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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 2, 2022

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

For the transition period from                      to                     

Commission File Number: 001-32253 

 EnerSys

(Exact name of registrant as specified in its charter) 

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

2366 Bernville Road

Reading, Pennsylvania 19605

(Address of principal executive offices) (Zip Code)

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

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, $0.01 par value per share

ENS

New York Stock Exchange

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934. 

Large Accelerated Filer

ý

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

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

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

Common Stock outstanding at February 4, 2022: 41,250,202 shares

1

---

ENERSYS

INDEX – FORM 10-Q

 

									Page
PART I – FINANCIAL INFORMATION
Item 1.			Financial Statements
			Consolidated Condensed Balance Sheets (Unaudited) as of January 2, 2022 and March 31, 2021						3
			Consolidated Condensed Statements of Income (Unaudited) for the Quarters Ended January 2, 2022 and January 3, 2021						4
			Consolidated Condensed Statements of Income (Unaudited) for the Nine Months Ended January 2, 2022 and January 3, 2021						5
			Consolidated Condensed Statements of Comprehensive Income (Unaudited) for the Quarters and Nine Months Ended January 2, 2022 and January 3, 2021						6
			Consolidated Condensed Statements of Cash Flows (Unaudited) for the Nine Months Ended January 2, 2022 and January 3, 2021						7
			Notes to Consolidated Condensed Financial Statements (Unaudited)						8
			1			Basis of Presentation			8
			2			Revenue Recognition			9
			3			Leases			9
			4			Goodwill and Other Intangible Assets			11
			5			Inventories			12
			6			Fair Value of Financial Instruments			12
			7			Derivative Financial Instruments			13
			8			Income Taxes			16
			9			Warranty			17
			10			Commitments, Contingencies and Litigation			18
			11			Restructuring and Other Exit Charges			18
			12			Debt			18
			13			Retirement Plans			20
			14			Stock-Based Compensation			20
			15			Stockholders’ Equity and Noncontrolling Interests			21
			16			Earnings Per Share			27
			17			Business Segments			28
			18			Subsequent Events			28
Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations						29
Item 3.			Quantitative and Qualitative Disclosures about Market Risk						41
Item 4.			Controls and Procedures						43
PART II – OTHER INFORMATION
Item 1.			Legal Proceedings						44
Item 1A.			Risk Factors						44
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds						45
Item 4.			Mine Safety Disclosures						45
Item 6.			Exhibits						46
SIGNATURES									47

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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) 

						January 2, 2022						March 31, 2021
Assets
Current assets:
Cash and cash equivalents						$	397,060					$	451,808
Accounts receivable, net of allowance for doubtful accounts: January 2, 2022 - $12,800; March 31, 2021 - $12,992						636,049						603,581
Inventories, net						671,399						518,247
Prepaid and other current assets						138,944						117,681
Total current assets						1,843,452						1,691,317
Property, plant, and equipment, net						501,888						497,056
Goodwill						700,826						705,593
Other intangible assets, net						405,128						430,898
Deferred taxes						65,592						65,212
Other assets						74,517						72,721
Total assets						$	3,591,403					$	3,462,797
Liabilities and Equity
Current liabilities:
Short-term debt						$	33,503					$	34,153
Accounts payable						317,585						323,876
Accrued expenses						270,973						318,959
Total current liabilities						622,061						676,988
Long-term debt, net of unamortized debt issuance costs						1,191,469						969,618
Deferred taxes						76,756						76,412
Other liabilities						193,103						196,203
Total liabilities						2,083,389						1,919,221
Commitments and contingencies
Equity:
Preferred Stock, $0.01 par value, 1,000,000 shares authorized, no shares issued or outstanding at January 2, 2022 and at March 31, 2021						—						—
Common Stock, $0.01 par value per share, 135,000,000 shares authorized, 55,737,999 shares issued and 41,546,352 shares outstanding at January 2, 2022; 55,552,810 shares issued and 42,753,020 shares outstanding at March 31, 2021						557						555
Additional paid-in capital						562,805						554,168
Treasury stock at cost, 14,191,647 shares held as of January 2, 2022 and 12,799,790 shares held as of March 31, 2021						(677,476)						(563,481)
Retained earnings						1,762,841						1,669,751
Contra equity - indemnification receivable						(3,620)						(5,355)
Accumulated other comprehensive loss						(140,987)						(115,883)
Total EnerSys stockholders’ equity						1,504,120						1,539,755
Nonredeemable noncontrolling interests						3,894						3,821
Total equity						1,508,014						1,543,576
Total liabilities and equity						$	3,591,403					$	3,462,797

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Income (Unaudited)

(In Thousands, Except Share and Per Share Data)

						Quarter ended
						January 2, 2022						January 3, 2021
Net sales						$	844,006					$	751,067
Cost of goods sold						659,668						561,755
Gross profit						184,338						189,312
Operating expenses						130,701						118,045
Restructuring and other exit charges						2,472						15,196
Operating earnings						51,165						56,071
Interest expense						9,744						9,351
Other (income) expense, net						(1,413)						2,861
Earnings before income taxes						42,834						43,859
Income tax expense						6,570						5,235
Net earnings attributable to EnerSys stockholders						$	36,264					$	38,624
Net earnings per common share attributable to EnerSys stockholders:
Basic						$	0.87					$	0.91
Diluted						$	0.85					$	0.89
Dividends per common share						$	0.175					$	0.175
Weighted-average number of common shares outstanding:
Basic						41,905,815						42,599,834
Diluted						42,497,045						43,290,403

