Edgar Filing: EnerSys

Document

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 30, 2018



¨	TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-32253

EnerSys

(Exact name of registrant as specified in its charter)



Delaware		23-3058564
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

2366 Bernville Road

Reading, Pennsylvania 19605

(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code: 610-208-1991

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	¨

Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

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

Common Stock outstanding at February 1, 2019: 43,048,757 shares

ENERSYS

INDEX – FORM 10-Q



			Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Condensed Balance Sheets (Unaudited) as of December 30, 2018 and March 31, 2018		3

	Consolidated Condensed Statements of Income (Unaudited) for the Quarters Ended December 30, 2018 and December 31, 2017		4

	Consolidated Condensed Statements of Income (Unaudited) for the Nine Months Ended December 30, 2018 and December 31, 2017		5

	Consolidated Condensed Statements of Comprehensive Income (Unaudited) for the Quarters and Nine Months Ended December 30, 2018 and December 31, 2017		6

	Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended December 30, 2018 and December 31, 2017		7

	Notes to Consolidated Condensed Financial Statements (Unaudited)		8
	1	Basis of Presentation	8
	2	Acquisition	10
	3	Inventories	12
	4	Fair Value of Financial Instruments	12
	5	Derivative Financial Instruments	13
	6	Income Taxes	16
	7	Warranty	17
	8	Commitments, Contingencies and Litigation	17
	9	Restructuring Plans	18
	10	Debt	20
	11	Retirement Plans	21
	12	Stock-Based Compensation	21
	13	Stockholders’ Equity and Noncontrolling Interests	22
	14	Earnings Per Share	24
	15	Business Segments	25
	16	Subsequent Events	25

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations		26

Item 3.	Quantitative and Qualitative Disclosures about Market Risk		37

Item 4.	Controls and Procedures		39

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings		40

Item 1A.	Risk Factors		40

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		40

Item 4.	Mine Safety Disclosures		40

Item 6.	Exhibits		41

SIGNATURES			42

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PART I –	FINANCIAL INFORMATION



ITEM 1.	FINANCIAL STATEMENTS

ENERSYS

Consolidated Condensed Balance Sheets (Unaudited)

(In Thousands, Except Share and Per Share Data)



	December 30, 2018			March 31, 2018
Assets
Current assets:
Cash and cash equivalents	$	397,158		$	522,118
Accounts receivable, net of allowance for doubtful accounts: December 30, 2018 - $10,181; March 31, 2018 - $12,643	607,440			546,325
Inventories, net	501,338			414,234
Prepaid and other current assets	98,854			56,910
Total current assets	1,604,790			1,539,587
Property, plant, and equipment, net	422,207			390,260
Goodwill	672,596			352,805
Other intangible assets, net	457,143			147,141
Deferred taxes	41,816			44,402
Other assets	19,389			12,730
Total assets	$	3,217,941		$	2,486,925
Liabilities and Equity
Current liabilities:
Short-term debt	$	3,656		$	18,341
Accounts payable	280,958			258,982
Accrued expenses	266,000			214,207
Total current liabilities	550,614			491,530
Long-term debt, net of unamortized debt issuance costs	1,087,341			579,535
Deferred taxes	92,971			33,607
Other liabilities	172,735			181,142
Total liabilities	1,903,661			1,285,814
Commitments and contingencies
Equity:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at December 30, 2018 and at March 31, 2018	—			—
Common Stock, $0.01 par value per share, 135,000,000 shares authorized; 54,848,186 shares issued and 43,047,708 shares outstanding at December 30, 2018; 54,595,105 shares issued and 41,915,000 shares outstanding at March 31, 2018	548			546
Additional paid-in capital	511,442			477,288
Treasury stock, at cost, 11,800,478 shares held as of December 30, 2018 and 12,680,105 shares held as of March 31, 2018	(499,528		)	(560,991		)
Retained earnings	1,439,447			1,320,549
Accumulated other comprehensive loss	(142,807		)	(41,717		)
Total EnerSys stockholders’ equity	1,309,102			1,195,675
Nonredeemable noncontrolling interests	5,178			5,436
Total equity	1,314,280			1,201,111
Total liabilities and equity	$	3,217,941		$	2,486,925

