information and other methodologies believed to be appropriate 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 Company’s 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 Company’s long-term obligations and other financial instruments are as follows:
 

16


 

December 31, 2012

March 31, 2012
 

Carrying Value

Estimated Fair
Value

Carrying Value

Estimated Fair
Value
 

(In thousands)
(Liability) Asset:








Senior Secured Notes due 2018

$
(675,000
)

$
(577,125
)

$
(675,000
)

$
(562,781
)
Convertible Senior Subordinated Notes due 2013

(55,750
)

(52,126
)

(60,000
)

(51,000
)
Interest Rate Swaps (a)





4,078


4,078

Foreign Currency Forwards (a)








Asset





104


104

Liability

(1
)

(1
)

(5,725
)

(5,725
)
Commodity Swaps (a)








Asset

563


563


320


320

Liability





(697
)

(697
)
 
(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:
 
Level 1
Observable inputs such as quoted prices in active markets for identical assets and liabilities;
 
 
 
 
 
 
Level 2
Inputs other than quoted prices in active markets that are observable either directly or indirectly; and
 
 
 
 
 
 
Level 3
Inputs from valuation techniques in which one or more key value drivers are not observable, and must be based on the reporting entity’s own assumptions.

The following table represents the Company’s financial instruments that are measured at fair value on a recurring basis, and the basis for that measurement:
 


Total
Fair Value
Measurement

Quoted Price in
Active Markets
for
Identical Assets
(Level 1)

Significant
Other
Observable
Inputs
(Level 2)

Significant
Unobservable
Inputs
(Level 3)
 

(In thousands)
December 31, 2012:








Assets:








Foreign exchange forwards

$


$


$


$

Commodity Swaps

563




563



Liabilities:








Foreign exchange forwards

1




1



March 31, 2012:








Assets:








Interest rate swaps

$
4,078


$


$
4,078


$

Foreign currency forwards

104




104



Commodity Swaps

320




320



Liabilities:








Foreign exchange forwards

5,725




5,725



Commodity Swaps

697




697



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

17


underlying markets in which those derivatives are traded. For additional discussion of the Company’s 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 Rest of World (“ROW”), Industrial Energy Americas and Industrial Energy Europe and ROW. The Company is a global producer and recycler of lead-acid batteries. The Company’s 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, hospitals, air traffic control, security systems, utility, railway and military applications.
The Company’s four reportable segments are determined based upon the nature of the markets served and the geographic regions in which they operate. The Company’s chief operating decision-maker monitors and manages the financial performance of these four business groups. Costs of certain shared services and other corporate costs are not allocated or charged to the business groups.

Selected financial information concerning the Company’s reportable segments is as follows:
 

18


 

For the Three Months Ended
 
For the Nine Months Ended
 

December 31, 2012
 
December 31, 2011
 
December 31, 2012
 
December 31, 2011
 

(In thousands)
Net sales








Transportation Americas

$
231,183


$
234,487


$
659,362


$
676,521

Transportation Europe & ROW

282,653


269,104


687,916


743,802

Industrial Energy Americas

85,533


75,973


271,084


255,512

Industrial Energy Europe & ROW

205,510


204,487


591,647


626,264



$
804,879


$
784,051


$
2,210,009


$
2,302,099

Operating income (loss)

 

 

 

 
Transportation Americas

$
2,864


$
3,021


$
(12,148
)

$
(716
)
Transportation Europe & ROW

8,611


19,451


17,609


38,300

Industrial Energy Americas

7,703


11,578


21,220


32,486

Industrial Energy Europe & ROW

9,039


5,777


23,827


19,442

Unallocated corporate

(7,715
)

(9,498
)

(21,492
)

(22,796
)


20,502


30,329


29,016


66,716

Less: restructuring and impairments, net (a)

15,776


2,145


16,400


3,722

Total operating income

$
4,726


$
28,184


$
12,616


$
62,994

Depreciation and Amortization

 

 

 

 
Transportation Americas

$
7,007


$
7,120


$
20,930


$
20,859

Transportation Europe & ROW

4,680


4,471


13,979


14,570

Industrial Energy Americas

2,799


2,830


8,070


8,902

Industrial Energy Europe & ROW

3,886


5,160


12,674


15,887

Unallocated corporate

1,060


1,124


3,220


3,772



$
19,432


$
20,705


$
58,873


$
63,990

Capital expenditures

 

 

 

 
Transportation Americas

$
7,873


$
8,449


$
27,894


$
26,915

Transportation Europe & ROW

11,487


8,106


27,442


23,165

Industrial Energy Americas

2,287


1,238


8,275


5,347

Industrial Energy Europe & ROW

3,301


4,540


7,941


9,807

Unallocated corporate

268


6,405


3,286


6,697



$
25,216


$
28,738


$
74,838


$
71,931

 
(a)
See Note 13 for detail by segment.