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
						January 2, 2022						January 3, 2021
Net sales						$	2,450,294					$	2,164,393
Cost of goods sold						1,893,917						1,622,544
Inventory adjustment relating to exit activities						960						—
Gross profit						555,417						541,849
Operating expenses						380,497						357,441
Restructuring charges and other exit charges						13,161						19,702
Operating earnings						161,759						164,706
Interest expense						28,424						29,345
Other (income) expense, net						(1,711)						8,433
Earnings before income taxes						135,046						126,928
Income tax expense						19,227						17,390
Net earnings attributable to EnerSys stockholders						$	115,819					$	109,538
Net earnings per common share attributable to EnerSys stockholders:
Basic						$	2.73					$	2.58
Diluted						$	2.69					$	2.54
Dividends per common share						$	0.525					$	0.525
Weighted-average number of common shares outstanding:
Basic						42,393,907						42,502,460
Diluted						43,096,740						43,103,304

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Comprehensive Income (Unaudited)

(In Thousands)

						Quarter ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Net earnings						$	36,264					$	38,624					$	115,819					$	109,538
Other comprehensive income:
Net unrealized (loss) gain on derivative instruments, net of tax						(786)						2,718						878						6,531
Pension funded status adjustment, net of tax						216						269						689						865
Foreign currency translation adjustment						(18,214)						52,901						(26,551)						113,881
Total other comprehensive (loss) income, net of tax						(18,784)						55,888						(24,984)						121,277
Total comprehensive income						17,480						94,512						90,835						230,815
Comprehensive income attributable to noncontrolling interests						56						149						120						301
Comprehensive income attributable to EnerSys stockholders						$	17,424					$	94,363					$	90,715					$	230,514

See accompanying notes.

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ENERSYS

Consolidated Condensed Statements of Cash Flows (Unaudited)

(In Thousands)

						Nine months ended
						January 2, 2022						January 3, 2021
Cash flows from operating activities
Net earnings						$	115,819					$	109,538
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization						72,322						70,192
Write-off of assets relating to exit activities						3,922						7,292
Derivatives not designated in hedging relationships:
Net gains						(421)						(592)
Cash proceeds						342						790
Provision for doubtful accounts						1,933						270
Deferred income taxes						(24)						(1,785)
Non-cash interest expense						1,620						1,554
Stock-based compensation						15,817						16,982
Gain on disposal of property, plant, and equipment						(528)						(4,007)
Changes in assets and liabilities:
Accounts receivable						(40,264)						71,077
Inventories						(163,747)						28,069
Prepaid and other current assets						(18,344)						15,047
Other assets						1,322						3,012
Accounts payable						(9,086)						(40,933)
Accrued expenses						(58,233)						9,839
Other liabilities						(480)						(14,246)
Net cash (used in) provided by operating activities						(78,030)						272,099
Cash flows from investing activities
Capital expenditures						(52,351)						(53,742)
Proceeds from disposal of facility						3,268						—
Insurance proceeds relating to property, plant and equipment						—						4,800
Proceeds from disposal of property, plant, and equipment						1,433						145
Net cash used in investing activities						(47,650)						(48,797)
Cash flows from financing activities
Net repayments on short-term debt						(297)						(9,367)
Proceeds from Second Amended Revolver borrowings						424,800						90,000
Repayments of Second Amended Revolver borrowings						(39,800)						(123,000)
Repayments of Second Amended Term Loan						(161,447)						(28,194)
Debt issuance costs						(2,952)						—
Option proceeds, net						1,273						4,818
Payment of taxes related to net share settlement of equity awards						(9,120)						(4,959)
Purchase of treasury stock						(114,534)						—
Dividends paid to stockholders						(22,187)						(22,338)
Other						607						466
Net cash provided by (used in) financing activities						76,343						(92,574)
Effect of exchange rate changes on cash and cash equivalents						(5,411)						30,944
Net (decrease) increase in cash and cash equivalents						(54,748)						161,672
Cash and cash equivalents at beginning of period						451,808						326,979
Cash and cash equivalents at end of period						$	397,060					$	488,651

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 adjustments except those otherwise described herein) considered necessary for a fair presentation have been included, unless otherwise disclosed. Operating results for the three and nine months ended January 2, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2022.

The Consolidated Condensed Balance Sheet at March 31, 2021 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 2021 Annual Report on Form 10-K (SEC File No. 001-32253), which was filed on May 26, 2021 (the “2021 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 2022 end on July 4, 2021, October 3, 2021, January 2, 2022, and March 31, 2022, respectively. The four quarters in fiscal 2021 ended on July 5, 2020, October 4, 2020, January 3, 2021, and March 31, 2021, 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 December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740)”: Simplifying the Accounting for Income Taxes, which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. The guidance is effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The Company adopted the standard in the first quarter of fiscal 2022 and the adoption did not have a material impact on the Company's consolidated financial statements.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. These estimates and assumptions take into account historical and forward looking factors that the Company believes are reasonable, including, but not limited to, the potential impacts arising from the coronavirus pandemic including its variants (“COVID-19”) and public and private sector policies and initiatives aimed at reducing its transmission. As the extent and duration of the impacts of COVID-19 remain unclear, the Company’s estimates and assumptions may evolve as conditions change. Actual results could differ significantly from those estimates.

Examples of significant estimates include the allowance for credit losses, the recoverability of property, plant and equipment, the incremental borrowing rate for lease liabilities, the recoverability of intangible assets and other long-lived assets, fair value measurements, including those related to financial instruments, goodwill and intangible assets, valuation allowances on tax assets, pension and postretirement benefit obligations, contingencies and the identification and valuation of assets acquired and liabilities assumed in connection with business combinations.

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2. Revenue Recognition

The Company’s revenues by reportable segments are presented in Note 17 and are consistent with how we organize and manage our operations, as well as product line net sales information.