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Income (Unaudited)

(In Thousands, Except Share and Per Share Data)



	Quarter ended
	December 30, 2018			December 31, 2017
Net sales	$	680,022		$	658,935
Cost of goods sold	511,729			491,625
Inventory step up to fair value relating to Alpha acquisition	3,747			—
Gross profit	164,546			167,310
Operating expenses	112,046			96,717
Restructuring and other exit charges	5,392			1,808
Legal proceedings settlement income	(2,843		)	—
Operating earnings	49,951			68,785
Interest expense	7,082			6,469
Other (income) expense, net	(55		)	(212		)
Earnings before income taxes	42,924			62,528
Income tax (benefit) expense	(5,690		)	88,307
Net earnings (loss)	48,614			(25,779		)
Net earnings attributable to noncontrolling interests	197			68
Net earnings (loss) attributable to EnerSys stockholders	$	48,417		$	(25,847	)
Net earnings (loss) per common share attributable to EnerSys stockholders:
Basic	$	1.14		$	(0.61	)
Diluted	$	1.12		$	(0.61	)
Dividends per common share	$	0.175		$	0.175
Weighted-average number of common shares outstanding:
Basic	42,337,459			42,125,745
Diluted	43,102,598			42,125,745

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Income (Unaudited)

(In Thousands, Except Share and Per Share Data)



	Nine months ended
	December 30, 2018			December 31, 2017
Net sales	$	2,011,414		$	1,898,849
Cost of goods sold	1,516,381			1,407,833
Inventory step up to fair value relating to Alpha acquisition and exit activities	4,273			—
Gross profit	490,760			491,016
Operating expenses	307,864			283,478
Restructuring and other exit charges	8,252			4,417
Legal proceedings settlement income	(2,843		)	—
Operating earnings	177,487			203,121
Interest expense	20,011			18,712
Other (income) expense, net	(1,052		)	5,816
Earnings before income taxes	158,528			178,593
Income tax expense	16,447			112,899
Net earnings	142,081			65,694
Net earnings attributable to noncontrolling interests	380			118
Net earnings attributable to EnerSys stockholders	$	141,701		$	65,576
Net earnings per common share attributable to EnerSys stockholders:
Basic	$	3.36		$	1.53
Diluted	$	3.31		$	1.51
Dividends per common share	$	0.53		$	0.53
Weighted-average number of common shares outstanding:
Basic	42,161,163			42,837,986
Diluted	42,816,762			43,345,926

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(In Thousands)



	Quarter ended						Nine months ended
	December 30, 2018			December 31, 2017			December 30, 2018			December 31, 2017
Net earnings (loss)	$	48,614		$	(25,779	)	$	142,081		$	65,694
Other comprehensive (loss) income:
Net unrealized (loss) gain on derivative instruments, net of tax	4,732			(587		)	(442		)	29
Pension funded status adjustment, net of tax	204			331			804			996
Foreign currency translation adjustment	(15,777		)	14,053			(102,090		)	86,901
Total other comprehensive (loss) gain, net of tax	(10,841		)	13,797			(101,728		)	87,926
Total comprehensive income (loss)	37,773			(11,982		)	40,353			153,620
Comprehensive (loss) income attributable to noncontrolling interests	281			156			(258		)	237
Comprehensive income (loss) attributable to EnerSys stockholders	$	37,492		$	(12,138	)	$	40,611		$	153,383

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Cash Flows (Unaudited)

(In Thousands)