19


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company’s consolidated results of operations 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 Company’s 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 II included in this Report on Form 10-Q, as well as the risk factors included in Item 1A. to Part I of the Company’s 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.
Executive Overview
The Company is a global producer and recycler of lead-acid batteries. The Company’s 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 including Stop & Start, micro-hybrid flooded (“MHF”) absorbed glass-mat ("AGM"), 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 Company’s four reportable segments are determined based upon the nature of the markets served and the geographic regions in which they operate. The Company’s chief operating decision-maker monitors and manages the financial performance of these four business groups.
Factors Which Affect the Company’s Financial Performance
Lead and Other Raw Materials. Lead represented approximately 46.8% of the Company’s cost of sales for the nine months ended December 31, 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 Company’s products to be reduced and the Company’s net sales and gross margins to decline. The average price of lead as quoted on the London Metals Exchange (“LME”) increased 11.0% from $1,983 per metric ton for the three months ended December 31, 2011 to $2,203 per metric ton for the three months ended December 31, 2012. For the nine month period, the average price of LME lead decreased 12.1% from $2,334 per metric ton for the nine months ended December 31, 2011 to $2,052 per metric ton for the nine months ended December 31, 2012. At January 28, 2013, the quoted price on the LME was $2,367 per metric ton. Due to a variety of factors, including the market for spent batteries as an input cost for the Company's lead recycling operations, the price of lead on the LME does not always reflect the price of lead for the Company.
In the Americas, the Company has historically obtained the vast majority of its lead requirements from five Company-owned and operated secondary lead recycling plants. In fiscal 2013, the Company announced the closure of one of these facilities and the idling of another. The Company's recycling facilities reclaim lead by recycling spent lead-acid batteries, which are obtained for recycling from the Company’s customers and outside spent-battery collectors. Historically, recycling in the Americas has helped the Company more effectively control the cost of its principal raw material when compared to purchasing lead at prevailing market prices on the LME. Similar to the fluctuation in lead prices, however, the cost of spent batteries has also fluctuated. For example, the average market cost of purchased spent batteries increased approximately 21.1% for the nine months ended December 31, 2012 versus the prior year period while lead prices on the LME have declined during the same period. The combination of higher spent battery costs and lower lead prices on the LME has put significant pressure on the Company’s margins. In response, the Company takes pricing actions as allowed by the market and is attempting to secure higher captive spent battery return rates to help mitigate the risks associated with this price volatility.

20


In Europe, the Company’s lead requirements are mainly fulfilled by third-party suppliers. Because of the Company’s 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 OE customers. The Company currently obtains a small portion of its lead requirements from recycling in its European facilities. Similar to the situation in the Americas, spent battery costs as a percent of LME have been increasing in Europe. We expect rising spent battery costs to increase the cost of acquiring lead from metal suppliers over and above lead prices on the LME.
The Company expects that continued volatility in lead and other commodity costs, to affect all business segments, and if the Company is unable to pass higher material costs resulting from this volatility to its customers, the Company’s financial performance will be adversely impacted. The implementation of selective pricing actions and price escalators generally lag the rise in market prices of lead and other commodities.
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 in its battery assembly facilities, 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 Company’s ability to pass along increased prices to keep pace with rising production costs. The effects of this competition have been exacerbated by excess manufacturing capacity in certain of the Company’s markets. In addition, fluctuating lead prices and low-priced Asian imports have also impacted certain of the Company’s markets.
Exchange Rates. The Company is exposed to foreign currency risk in most European countries, principally from fluctuations in the Euro. For the first nine months of fiscal 2013, the exchange rate of the Euro to the U.S. Dollar decreased 8.6% on average to $1.28 compared to $1.40 for first nine months of fiscal 2012. At December 31, 2012, the Euro was $1.32 or 1.1% lower as compared to $1.33 at March 31, 2012. Fluctuations in foreign currencies impacted the Company’s results for the periods presented herein. For the nine months ended December 31, 2012, approximately 57.9% of the Company’s net sales were generated in Europe and ROW. Further, approximately 63.0% of the Company’s aggregate accounts receivable and inventories as of December 31, 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 United Kingdom, 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 may impact the Company’s financial results. In addition, capital spending by major customers in our network power channels over the last several years continues to be below historic levels.
Seasonality and Weather. The Company sells a disproportionate share of its transportation aftermarket batteries during the fall and early winter (the Company’s 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 Company’s working capital requirements, particularly during the second and third fiscal quarters, 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 Company’s 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 Company’s 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 Company’s manufacturing and distribution costs are fixed.
Third quarter of Fiscal 2013 Highlights and Outlook
The Company ceased operations at its Frisco, Texas recycling facility in December 2012 and recently announced the idling of secondary lead recycling operations at its Reading, Pennsylvania facility, expected to be effective no later than March 31, 2013. The Company anticipates that its remaining three U.S. operating recycling facilities will continue to provide a