Service revenues related to the work performed for the Company’s customers by its maintenance technicians generally represent a separate and distinct performance obligation. Control for these services passes to the customer as the services are performed. Service revenues for the third quarter of fiscal 2022 and 2021 amounted to $87,958 and $73,581, respectively. Service revenues for the nine months of fiscal 2022 and 2021 amounted to $260,588 and $216,666, respectively.

A small portion of the Company's customer arrangements oblige the Company to create customized products for its customers that require the bundling of both products and services into a single performance obligation because the individual products and services that are required to fulfill the customer requirements do not meet the definition for a distinct performance obligation. These customized products generally have no alternative use to the Company and the terms and conditions of these arrangements give the Company the enforceable right to payment for performance completed to date, including a reasonable profit margin. For these arrangements, control transfers over time and the Company measures progress towards completion by selecting the input or output method that best depicts the transfer of control of the underlying goods and services to the customer for each respective arrangement. Methods used by the Company to measure progress toward completion include labor hours, costs incurred and units of production. Revenues recognized over time for the third quarter of fiscal 2022 and 2021 amounted to $49,058 and $37,975, respectively. Revenues recognized over time for the nine months of fiscal 2022 and 2021 amounted to $133,569 and $109,152, respectively.

On January 2, 2022, the aggregate transaction price allocated to unsatisfied (or partially unsatisfied) performance obligations was approximately $144,588, of which, the Company estimates that approximately $59,599 will be recognized as revenue in fiscal 2022, $68,629 in fiscal 2023, $12,510 in fiscal 2024, and $3,850 in fiscal 2025.

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 January 2, 2022, the current and non-current portion of contract liabilities were $31,293 and $1,416, respectively. As of March 31, 2021, the current and non-current portion of contract liabilities were $15,992 and $2,072, respectively. Revenues recognized during the third quarter of fiscal 2022 and 2021 that were included in the contract liability at the beginning of the quarter, amounted to $4,890 and $6,785, respectively. Revenues recognized during the nine months of fiscal 2022 and 2021 that were included in the contract liability at the beginning of the quarter, amounted to $6,722 and $12,110, respectively.

Amounts representing work completed and not billed to customers represent contract assets and were $50,257 and $46,451 as of January 2, 2022 and March 31, 2021, 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 January 2, 2022, the right of return asset related to the value of inventory anticipated to be returned from customers was $4,604 and refund liability representing amounts estimated to be refunded to customers was $8,119.

3. Leases

The Company leases manufacturing facilities, distribution centers, office space, vehicles and other equipment under non-cancellable leases with initial terms typically ranging from 1 to 17 years.

Short term leases with an initial term of 12 months or less are not presented on the balance sheet and expense is recognized on a straight-line basis over the lease term.

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The following table presents lease assets and liabilities and their balance sheet classification:

						Classification						As of January 2, 2022						As of March 31, 2021
Operating Leases:
Right-of-use assets						Other assets						$	63,699					$	62,159
Operating lease current liabilities						Accrued expenses						20,108						21,774
Operating lease non-current liabilities						Other liabilities						45,701						42,528
Finance Leases:
Right-of-use assets						Property, plant, and equipment, net						$	402					$	573
Finance lease current liabilities						Accrued expenses						203						236
Finance lease non-current liabilities						Other liabilities						280						435

The components of lease expense for the third quarter and nine months ended January 2, 2022 and January 3, 2021 were as follows:

												Quarter ended												Nine months ended
						Classification						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Operating Leases:
Operating lease cost						Operating expenses						$	6,649					$	6,635					$	19,787					$	20,316
Variable lease cost						Operating expenses						2,288						1,797						7,215						5,529
Short term lease cost						Operating expenses						1,497						1,610						5,067						5,016
Finance Leases:
Depreciation						Operating expenses						$	58					$	53					$	177					$	141
Interest expense						Interest expense						6						8						21						22
Total												$	10,498					$	10,103					$	32,267					$	31,024

The following table presents the weighted average lease term and discount rates for leases as of January 2, 2022 and March 31, 2021:

January 2, 2022

March 31, 2021

Operating Leases:

Weighted average remaining lease term (years)

5.7 years

5.5 years

Weighted average discount rate

4.61%

5.16%

Finance Leases:

Weighted average remaining lease term (years)

2.5 years

3.1 years

Weighted average discount rate

4.80%

4.81%

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The following table presents future payments due under leases reconciled to lease liabilities as of January 2, 2022:

						Finance Leases						Operating Leases
Three months ended March 31, 2022						$	65					$	6,459
Year ended March 31,
2023						214						20,462
2024						155						14,561
2025						47						10,125
2026						25						7,008
Thereafter						—						16,680
Total undiscounted lease payments						506						75,295
Present value discount						23						9,486
Lease liability						$	483					$	65,809

The following table presents supplemental disclosures of cash flow information related to leases for the third quarter and nine months ended January 2, 2022 and January 3, 2021:

						Quarter ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from finance leases						$	6					$	8					$	21					$	22
Operating cash flows from operating leases						6,775						6,710						20,024						20,370
Financing cash flows from finance leases						59						52						179						138
Supplemental non-cash information on lease liabilities arising from right-of-use assets:
Right-of-use assets obtained in exchange for new finance lease liabilities						$	—					$	98					$	—					$	185
Right-of-use assets obtained in exchange for new operating lease liabilities						13,987						2,181						19,577						9,313