	Nine months ended
	December 30, 2018			December 31, 2017
Cash flows from operating activities
Net earnings	$	142,081		$	65,694
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization	42,511			40,320
Write-off of assets relating to exit activities	4,498			210
Derivatives not designated in hedging relationships:
Net losses (gains)	390			(105		)
Cash settlements	(865		)	(234		)
Provision for doubtful accounts	849			775
Deferred income taxes	(222		)	(7,228		)
Non-cash interest expense	953			1,289
Stock-based compensation	14,587			14,773
(Gain) loss on disposal of property, plant, and equipment	(157		)	69
Changes in assets and liabilities, net of effects of acquisitions:
Accounts receivable	21,860			12,987
Inventories	(36,440		)	(44,389		)
Prepaid and other current assets	(12,507		)	(1,241		)
Other assets	(1,260		)	(1,142		)
Accounts payable	(649		)	(10,619		)
Accrued expenses	14,306			(30,485		)
Other liabilities	(23,511		)	89,228
Net cash provided by operating activities	166,424			129,902

Cash flows from investing activities
Capital expenditures	(52,672		)	(43,086		)
Purchase of businesses	(650,000		)	(2,964		)
Proceeds from disposal of property, plant, and equipment	549			395
Net cash used in investing activities	(702,123		)	(45,655		)

Cash flows from financing activities
Net repayments on short-term debt	(13,564		)	(1,376		)
Proceeds from Amended 2017 Revolver borrowings	454,500			356,750
Proceeds from 2011 Revolver borrowings	—			147,050
Repayments of Amended 2017 Revolver borrowings	(246,000		)	(111,450		)
Repayments of 2011 Revolver borrowings	—			(312,050		)
Proceeds from Amended 2017 Term Loan	299,105			150,000
Repayments of 2011 Term Loan	—			(127,500		)
Debt issuance costs	(1,235		)	(2,677		)
Option proceeds	9,044			758
Payment of taxes related to net share settlement of equity awards	(3,384		)	(7,477		)
Purchase of treasury stock	(25,000		)	(121,191		)
Dividends paid to stockholders	(22,280		)	(22,339		)
Other	29			(19		)
Net cash provided by (used in) financing activities	451,215			(51,521		)
Effect of exchange rate changes on cash and cash equivalents	(40,476		)	38,267
Net (decrease) increase in cash and cash equivalents	(124,960		)	70,993
Cash and cash equivalents at beginning of period	522,118			500,329
Cash and cash equivalents at end of period	$	397,158		$	571,322

Supplemental disclosures:

Non-cash investing and financing activities:
Common stock issued as partial consideration for Alpha acquisition	$	100,000		$	—

See accompanying notes.

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ENERSYS

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (Unaudited)

(In Thousands, Except Share and Per Share Data)

1. Basis of Presentation

The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included, unless otherwise disclosed. Operating results for the three months and nine months ended December 30, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2019.

The Consolidated Condensed Balance Sheet at March 31, 2018 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

The financial statements should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in the Company’s 2018 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 30, 2018 (the “2018 Annual Report”).

EnerSys (the “Company”) reports interim financial information for 13-week periods, except for the first quarter, which always begins on April 1, and the fourth quarter, which always ends on March 31. The four quarters in fiscal 2019 end on July 1, 2018, September 30, 2018, December 30, 2018, and March 31, 2019, respectively. The four quarters in fiscal 2018 ended on July 2, 2017, October 1, 2017, December 31, 2017, and March 31, 2018, respectively.

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

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” providing guidance on revenue from contracts with customers that supersedes most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services.

The Company adopted the ASU on April 1, 2018 using the modified retrospective transition method. Under the modified retrospective transition method, the cumulative effect of applying Topic 606 to all contracts where all revenue has not been completely recognized under previously existing accounting principles that are not completed as of the date of adoption is recorded as an adjustment to the opening balance of retained earnings (if applicable) while the comparative periods are not restated and continue to be reported under the accounting standards in effect for those periods. There was no cumulative effect of adopting the standard at the date of initial application in retained earnings. Concurrent with the adoption of the ASU, the Company has updated its revenue recognition policy as follows:

The Company determines revenue recognition by applying the following steps:

1. identify the contract with a customer;

2. identify the performance obligations in the contract;

3. determine the transaction price;

4. allocate the transaction price to the performance obligations; and

5. recognize revenue as the performance obligations are satisfied.