21


significant portion of the lead requirements for the Americas regions. The Company has established arrangements with third party recyclers in North America to provide tolling for the region’s remaining lead requirements. Limited additional purchases of finished lead from third party suppliers may also be required to satisfy the region’s requirement. Successful idling of the secondary lead recycling operations at the Reading, Pennsylvania facility will also allow the Company to avoid capital spending of up to as $30.0 million over the next 15 to 18 months.
The key elements of the Company’s underlying business plans and continued strategies are:
(i) Successful execution of the closure of the Company’s Bristol, Tennessee transportation battery facility, including transitioning existing production to two of the Company’s other facilities.
(ii) Successful closure of the Company’s Frisco, Texas facility and idling of secondary lead recycling operations at the Reading, Pennsylvania facility, and the sale of a portion of the Frisco location for anticipated net proceeds of approximately $37.0 million.
(iii) Actions designed to improve the Company’s liquidity and operating cash flow include 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 Company’s restructuring initiatives, and closely managing capital expenditures.
(iv) Continued factory and distribution productivity improvements through the Company’s established Lean/Six Sigma program, as well as the Value Analysis Value Engineering (“VAVE”) and Take Charge! initiatives.
(v) An enhanced focus on growth of the Industrial Americas business through increased new product offerings (Tubular Motive Power, High Frequency Chargers, etc.), increases in capacity, and a larger and more distributed sales and service team tied to the Transportation branch network.
(vi) Continued investment in production capacity to meet evolving needs for enhanced batteries (AGM and MHF) required for the increasing numbers of Stop & Start and micro-hybrid vehicles.

(vii) Continued research and development and engineering investments designed to develop enhanced lead-acid products as well as products utilizing alternative chemistries.

Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations is based upon the Company’s Condensed Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). 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 differ materially from these estimates under different assumptions or conditions.
The Company believes that the critical accounting policies and estimates disclosed in the Company’s 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 Company’s annual report and the discussion below for further information.
Deferred Taxes
The Company records valuation allowances to reduce its deferred tax assets to amounts that are more likely than not to be realized. In assessing the need for a valuation allowance, the Company considers both positive and negative evidence related to the likelihood of realization of the deferred tax assets. The weight given to the positive and negative evidence is commensurate with the extent to which the evidence may be objectively verified. As such, it is generally difficult for positive evidence regarding projected future taxable income exclusive of reversing taxable temporary differences to outweigh objective negative evidence of recent financial reporting losses.
This assessment, which is completed on a taxing jurisdiction basis, takes into account a number of types of evidence, including the following:
Nature, frequency, and severity of current and cumulative financial reporting losses. A pattern of objectively-measured recent financial reporting losses is heavily weighted as a source of negative evidence. Three year cumulative pre-tax losses generally are considered to be significant negative evidence regarding future profitability. Also, the strength and trend of the Company's earnings, as well as other relevant factors, are considered. In certain circumstances, historical information may not be as relevant due to changes in the business operations;