4. Goodwill and Other Intangible Assets

Other Intangible Assets

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

						Balance as of
						January 2, 2022																		March 31, 2021
						Gross Amount						Accumulated Amortization						Net Amount						Gross Amount						Accumulated Amortization						Net Amount
Indefinite-lived intangible assets:
Trademarks						$	147,990					$	(953)					$	147,037					$	148,164					$	(953)					$	147,211
Finite-lived intangible assets:
Customer relationships						298,107						(104,266)						193,841						298,576						(87,308)						211,268
Non-compete						2,825						(2,825)						—						2,825						(2,825)						—
Technology						97,288						(36,446)						60,842						97,349						(29,561)						67,788
Trademarks						8,012						(4,604)						3,408						8,012						(3,381)						4,631
Licenses						1,196						(1,196)						—						1,196						(1,196)						—
Total						$	555,418					$	(150,290)					$	405,128					$	556,122					$	(125,224)					$	430,898

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The Company’s amortization expense related to finite-lived intangible assets was $8,318 and $25,066 for the third quarter and nine months of fiscal 2022, compared to $8,334 and $25,076 for the third quarter and nine months of fiscal 2021. The expected amortization expense based on the finite-lived intangible assets as of January 2, 2022, is $7,558 for the remainder of fiscal 2022, $30,399 in fiscal 2023, $27,544 in fiscal 2024, $26,552 in fiscal 2025 and $25,618 in fiscal 2026.

Goodwill

The following table presents the amount of goodwill, as well as any changes in the carrying amount of goodwill by segment during the nine months of fiscal 2022:

						Energy Systems						Motive Power						Specialty						Total
Balance at March 31, 2021						$	279,676					$	327,055					$	98,862					$	705,593
Foreign currency translation adjustment						(2,428)						(1,882)						(457)						(4,767)
Balance as of January 2, 2022						$	277,248					$	325,173					$	98,405					$	700,826

5. Inventories

						January 2, 2022						March 31, 2021
Raw materials						$	228,991					$	147,040
Work-in-process						104,595						97,715
Finished goods						337,813						273,492
Total						$	671,399					$	518,247

6. Fair Value of Financial Instruments

Recurring Fair Value Measurements

The following tables represent the financial assets and (liabilities) measured at fair value on a recurring basis as of January 2, 2022 and March 31, 2021, and the basis for that measurement:

 

						Total Fair Value Measurement January 2, 2022						Quoted Price in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Lead forward contracts						$	615					$	—					$	615					$	—
Foreign currency forward contracts						(16)						—						(16)						—
Net investment hedges						(5,618)						—						(5,618)						—
Total derivatives						$	(5,019)					$	—					$	(5,019)					$	—

 

						Total Fair Value Measurement March 31, 2021						Quoted Price in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Lead forward contracts						$	(1,980)					$	—					$	(1,980)					$	—
Foreign currency forward contracts						424						—						424						—
Total derivatives						$	(1,556)					$	—					$	(1,556)					$	—

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 the 2021 Annual Report.

The fair values for foreign currency forward contracts and net investment hedges 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.

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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 Second Amended Credit Facility (as defined in Note 12), approximate their respective carrying value, as they are variable rate debt and the terms are comparable to market terms as of the balance sheet dates and are classified as Level 2.

In fiscal 2020, the Company issued its 4.375% Senior Notes due December 15, 2027 (the “2027 Notes”), with an original face value of $300,000. The Company's 5.00% Senior Notes due April 30, 2023 (the “2023 Notes”), with an original face value of $300,000, were issued in fiscal 2016. The fair value of the 2027 Notes and 2023 Notes (collectively, the “Senior Notes”) represent the trading values based upon quoted market prices and are classified as Level 2. The 2027 Notes were trading at approximately 104% and 102% of face value on January 2, 2022 and March 31, 2021, respectively. The 2023 Notes were trading at approximately 103% and 105% of face value on January 2, 2022 and March 31, 2021, respectively.

The carrying amounts and estimated fair values of the Company’s derivatives and Senior Notes at January 2, 2022 and March 31, 2021 were as follows:

						January 2, 2022												March 31, 2021
						Carrying Amount						Fair Value						Carrying Amount						Fair Value
Financial assets:
Derivatives (1)						$	—					$	—					$	—					$	—
Financial liabilities:
Senior Notes (2)						$	600,000					$	619,890					$	600,000					$	621,000
Derivatives (1)						5,019						5,019						1,556						1,556

(1)Represents lead, foreign currency forward contracts and net investment hedges (see Note 7 for asset and liability positions of the lead, foreign currency forward contracts and net investment hedges at January 2, 2022 and March 31, 2021).

(2)The fair value amount of the Senior Notes at January 2, 2022 and March 31, 2021 represent the trading value of the instruments.

7. Derivative Financial Instruments

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

Derivatives in Cash Flow Hedging Relationships

Lead Forward Contracts

The Company enters into lead forward contracts to fix the price for a portion of its lead purchases. Management considers the lead forward contracts to be effective against changes in the cash flows of the underlying lead purchases. The vast majority of such contracts are for a period not extending beyond one year. At January 2, 2022 and March 31, 2021, the Company has hedged the price to purchase approximately 48.0 million pounds and 54.5 million pounds of lead, respectively, for a total purchase price of $49,869 and $50,567, 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 January 2, 2022 and March 31, 2021, the Company had entered into a total of $28,622 and $26,033, respectively, of such contracts.

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Derivatives in Net Investment Hedging Relationships

Net Investment Hedges

On December 23, 2021, the Company entered into cross currency fixed interest rate swap agreements, with aggregate notional amounts of $300,000, to hedge its net investments in foreign operations against future volatility in the exchange rates between U.S. Dollars and Euros. These swaps mature on December 15, 2027 and qualify for hedge accounting as a net investment hedging instrument, which allows the swaps to be remeasured to foreign currency translation adjustment within AOCI (“Accumulated Other Comprehensive Income”) to offset the translation risk from those investments. Balances in the foreign currency translation adjustment accounts remain until the sale or substantially complete liquidation of the foreign entity, upon which they are recognized as a component of income (expense).