The Company recognizes revenue when (or as) performance obligations are satisfied by transferring control of the performance obligation to a customer. Control of a performance obligation may transfer to the customer either at a point in time or over time depending on an evaluation of the specific facts and circumstances for each contract, including the terms and conditions of the contract as agreed with the customer, as well as the nature of the products or services to be provided.

The Company's primary performance obligation to its customers is the delivery of finished goods and products, pursuant to purchase orders. Control of the products sold typically transfers to its customers at the point in time when the goods are shipped as this is also when title generally passes to its customers under the terms and conditions of our customer arrangements.

Each customer purchase order sets forth the transaction price for the products and services purchased under that arrangement. Some customer arrangements include variable consideration, such as volume rebates, some of which depend upon the customers meeting specified performance criteria, such as a purchasing level over a period of time. The Company uses judgment to estimate the most likely amount of variable consideration at each reporting date. When estimating variable consideration the Company also applies judgment when considering the probability of whether a reversal of revenue could occur and only recognize revenue subject to this constraint.

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

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

On December 30, 2018, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $97,189, of which, the Company estimates that approximately $34,244 will be recognized as revenue in fiscal 2019, $47,032 in fiscal 2020, $10,023 in fiscal 2021, $5,738 in fiscal 2022 and $152 in fiscal 2023.

The Company's typical payment terms are 30 days and sales arrangements do not contain any significant financing component for its customers.

Any payments that are received from a customer in advance, prior to the satisfaction of a related performance obligation and billings in excess of revenue recognized, are deferred and treated as a contract liability. Advance payments and billings in excess of revenue recognized are classified as current or non-current based on the timing of when recognition of revenue is expected. As of December 30, 2018, the current and non-current portion of contract liabilities were $24,736 and $7,430, respectively. As of March 31, 2018, the current and non-current portion of contract liabilities were $9,387 and $7,094, respectively. Amounts representing work completed and not billed to customers represent contract assets and were $31,916 and $24,810 as of December 30, 2018 and March 31, 2018, respectively. Revenues recognized during the third quarter and nine months of fiscal 2019, that were included in the contract liability at the beginning of the current quarter and nine months, amounted to $1,950 and $2,695, respectively.

The Company uses historic customer product return data as a basis of estimation for customer returns and records the reduction of sales at the time revenue is recognized. At December 30, 2018, the right of return asset related to the value of inventory anticipated to be returned from customers was $2,647 and refund liability representing amounts estimated to be refunded to customers was $5,013.

Freight charges billed to customers are included in sales and the related shipping costs are included in cost of sales in the Consolidated Condensed Statements of Income. If shipping activities are performed after a customer obtains control of a product, the Company applies a policy election to account for shipping as an activity to fulfill the promise to transfer the product to the customer.

The Company applies a policy election to exclude transaction taxes collected from customers from sales when the tax is both imposed on and concurrent with a specific revenue-producing transaction.

The Company generally provides customers with a product warranty that provides assurance that the products meet standard specifications and are free of defects. The Company maintains a reserve for claims incurred under standard product warranty programs. Performance obligations related to service warranties are not material to the consolidated financial statements.

The Company pays sales commissions to its sales representatives, which may be considered as incremental costs to obtain a contract. However, since the recoverability period is less than one year, the Company has utilized the practical expedient to record these costs of obtaining a contract as an expense as they are incurred.

In March 2017, the FASB issued ASU No. 2017-07, “Compensation—Retirement Benefits (Topic 715)”, which requires an entity to report the service cost component of pension and other postretirement benefit costs in the same line item as other compensation costs. The other components of net (benefit) cost will be required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. This standard is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted and requires the retrospective method to be applied to all periods presented. The Company adopted this guidance effective April 1, 2018. The service cost component of pension expense continues to be recognized in cost of goods sold whereas other components of pension expense have been reclassified to “Other (income) expense, net” in the Condensed Consolidated Statements of Income. The Company reclassified $345 and $1,080, from “Cost of goods sold” relating to the third quarter and nine months of fiscal 2018, respectively, to “Other (income) expense, net” in the Condensed Consolidated Statements of Income.