22


Sources of future taxable income. Future reversals of existing temporary differences are heavily-weighted sources of objectively verifiable positive evidence. Projections of future taxable income exclusive of reversing temporary differences and carryforwards are a source of positive evidence only when the projections are combined with a history of recent profits and can be reasonably estimated. Otherwise, these projections are considered inherently subjective and generally will not be sufficient to overcome negative evidence that includes relevant cumulative losses in recent years, particularly if the projected future taxable income is dependent on an anticipated turnaround to profitability that has not yet been achieved. In such cases, we generally give these projections of future taxable income limited weight for the purposes of our valuation allowance assessment pursuant to GAAP;
Taxable income in prior carryback year(s) if carryback is permitted under the tax law would be considered significant positive evidence, depending on availability, when evaluating current period losses ; and
Tax planning strategies. If necessary and available, tax planning strategies would be implemented to accelerate taxable amounts to utilize expiring carry forwards. These strategies would be a source of additional positive evidence and, depending on their nature, could be heavily weighted.
If the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the Company's net recorded amount, an adjustment to the net deferred tax asset would increase income in the period that such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the net deferred tax asset would decrease income in the period such determination was made. The Company regularly evaluates the need for valuation allowances against its deferred tax assets.
In Fiscal 2013, our U.S. operations had moved to a position of cumulative loss for the most recent three-year period. The Company considered the items below and concluded that the future tax benefits were not more likely than not to be realized:
3-year cumulative pretax loss;
Limited carry forward period for the U.S. net operating losses; and
Business plan projections for the U.S. showed continued losses.
Accordingly, in FY 2013, the Company established a full valuation allowance against net deferred tax assets for entities in the U.S. resulting in a $86.7 million expense in our provision for income taxes.
In Fiscal 2012, our French operations had returned to a position of cumulative profits for the most recent three-year period. The Company considered the items below and concluded that the future tax benefits were more likely than not to be realized:
3-year cumulative pretax income (excluding one-time Auxerre plant closure related restructuring costs);
Unlimited carry forward period for the French net operating losses;
Favorable financial impact resulting from the closure of the Auxerre battery plant, which reduced fixed cost and better leveraged capacity utilization; and
Business plan projections for France showed continued profitability.
Accordingly, in FY 2012, the Company released all of the valuation allowance against net deferred tax assets for entities in France resulting in a $73.6 million benefit in our provision for income taxes.
Results of Operations
Three months ended December 31, 2012 compared with three months ended December 31, 2011
Net Sales
Net sales were $804.9 million for the third quarter of fiscal 2013 versus $784.1 million in the third quarter of fiscal 2012. Foreign currency translation (primarily the weakening of the Euro against the U.S. dollar) unfavorably impacted net sales in the third quarter of fiscal 2013 by approximately $10.2 million. Excluding foreign currency translation impact, net sales increased by approximately $31.1 million, or 4.0%, primarily due to an increase in unit sales in some of the Company's markets, partially offset by an estimated $16.3 million unfavorable lead-related pricing impact.
Net sales by business segment were as follows:
 

23


 
 
 
 
 
 
FAVORABLE / (UNFAVORABLE)
 
 
For the Three Months Ended
 
TOTAL
 
Currency
Related
 
Non-Currency
Related
 
 
December 31, 2012
 
December 31, 2011
 
 
 
(In thousands)
Transportation Americas
 
$
231,183

 
$
234,487

 
$
(3,304
)
 
$
1,354

 
$
(4,658
)
Transportation Europe & ROW
 
282,653

 
269,104

 
13,549

 
(6,960
)
 
20,509

Industrial Energy Americas
 
85,533

 
75,973

 
9,560

 
194

 
9,366

Industrial Energy Europe & ROW
 
205,510

 
204,487

 
1,023

 
(4,810
)
 
5,833

TOTAL
 
$
804,879

 
$
784,051

 
$
20,828

 
$
(10,222
)
 