Impact of Hedging Instruments on AOCI

In the coming twelve months, the Company anticipates that $5,919 of pretax gain relating to lead, foreign currency forward contracts and net investment hedges will be reclassified from AOCI as part of cost of goods sold and interest expense. This amount represents the current net unrealized impact of hedging lead, foreign exchange rates and interest rates, which will change as market rates change in the future. This amount will ultimately be realized in the Consolidated Condensed Statements of Income as an offset to the corresponding actual changes in lead, foreign exchange rates and interest costs resulting from variable lead cost, foreign exchange and interest rates 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 January 2, 2022 and March 31, 2021, the notional amount of these contracts was $25,802 and $28,995, 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

January 2, 2022 and March 31, 2021

 

						Derivatives and Hedging  Activities Designated as Cash Flow Hedges												Derivatives and Hedging Activities Designated as Net Investment Hedges												Derivatives and Hedging Activities Not Designated as Hedging Instruments
						January 2, 2022						March 31, 2021						January 2, 2022						March 31, 2021						January 2, 2022						March 31, 2021
Prepaid and other current assets:
Lead forward contracts						$	615					$	—					$	—					$	—					$	—					$	—
Foreign currency forward contracts						5						524						—						—						—						—
Net investment hedges						—						—						4,083						—						—						—
Total assets						$	620					$	524					$	4,083					$	—					$	—					$	—
Accrued expenses:
Lead forward contracts						$	—					$	1,980					$	—					$	—					$	—					$	—
Foreign currency forward contracts						—						—						—						—						21						100
Other liabilities:
Net investment hedges						—						—						9,701						—						—						—
Total liabilities						$	—					$	1,980					$	9,701					$	—					$	21					$	100

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

For the quarter ended January 2, 2022

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						$	4,198					Cost of goods sold						$	5,147
Foreign currency forward contracts						296						Cost of goods sold						374
Total						$	4,494											$	5,521

Derivatives Designated as Net Investment 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)
Cross currency fixed interest rate swaps						$	(5,530)					Interest expense						$	88
Total						$	(5,530)											$	88

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						$	304
Total									$	304

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

For the quarter ended January 3, 2021

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						$	4,843					Cost of goods sold						$	998
Foreign currency forward contracts						(618)						Cost of goods sold						(336)
Total						$	4,225											$	662

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						$	220
Total									$	220

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

For the nine months ended January 2, 2022

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						$	9,361					Cost of goods sold						$	8,423
Foreign currency forward contracts						549						Cost of goods sold						346
Total						$	9,910											$	8,769

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Derivatives Designated as Net Investment 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)
Cross currency fixed interest rate swaps						$	(5,530)					Interest expense						$	88
Total						$	(5,530)											$	88

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						$	421
Total									$	421

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

For the nine months ended January 3, 2021

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						$	1,350					Cost of goods sold						$	(7,655)
Foreign currency forward contracts						(811)						Cost of goods sold						(362)
Total						$	539											$	(8,017)

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						$	592
Total									592

8. Income Taxes

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarter of fiscal 2022 and 2021 was based on the estimated effective tax rates applicable for the full years ending March 31, 2022 and March 31, 2021, respectively, after giving effect to items specifically related to the interim periods. The Company’s effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions, in which the Company operates, change in tax laws and the amount of the Company's consolidated earnings before taxes.

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures were effective January 1, 2020. The Company recorded an income tax benefit of $1,883 during the nine months of fiscal 2021.

The consolidated effective income tax rates for the third quarter of fiscal 2022 and 2021 were 15.3% and 11.9%, and for the nine months of fiscal 2022 and 2021 were 14.2% and 13.7%, respectively. The rate increase in the third quarter compared to the prior quarter is primarily due to Hagen, Germany exit charges and changes in the mix of earnings among tax jurisdictions. The rate increase in the nine months of fiscal 2022 compared to the prior year period is primarily due to changes in mix of earnings among tax jurisdictions.

Foreign income as a percentage of worldwide income is estimated to be 79% for fiscal 2022 compared to 67% for fiscal 2021. The foreign effective tax rates for the nine months of fiscal 2022 and 2021 were 10.2% and 5.0%, respectively. Income from the Company's Swiss subsidiary comprised a substantial portion of the Company's overall foreign mix of income for both fiscal 2022 and fiscal 2021 and were taxed at an effective income tax rate of approximately 8% in both periods.

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9. Warranty

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

						Quarter ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Balance at beginning of period						$	56,222					$	60,312					$	58,962					$	63,525
Current period provisions						4,237						6,175						11,898						20,832
Costs incurred						(6,269)						(6,741)						(15,641)						(26,713)
Foreign currency translation adjustment						221						698						(808)						2,800
Balance at end of period						$	54,411					$	60,444					$	54,411					$	60,444

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10. Commitments, Contingencies and Litigation

Litigation and Other Legal Matters

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

European Competition Investigations

Certain of the Company’s European subsidiaries had received subpoenas and requests for documents and, in some cases, interviews from, and have had on-site inspections conducted by, the competition authorities of Belgium, Germany and the Netherlands relating to conduct and anticompetitive practices of certain industrial battery participants. For additional information regarding these matters, see Note 19 - Commitments, Contingencies and Litigation to the Consolidated Financial Statements contained in the 2021 Annual Report. As of January 2, 2022 and March 31, 2021, the Company did not have a reserve balance related to these matters.