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Accounting Pronouncements Issued But Not Adopted as of December 30, 2018

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e. lessees and lessors). This update requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase of the leased asset by the lessee. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. This update is effective for annual periods beginning after December 15, 2018, using a modified retrospective approach, with early adoption permitted. In order to evaluate the impact of ASU No. 2016-02, the Company has formed a project team and initiated the process of assessing critical components of this new guidance and the potential impact that the guidance may have on its financial position, results of operations and cash flows. This evaluation process includes a review of the Company's leasing contracts and an assessment of the completeness of the Company's lease population. The Company is anticipating electing available practical expedients, including the transition option, upon adoption on April 1, 2019. The Company is also currently implementing a software tool and concurrently identifying changes to its business processes, systems and controls to support adoption of the new standard. Based upon the assessment to date, the Company believes that a key change upon adoption of the lease standard will be the recognition of leased assets and liabilities on its balance sheet but has not yet determined the impact, if any, on its results of operations or statement of cash flows.

In August 2017, the FASB issued ASU No. 2017-12, “Derivatives and Hedging (Topic 815)”: Targeted Improvements to Accounting for Hedging Activities, which amends and simplifies existing guidance in order to allow companies to more accurately present the economic effects of risk management activities in the financial statements. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those years. Early adoption is permitted in any interim period or fiscal year before the effective date. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220)”. The new standard will allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act (“Tax Act”). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statements users. However, because the amendment only relates to the reclassification of the income tax effects of the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. The guidance is effective for fiscal years beginning after December 15, 2018 with early adoption permitted, including the interim periods within those years. The Company is currently assessing the potential impact that the adoption will have on its consolidated financial statements.

2. Acquisition

On December 7, 2018, the Company completed the acquisition of all of the issued and outstanding common stock of Alpha Technologies Services, Inc. (“ATS”) and Alpha Technologies Ltd. (“ATL”), resulting in ATS and ATL becoming wholly-owned subsidiaries of the Company (the “share purchase”). Additionally, the Company acquired substantially all of the assets of Alpha Technologies Inc. and certain assets of Altair Advanced Industries, Inc. and other affiliates of ATS and ATL (all such sellers, together with ATS and ATL, “Alpha”), in each case in accordance with the terms and conditions of certain restructuring agreements (collectively, the “asset acquisition” and together with the share purchase, the “acquisition”). Based in Bellingham, Washington, Alpha is a global industry leader in the comprehensive commercial-grade energy solutions for broadband, telecom, renewable, industrial and traffic customers around the world. The aggregate purchase consideration for the acquisition was $750,000, of which $650,000 was paid in cash and the balance was settled by issuing 1,177,630 shares of EnerSys common stock. These shares were issued out of the Company's treasury stock and were valued at $84.92 per share, which was based on the thirty-day volume weighted average stock price of the Company’s common stock at closing. The fair value of the 1,177,630 shares had an approximate closing date fair value of $100,000. The Company funded the cash portion of the acquisition with borrowings from the Amended Credit Facility as defined in Note 10. See Note 10 for additional information.

The acquisition expands the Company's footprint in broadband and telecom markets.

The Company recorded the acquisition using the acquisition method of accounting and recognized the assets acquired and liabilities assumed at their estimated fair values as of the date of the acquisition. The results of operations of Alpha have been included in the Company’s Americas segment beginning December 8, 2018. Included within operating expenses in the Company's Consolidated Condensed Statements of Income are acquisition costs of $10,192 and $12,360, respectively, for the third quarter and nine months of fiscal 2019.

For the third quarter and nine months of fiscal 2019 ended December 30, 2018, the contribution of the acquisition to net sales was $26,795. Alpha recorded a net loss of $4,440 for the third quarter and nine months of fiscal 2019 ended December 30, 2018, excluding the effect of the transaction and integration costs, and interest expense on the debt to finance the acquisition.