$
31,050

Transportation Americas net sales, excluding foreign currency translation impact, decreased 2.0% primarily due to a 1.5% lower units sales to OEMs, partially offset by $3.4 million of favorable aftermarket pricing. Third-party lead sales for the third quarter of fiscal 2013 were approximately $2.3 million lower than such third-party sales in the third quarter of fiscal 2012 as the Company continued to reduce capacity in this volatile business, as evidenced by the previously announced shutdown of the Frisco, Texas recycling facility and scheduled idling of the Reading, Pennsylvania recycling facility.
Transportation Europe and ROW net sales, excluding foreign currency translation, increased 7.6% mainly due to 21.5% higher unit sales in the aftermarket channel, partially offset by $7.9 million of unfavorable lead-related pricing actions.
Industrial Energy Americas net sales, excluding the foreign currency translation impact, increased 12.3% primarily due to 27.4% higher unit sales in the Network Power market as well as higher Tubular product sales, partially offset by $2.9 million unfavorable lead-related pricing actions. Anticipated base price increases did not materialize as competitive actions were required to protect business.
Industrial Energy Europe and ROW net sales, excluding foreign currency translation impact, increased 2.9% primarily due to a 2.1% increase in Motive Power unit sales and a 10.0% increase in Network Power unit sales, partially offset by $4.7 million of unfavorable lead-related pricing actions.

Gross Profit
Gross profit was $120.1 million in the third quarter of fiscal 2013 versus $126.5 million in the third quarter of fiscal 2012. Gross margin decreased to 14.9% from 16.1% in the third quarter of fiscal 2012. Higher spent battery acquisition costs combined with lower third-party lead margins in the Americas impacted results by approximately $11.3 million. See further segment discussion below under the caption “Operating Income".
Operating Expenses
 
i.
Selling and administrative expenses increased $3.4 million, to $99.6 million in the third quarter of fiscal 2013 from $96.2 million in fiscal 2012. Excluding the favorable foreign currency translation impact of $0.7 million, the expenses increased $4.1 million, primarily due to higher salaried related costs including sales commissions. Included in selling and administrative expenses were general and administrative expenses of $41.7 million in the third quarter of fiscal 2013 and $41.3 million in the third quarter of fiscal 2012.
 
ii.
Restructuring and impairment expenses increased by $13.6 million, to $15.8 million in the third quarter of fiscal 2013 from $2.1 million in the third quarter of fiscal 2012, and included non-cash asset impairment charges of $10.6 million and $1.2 million in the third quarter of fiscal 2013 and 2012, respectively. During the third quarter of fiscal 2013, restructuring charges of $5.2 million related to the closure of the Bristol, Tennessee flooded battery plant, the idling of the Reading, Pennsylvania lead recycling operations, and the closure of GNB India. Impairment charges of $10.6 million are primarily related to the closure of GNB India, the sale of the transportation business in Australia, and other asset impairments.




Operating Income
Operating income was $4.7 million in the third quarter of fiscal 2013 versus $28.2 million in the third quarter of fiscal 2012. See segments discussion below.
Operating income (loss) by segment was as follows:
 

24


 
 
For the Three Months Ended
 
 
 
 
 
 
 
 
December 31, 2012
 
December 31, 2011
 
FAVORABLE / (UNFAVORABLE)
 
 
TOTAL
 
Percent of
Net Sales
 
TOTAL
 
Percent of
Net Sales
 
TOTAL
 
Currency
Related
 
Non-Currency
Related
 
 
(In thousands)
Transportation Americas
 
$
2,864

 
1.2
%
 
$
3,021

 
1.3
%
 
$
(157
)
 
$
27

 
$
(184
)
Transportation Europe & ROW
 
8,611

 
3.0
%
 
19,451

 
7.2
%
 
(10,840
)
 
(152
)
 
(10,688
)
Industrial Energy Americas
 
7,703

 
9.0
%
 
11,578

 
15.2
%
 
(3,875
)
 
(7
)
 
(3,868
)
Industrial Energy Europe & ROW
 
9,039

 
4.4
%
 
5,777

 
2.8
%
 
3,262

 
116

 
3,146

Unallocated corporate
 
(7,715
)
 
n/a

 
(9,498
)
 
n/a

 
1,783

 
(15
)
 
1,798

 
 
20,502

 
2.5
%
 
30,329

 
3.9
%
 
(9,827
)
 
(31
)
 
(9,796
)
Less: Restructuring and impairments, net
 
15,776

 
n/a

 
2,145

 
n/a

 
(13,631
)
 
170

 
(13,801
)
Total operating income
 
$
4,726

 
0.6
%
 
$
28,184

 
3.6
%
 
$
(23,458
)
 
$
139

 
$
(23,597
)
Gross margins by segment are shown below:
 
 
 