The precise scope, timing and time period at issue, as well as the final outcome of the investigations or customer claims, remain uncertain. Accordingly, the Company’s estimate may change from time to time, and actual losses could vary.

Environmental Issues

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

Lead, Foreign Currency Forward Contracts and Swaps

To stabilize its lead costs and reduce volatility from currency and interest rate movements, the Company entered into contracts with financial institutions. The vast majority of lead and foreign currency contracts are for a period not extending beyond one year. The Company also entered into cross currency fixed interest rate swap agreements to hedge its net investments in foreign operations against future volatility in the exchange rates between U.S. Dollars and Euros and these agreements mature on December 15, 2027. Please refer to Note 7 - Derivative Financial Instruments for more details.

11. Restructuring and other Exit Charges

Restructuring Programs

As disclosed in the 2021 Annual Report, the Company committed to restructuring plans aimed at improving operational efficiencies across its lines of business. A substantial portion of these plans are complete with an estimated $1,901 remaining to be incurred by the end of fiscal 2022, mainly related to plans started in fiscal 2021 and 2022. Restructuring and exit charges for the third quarter and nine months of fiscal 2022 by reportable segments are as follows:

						Quarter ended January 2, 2022
						Energy Systems						Motive Power						Specialty						Total
Restructuring charges						$	682					$	261					$	36					$	979
Exit charges						—						1,418						75						1,493
Restructuring and other exit charges						$	682					$	1,679					$	111					$	2,472

						Nine months ended January 2, 2022
						Energy Systems						Motive Power						Specialty						Total
Restructuring charges						$	1,701					$	1,542					$	75					$	3,318
Exit charges						(370)						11,346						(1,133)						9,843
Restructuring and other exit charges						$	1,331					$	12,888					$	(1,058)					$	13,161

A roll-forward of the restructuring reserve, excluding exit charges, is as follows:

Balance as of March 31, 2021						$	2,595
Accrued						3,318
Costs incurred						(4,689)
Foreign currency impact						34
Balance as of January 2, 2022						$	1,258

Exit Charges

Fiscal 2021 Programs

Hagen, Germany

In fiscal 2021, the Company's Board of Directors approved a plan to close substantially all of its facility in Hagen, Germany, which produces flooded motive power batteries for forklifts. Management determined that future demand for the motive power batteries produced at this facility was not sufficient, given the conversion from flooded to maintenance free batteries by customers, the existing number of competitors in the market, as well as the near term decline in demand and increased

uncertainty from the pandemic. The Company plans to retain the facility with limited sales, service and administrative functions along with related personnel for the foreseeable future.

The Company currently estimates that the total charges for these actions will amount to approximately $60,000, the majority of which has been recorded as of January 2, 2022. Cash charges for employee severance related payments, cleanup related to the facility, contractual releases and legal expenses are estimated to be $40,000 and non-cash charges from inventory and equipment write-offs are estimated to be $20,000. These actions resulted in the reduction of approximately 200 employees.

During fiscal 2021, the Company recorded cash charges relating to severance of $23,331 and non-cash charges of $7,946 primarily relating to fixed asset write-offs.

During the nine months of fiscal 2022, the Company recorded cash charges primarily relating to severance of $7,915 and non-cash charges of $3,801 primarily relating to fixed asset write-offs. The Company also recorded a non-cash write off relating to inventories of $960, which was reported in cost of goods sold.

Targovishte, Bulgaria

During fiscal 2019, the Company committed to a plan to close its facility in Targovishte, Bulgaria, which produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. Of the estimated total charges of $26,000 for this plan, the Company had recorded charges amounting to $20,242 in fiscal 2019, relating to severance and inventory and fixed asset write-offs and an additional $5,123 relating to cash and non-cash charges during fiscal 2020. During fiscal 2021, in keeping with its strategy of

exiting the manufacture of batteries for diesel-electric submarines, the Company completed further actions which resulted in

$220 relating to cash and non-cash charges. During the nine months of fiscal 2022, the Company sold this facility for $1,489. A net gain of $1,208 was recorded as a credit to exit charges in the Consolidated Condensed Statement of Income.

Vijayawada, India

During fiscal 2021, the Company committed to a plan to close its facility in Vijayawada, India to align with its strategic vision for the new line of business structure and footprint. The Company recorded exit charges of $1,509, primarily relating to asset write-offs.

Fiscal 2022 Program

Zamudio, Spain

During the first quarter of fiscal 2022, the Company closed a minor assembling plant in Zamudio, Spain and sold the same for $1,779. A net gain of $740 was recorded as a credit to exit charges in the Consolidated Condensed Statement of Income.

Richmond, Kentucky Plant Fire

During fiscal 2021, the Company settled its claims with its insurance carrier relating to the fire that broke out in the battery formation area of the Company's Richmond, Kentucky motive power production facility in fiscal 2020.

During the nine months of fiscal 2021, the Company recorded a charge of $16,577 as receivable for cleanup and received $18,408 from the insurance carrier. In addition to the property damage claim, the Company also received $7,500 in business interruption claims that was credited to cost of goods sold.