The following table summarizes the preliminary fair values assigned to the assets acquired and liabilities assumed and resulting goodwill. These values are not yet finalized and are subject to change, which could be significant. The amounts recognized will be finalized as the

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information necessary to complete the analyses is obtained, but no later than December 7, 2019 or one year from the acquisition date (“the measurement period”).

The acquired assets and assumed liabilities include the following:



Accounts receivable	$	115,467
Inventories	93,262
Other current assets	6,822
Other intangible assets	319,434
Property, plant and equipment	20,507
Other assets	7,165
Total assets acquired	$	562,657
Short-term debt	264
Accounts payable	34,009
Accrued liabilities	43,636
Deferred income taxes	60,292
Other liabilities	10,802
Total liabilities assumed	$	149,003
Net assets acquired	$	413,654

Purchase price	$	750,000
Less: Fair value of acquired identifiable assets and liabilities	413,654
Goodwill	$	336,346

The following table summarizes the estimated fair value of Alpha's identifiable intangible assets and the initial assessment of their respective estimated lives:



	Type	Life in Years	Fair Value
Trademarks	Indefinite-lived	Indefinite	$	88,849
Customer relationships	Finite-lived	13	188,805
Technology	Finite-lived	10	41,780
Total identifiable intangible assets			$	319,434

The preliminary purchase price of the acquisition has been allocated to the Company’s tangible and identifiable intangible assets acquired and liabilities assumed, based on their estimated acquisition date fair values. The excess of the purchase price over the net tangible and intangible assets is recorded to goodwill. Estimated goodwill deductible for tax purposes is $42,040. The preliminary allocation of purchase price is based upon a valuation undertaken by the Company and is subject to change during the measurement period. The initial accounting for the acquisition is incomplete pending final valuation of the tangible and identifiable intangible assets acquired and liabilities assumed.

The following unaudited summary information is presented on a consolidated pro forma basis as if the acquisition had occurred on April 1, 2017:



	Quarter ended					Nine months ended
	December 30, 2018		December 31, 2017			December 30, 2018		December 31, 2017
Net sales	$	805,839	$	799,416		$	2,482,137	$	2,302,525
Net earnings (loss) attributable to EnerSys stockholders	62,354		(28,713		)	181,941		66,724
Net earnings (loss) per share attributable to EnerSys stockholders - basic	1.44		(0.66		)	4.21		1.52
Net earnings per share attributable to EnerSys stockholders - assuming dilution	1.42		(0.66		)	4.14		1.50

The pro forma amounts include additional interest expense on the debt issued to finance the purchases, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and plant assets, and related tax effects. The pro forma results are not necessarily indicative of the combined results had the Alpha acquisition been completed on April 1, 2017, nor are they indicative of future

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combined results. The pro forma results for the third quarter and nine months of fiscal 2018 exclude pre-tax transaction costs of $10,192 and $12,360, respectively, as well as the pre-tax amortization of the acquisition date step up to fair value of inventories of $3,747 (these were recognized in the actual results of the third quarter and nine months fiscal 2019) as they are considered non-recurring in nature. The remeasurement of Alpha's deferred taxes due to the Tax Act are also being excluded in arriving at these pro forma results.

Other Intangible Assets

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



	Balance as of
	December 30, 2018							March 31, 2018
	Gross Amount		Accumulated Amortization			Net Amount		Gross Amount		Accumulated Amortization			Net Amount
Indefinite-lived intangible assets:
Trademarks	$	185,450	$	(953	)	$	184,497	$	97,444	$	(953	)	$	96,491
Finite-lived intangible assets:
Customer relationships	254,527		(37,102		)	217,425		66,973		(31,500		)	35,473
Non-compete	2,998		(2,799		)	199		2,852		(2,759		)	93
Technology	64,292		(10,362		)	53,930		22,769		(8,872		)	13,897
Trademarks	2,003		(1,212		)	791		2,003		(1,151		)	852
Licenses	1,483		(1,182		)	301		1,491		(1,156		)	335
Total	$	510,753	$	(53,610	)	$	457,143	$	193,532	$	(46,391	)	$	147,141