For the Three Months Ended
 
 
December 31, 2012
 
December 31, 2011
Transportation Americas
 
15.2
%
 
14.1
%
Transportation Europe & ROW
 
11.8
%
 
15.9
%
Industrial Energy Americas
 
21.9
%
 
28.7
%
Industrial Energy Europe & ROW
 
15.9
%
 
14.1
%
Total
 
14.9
%
 
16.1
%

Transportation Americas operating income was relatively flat with the prior period as compressed margins resulting from higher recycled lead input costs and decreased revenue from lower LME lead prices continue, offsetting positive pricing actions in the aftermarket.
Transportation Europe and ROW operating income, excluding foreign currency translation, declined due to the continued impact of competitive pricing in the aftermarket business combined with unfavorable mix resulting from a shift to lower margin private label products during the period, and higher commodity and energy costs.
The Industrial Energy Americas segment also experienced continued compressed margins, despite higher unit sales, as a result of the increased costs of spent batteries and lower LME lead pricing. The negative aggregate lead-related impact was approximately $7.0 million.
Industrial Energy Europe and ROW operating income, excluding foreign currency translation impact, increased primarily due to higher unit sales in the Motive Power segment, combined with favorable lead recovery.
Unallocated corporate operating expenses, excluding the foreign currency translation impact, decreased mainly due to lower professional fees and lower salary related expenses.
Other (Income) Expenses
Other (income) expense was $(2.0) million in the third quarter of fiscal 2013 versus $3.4 million in the third quarter of fiscal 2012. The $5.4 million change was due to favorable currency remeasurement versus the prior year period.
Interest Expenses
Interest expense increased by $1.2 million, to $18.4 million in the third quarter of fiscal 2013 from $17.2 million in the third quarter of fiscal 2012 as a result of higher average borrowings outstanding.


25


Income Taxes
 
 

For the Three Months Ended
 

December 31, 2012

December 31, 2011
 

(In thousands)
Pre-tax (loss) income

$
(11,639
)

$
7,587

Income tax expense (benefit)

3,644


(60,313
)
Effective tax rate

(31.3
)%

(795.0
)%
The income tax expense (benefit) for the third quarter of fiscal 2013 included the recognition of taxes on income and losses in almost all of the Company's jurisdictions with the exception of the United States, Spain and the United Kingdom, on which full valuation allowances are recorded. In addition, the effective tax rate for the third quarter was affected by the recognition of $9.8 million in valuation allowances on current period tax benefits.
The income tax expense (benefit) for the third quarter of fiscal 2012 included the recognition of taxes on income and losses in almost all of the Company's jurisdictions with the exception of the United Kingdom and Spain, on which full valuation allowances are recorded. The Company released the valuation allowance for France in third quarter fiscal 2012 after determining that it was more likely than not that the Company would realize all deductible temporary differences and carryforwards in the foreseeable future. In addition, the Company recorded a $13.4 million settlement related to Spanish tax audits.
The effective tax rate for the third quarter of fiscal 2012 was impacted by the following discrete items: release of a valuation allowance in France of $76.7 million; a Spanish tax audit settlement for $13.4 million; recording of a $1.6 million valuation allowance on a deferred tax asset in Portugal; and the utilization of $1.2 million in valuation allowances on current period tax expense.

Nine months ended December 31, 2012 compared with nine months ended December 31, 2011
Net Sales
Net sales were $2.2 billion in the first nine months of fiscal 2013 versus $2.3 billion in the first nine months of fiscal 2012. Foreign currency translation (primarily the weakening of the Euro against the U.S. Dollar) unfavorably impacted net sales in the first nine months of fiscal 2013 by approximately $97.7 million. Excluding the foreign currency translation impact, net sales increased by approximately $5.6 million, or 0.2%, primarily as a result of an increase in unit sales in some of the Company's markets, partially offset by $65.0 million in unfavorable lead related pricing actions.
Net sales by business segment were as follows:
 
 
 
 
 
 
 
FAVORABLE / (UNFAVORABLE)
 
 
For the Nine Months Ended
 
TOTAL
 
Currency
Related
 
Non-Currency
Related
 
 
December 31, 2012
 
December 31, 2011
 
 
 
(In thousands)
Transportation Americas
 
$
659,362

 
$
676,521

 
$
(17,159
)