12. Debt

The following summarizes the Company’s long-term debt as of January 2, 2022 and March 31, 2021:

 

						January 2, 2022												March 31, 2021
						Principal						Unamortized Issuance Costs						Principal						Unamortized Issuance Costs
Senior Notes						$	600,000					$	4,205					$	600,000					$	5,106
Second Amended Credit Facility, due 2026						599,222						3,548						376,039						1,315
						$	1,199,222					$	7,753					$	976,039					$	6,421
Less: Unamortized issuance costs						7,753												6,421
Long-term debt, net of unamortized issuance costs						$	1,191,469											$	969,618

The Company's Senior Notes comprise the following:

4.375% Senior Notes due 2027

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

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

5.00% Senior Notes due 2023

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

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2017 Credit Facility and Subsequent Amendments

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

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

During the second quarter of fiscal 2022, the Company entered into a second amendment to the Amended Credit Facility (as amended, the “Second Amended Credit Facility”). The Second Amended Credit Facility, scheduled to mature on September 30, 2026, consists of a $130,000 senior secured term loan (the “Second Amended Term Loan”), a CAD 106,440 ($84,229) senior secured term loan and an $850,000 senior secured revolving credit facility (the “Second Amended Revolver”). The second amendment resulted in a decrease of the Amended Term Loan by $150,000 and an increase of the Amended Revolver by $150,000.

Subsequent to the second amendment, the quarterly installments payable on the Second Amended Term Loan are $2,678 beginning December 31, 2022, $4,017 beginning December 31, 2024 and $5,356 beginning December 31, 2025 with a final payment of $160,672 on September 30, 2026. The Second Amended Credit Facility may be increased by an aggregate amount of $350,000 in revolving commitments and / or one or more new tranches of term loans, under certain conditions. Both the Second Amended Revolver and the Second Amended Term Loan bear interest, at the Company's option, at a rate per annum equal to either (i) the London Interbank Offered Rate (“LIBOR”) or Canadian Dollar Offered Rate (“CDOR”) plus (i) LIBOR plus between 1.125% and 2.00% (currently 1.50% and based on the Company's consolidated net leverage ratio) or (ii) the U.S. Dollar Base Rate (which equals, for any day a fluctuating rate per annum equal to the highest of (a) the Federal Funds Effective Rate plus 0.50%, (b) Bank of America “Prime Rate” and (c) the Eurocurrency Base Rate plus 1%; provided that, if the Base Rate shall be less than zero, such rate shall be deemed zero) (iii) the CDOR Base Rate equal to the higher of (a) Bank of America “Prime Rate” and (b) average 30-day CDOR rate plus 0.50%. The Second Amended Credit Facility provides for alternate benchmark rates such as the Secured Overnight Financing Rate (“SOFR”) to replace LIBOR when it is phased out.

Obligations under the Second Amended Credit Facility are secured by substantially all of the Company’s existing and future acquired assets, including substantially all of the capital stock of the Company’s United States subsidiaries that are guarantors under the Second Amended Credit Facility and up to 65% of the capital stock of certain of the Company’s foreign subsidiaries that are owned by the Company’s United States subsidiaries.

The Second Amended Credit Facility allows for up to two temporary increases in the maximum leverage ratio from 3.50x to 4.00x for a four quarter period following an acquisition larger than $250,000.

As of January 2, 2022, the Company had $385,000 outstanding under the Second Amended Revolver and $214,222 under the Second Amended Term Loan.

The current portion of the Second Amended Term Loan is $2,678.

Short-Term Debt

As of January 2, 2022 and March 31, 2021, the Company had $33,503 and $34,153, respectively, of short-term borrowings. The weighted average interest rate on these borrowings was approximately 2% at both January 2, 2022 and March 31, 2021.

Letters of Credit

As of January 2, 2022 and March 31, 2021, the Company had $2,959 of standby letters of credit.

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Debt Issuance Costs

In connection with the Second Amended Credit Facility, the Company capitalized $2,952 in debt issuance costs and wrote off $128 of unamortized debt issuance costs. Amortization expense, relating to debt issuance costs, included in interest expense was $487 and $518, respectively, for the third quarter ended January 2, 2022 and January 3, 2021 and $1,620 and $1,554 for the nine months of fiscal 2022 and fiscal 2021, respectively. Debt issuance costs, net of accumulated amortization, totaled $7,753 and $6,421, respectively, at January 2, 2022 and March 31, 2021.

Available Lines of Credit

As of January 2, 2022 and March 31, 2021, the Company had available and undrawn, under all its lines of credit, $570,731 and $697,875, respectively, including $107,856 and $122,303, respectively, of uncommitted lines of credit.

13. Retirement Plans

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

						United States Plans												International Plans
						Quarter ended												Quarter ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Service cost						$	—					$	—					$	282					$	252
Interest cost						127						135						352						352
Expected return on plan assets						(137)						(73)						(545)						(480)
Amortization and deferral						(5)						92						290						263
Net periodic benefit cost						$	(15)					$	154					$	379					$	387

						United States Plans												International Plans
						Nine months ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Service cost						$	—					$	—					$	872					$	739
Interest cost						387						400						1,078						1,027
Expected return on plan assets						(394)						(204)						(1,663)						(1,401)
Amortization and deferral						5						357						890						766
Net periodic benefit cost						$	(2)					$	553					$	1,177					$	1,131

14. Stock-Based Compensation

As of January 2, 2022, the Company maintains the 2017 Equity Incentive Plan as amended from time to time (“2017 EIP”). The 2017 EIP reserved 4,173,554 shares of common stock for the grant of various classes of nonqualified stock options, restricted stock units, market condition-based on total shareholder return (“TSR”) and performance condition-based share units (“PSU”) and other forms of equity-based compensation.

The Company recognized stock-based compensation expense associated with its equity incentive plans of $6,393 for the third quarter of fiscal 2022 and $6,396 for the third quarter of fiscal 2021. Stock-based compensation was $15,817 and $16,982 for the nine months of fiscal 2022 and fiscal 2021, respectively. The Company recognizes compensation expense using the straight-line method over the vesting period of the awards.