The Company’s amortization expense related to finite-lived intangible assets was $3,105 and $7,220, for the third quarter and nine months of fiscal 2019, respectively. The expected amortization expense based on the finite-lived intangible assets as of December 30, 2018, is $1,766 for the remainder of fiscal 2019, $8,281 in fiscal 2020, $8,023 in fiscal 2021, $7,941 in fiscal 2022 and $5,689 in fiscal 2023.

Goodwill

The changes in the carrying amount of goodwill by reportable segment are as follows:



	Americas			EMEA			Asia			Total
Balance at March 31, 2018	$	151,255		$	155,825		$	45,725		$	352,805
Goodwill acquired	336,346			—			—			336,346
Foreign currency translation adjustment	(1,888		)	(11,194		)	(3,473		)	(16,555		)
Balance as of December 30, 2018	$	485,713		$	144,631		$	42,252		$	672,596

3. Inventories

Inventories, net consist of:



	December 30, 2018		March 31, 2018
Raw materials	$	120,433	$	92,216
Work-in-process	108,667		136,068
Finished goods	272,238		185,950
Total	$	501,338	$	414,234

4. Fair Value of Financial Instruments

Recurring Fair Value Measurements

The following tables represent the financial assets and (liabilities) measured at fair value on a recurring basis as of December 30, 2018 and March 31, 2018, and the basis for that measurement:

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	Total Fair Value Measurement December 30, 2018		Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Lead forward contracts	$	330	$	—	$	330	$	—
Foreign currency forward contracts	683		—		683		—
Total derivatives	$	1,013	$	—	$	1,013	$	—



	Total Fair Value Measurement March 31, 2018			Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Lead forward contracts	$	(3,877	)	$	—	$	(3,877	)	$	—
Foreign currency forward contracts	22			—		22			—
Total derivatives	$	(3,855	)	$	—	$	(3,855	)	$	—

The fair values of lead forward contracts are calculated using observable prices for lead as quoted on the London Metal Exchange (“LME”) and, therefore, were classified as Level 2 within the fair value hierarchy, as described in Note 1, Summary of Significant Accounting Policies to the Company's consolidated financial statements included in its 2018 Annual Report.

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

Financial Instruments

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

The fair value of the Company’s short-term debt and borrowings under the Amended Credit Facility (as defined in Note 10), approximate their respective carrying value, as they are variable rate debt and the terms are comparable to market terms as of the balance sheet dates and are classified as Level 2.

The Company's 5.00% Senior Notes due 2023 (the “Notes”), with an original face value of $300,000, were issued in April 2015. The fair value of the Notes represent the trading values based upon quoted market prices and are classified as Level 2. The Notes were trading at approximately 97% and 102% of face value on December 30, 2018 and March 31, 2018, respectively.

The carrying amounts and estimated fair values of the Company’s derivatives and Notes at December 30, 2018 and March 31, 2018 were as follows:



	December 30, 2018				March 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets:
Derivatives ⁽¹⁾	$	1,013	$	1,013	$	22	$	22
Financial liabilities:
Notes ⁽²⁾	$	300,000	$	291,000	$	300,000	$	304,500
Derivatives ⁽¹⁾	—		—		3,877		3,877


(1)	Represents lead and foreign currency forward contracts (see Note 5 for asset and liability positions of the lead and foreign currency forward contracts at December 30, 2018 and March 31, 2018).


(2)	The fair value amount of the Notes at December 30, 2018 and March 31, 2018 represent the trading value of the instruments.

5. Derivative Financial Instruments

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

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Derivatives in Cash Flow Hedging Relationships

Lead Forward Contracts

The Company enters into lead forward contracts to fix the price for a portion of its lead purchases. Management considers the lead forward contracts to be effective against changes in the cash flows of the underlying lead purchases. The vast majority of such contracts are for a period not extending beyond one year. At December 30, 2018 and March 31, 2018, the Company has hedged the price to purchase approximately 77.0 million pounds and 62.9 million pounds of lead, respectively, for a total purchase price of $70,235 and $72,207, respectively.

Foreign Currency Forward Contracts

The Company uses foreign currency forward contracts and options to hedge a portion of the Company’s foreign currency exposures for lead, as well as other foreign currency exposures so that gains and losses on these contracts offset changes in the underlying foreign currency denominated exposures. The vast majority of such contracts are for a period not extending beyond one year. As of December 30, 2018 and March 31, 2018, the notional amount of these contracts was $48,131 and $54,164, respectively.

In the coming twelve months, the Company anticipates that $4,929 of pretax loss relating to lead and foreign currency forward contracts will be reclassified from accumulated other comprehensive income (“AOCI”) as part of cost of goods sold. This amount represents the current net unrealized impact of hedging lead and foreign exchange rates, which will change as market rates change in the future, and will ultimately be realized in the Consolidated Condensed Statements of Income as an offset to the corresponding actual changes in lead costs to be realized in connection with the variable lead cost and foreign exchange rates being hedged.

Derivatives not Designated in Hedging Relationships

Foreign Currency Forward Contracts

The Company also enters into foreign currency forward contracts to economically hedge foreign currency fluctuations on intercompany loans and foreign currency denominated receivables and payables. These are not designated as hedging instruments and changes in fair value of these instruments are recorded directly in the Consolidated Condensed Statements of Income. As of December 30, 2018 and March 31, 2018, the notional amount of these contracts was $59,819 and $28,486, respectively.

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

Fair Value of Derivative Instruments

December 30, 2018 and March 31, 2018



	Derivatives and Hedging Activities Designated as Cash Flow Hedges				Derivatives and Hedging Activities Not Designated as Hedging Instruments
	December 30, 2018		March 31, 2018		December 30, 2018		March 31, 2018
Prepaid and other current assets:
Lead forward contracts	$	330	$	—	$	—	$	—
Foreign currency forward contracts	395		209		288		—
Total assets	$	725	$	209	$	288	$	—
Accrued expenses:
Lead forward contracts	$	—	$	3,877	$	—	$	—
Foreign currency forward contracts	—		—		—		187
Total liabilities	$	—	$	3,877	$	—	$	187

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The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income

For the quarter ended December 30, 2018



Derivatives Designated as Cash Flow Hedges	Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts	$	(501	)	Cost of goods sold	$	(6,892	)
Foreign currency forward contracts	583			Cost of goods sold	789
Total	$	82			$	(6,103	)



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

The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income

For the quarter ended December 31, 2017



Derivatives Designated as Cash Flow Hedges	Pretax Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts	$	(396	)	Cost of goods sold	$	2,266
Foreign currency forward contracts	(87		)	Cost of goods sold	(1,811		)
Total	$	(483	)		$	455



Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Pretax Gain (Loss)
Foreign currency forward contracts	Other (income) expense, net	$	93
Total		$	93

The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income

For the nine months ended December 30, 2018



Derivatives Designated as Cash Flow Hedges	Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts	$	(11,510	)	Cost of goods sold	$	(9,611	)
Foreign currency forward contracts	1,303			Cost of goods sold	(14		)
Total	$	(10,207	)		$	(9,625	)



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

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The Effect of Derivative Instruments on the Consolidated Condensed Statements of Income

For the nine months ended December 31, 2017



Derivatives Designated as Cash Flow Hedges	Pretax Gain (Loss) Recognized in AOCI on Derivative (Effective Portion)			Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Pretax Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
Lead forward contracts	$	2,686		Cost of goods sold	$	2,177
Foreign currency forward contracts	(3,175		)	Cost of goods sold	(2,714		)
Total	$	(489	)		$	(537	)



Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	Pretax Gain (Loss)
Foreign currency forward contracts	Other (income) expense, net	$	105
Total		$	105

6. Income Taxes

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the