During the nine months of fiscal 2022, the Company granted to non-employee directors 23,548 restricted stock units, under the deferred compensation plan for non-employee directors. The awards vest immediately upon the date of grant and are settled in shares of common stock.

During the nine months of fiscal 2022, the Company granted to management and other key employees 246,222 non-qualified stock options that vest ratably over three years from the date of grant and 229,600 restricted stock units that vest ratably over four years from the date of grant.

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Common stock activity during the nine months of fiscal 2022 included the exercise of 41,552 stock options and the vesting of 209,910 restricted stock units, 46,295 TSRs and 670 PSUs.

As of January 2, 2022, there were 981,356 non-qualified stock options, 891,281 restricted stock units including non-employee director restricted stock units, 75,218 TSRs and 77,195 PSUs outstanding.

15. Stockholders’ Equity and Noncontrolling Interests

Common Stock

The following demonstrates the change in the number of shares of common stock outstanding during the nine months ended January 2, 2022:

 

Shares outstanding as of March 31, 2021						42,753,020
Purchase of treasury stock						(1,422,569)
Shares issued under equity-based compensation plans, net of equity awards surrendered for option price and taxes						215,901
Shares outstanding as of January 2, 2022						41,546,352

Treasury Stock

During the nine months ended January 2, 2022, the Company purchased 1,422,569 shares for $114,534 and did not purchase any shares during the nine months ended January 3, 2021. At January 2, 2022 and March 31, 2021, the Company held 14,191,647 and 12,799,790 shares as treasury stock, respectively. During the nine months ended January 2, 2022, the Company also issued 10,712 shares out of its treasury stock, valued at $62.55 per share, on a LIFO basis, to participants under the Company's Employee Stock Purchase Plan.

Accumulated Other Comprehensive Income (“AOCI ”)

The components of AOCI, net of tax, as of January 2, 2022 and March 31, 2021, are as follows:

						March 31, 2021						Before Reclassifications						Amounts Reclassified from AOCI						January 2, 2022
Pension funded status adjustment						$	(20,947)					$	—					$	689					$	(20,258)
Net unrealized gain (loss) on derivative instruments						360						7,592						(6,714)						1,238
Foreign currency translation adjustment (1)						(95,296)						(26,671)						—						(121,967)
Accumulated other comprehensive (loss) income						$	(115,883)					$	(19,079)					$	(6,025)					$	(140,987)

(1) Foreign currency translation adjustment for the nine months ended January 2, 2022 includes a $4,302 loss (net of taxes of $1,316) relating to the net investment hedges entered into by the Company on December 23, 2021.

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The following table presents reclassifications from AOCI during the third quarter ended January 2, 2022:

Components of AOCI						Amounts Reclassified from AOCI						Location of (Gain) Loss Recognized on Income Statement
Derivatives in cash flow hedging relationships:
Net unrealized gain on derivative instruments						$	(5,521)					Cost of goods sold
Tax expense						1,294
Net unrealized gain on derivative instruments, net of tax						$	(4,227)
Derivatives in net investment hedging relationships:
Net unrealized gain on derivative instruments						$	(88)					Interest expense
Tax expense						20
Net unrealized gain on derivative instruments, net of tax						$	(68)
Defined benefit pension costs:
Prior service costs and deferrals						$	285					Net periodic benefit cost, included in other (income) expense, net - See Note 13
Tax benefit						(69)
Net periodic benefit cost, net of tax						$	216

The following table presents reclassifications from AOCI during the nine months ended January 2, 2022:

Components of AOCI						Amounts Reclassified from AOCI						Location of (Gain) Loss Recognized on Income Statement
Derivatives in cash flow hedging relationships:
Net unrealized gain on derivative instruments						$	(8,769)					Cost of goods sold
Tax expense						2,055
Net unrealized gain on derivative instruments, net of tax						$	(6,714)
Derivatives in net investment hedging relationships:
Net unrealized gain on derivative instruments						$	(88)					Interest expense
Tax expense						20
Net unrealized gain on derivative instruments, net of tax						$	(68)
Defined benefit pension costs:
Prior service costs and deferrals						$	895					Net periodic benefit cost, included in other (income) expense, net - See Note 13
Tax benefit						(206)
Net periodic benefit cost, net of tax						$	689

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The following table presents reclassifications from AOCI during the third quarter ended January 3, 2021:

Components of AOCI						Amounts Reclassified from AOCI						Location of (Gain) Loss Recognized on Income Statement
Derivatives in cash flow hedging relationships:
Net unrealized gain on derivative instruments						$	(662)					Cost of goods sold
Tax expense						157
Net unrealized gain on derivative instruments, net of tax						$	(505)
Defined benefit pension costs:
Prior service costs and deferrals						$	355					Net periodic benefit cost, included in other (income) expense, net - See Note 13
Tax benefit						(86)
Net periodic benefit cost, net of tax						$	269

The following table presents reclassifications from AOCI during the nine months ended January 3, 2021:

Components of AOCI						Amounts Reclassified from AOCI						Location of (Gain) Loss Recognized on Income Statement
Derivatives in cash flow hedging relationships:
Net unrealized loss on derivative instruments						$	8,017					Cost of goods sold
Tax benefit						(1,897)
Net unrealized loss on derivative instruments, net of tax						$	6,120
Defined benefit pension costs:
Prior service costs and deferrals						$	1,123					Net periodic benefit cost, included in other (income) expense, net - See Note 13
Tax benefit						(258)
Net periodic benefit cost, net of tax						$	865

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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the third quarter and nine months ended January 2, 2022:

(In Thousands, Except Per Share Data)						Preferred Stock						Common Stock						Additional Paid-in Capital						Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Contra-Equity						Total EnerSys Stockholders’ Equity						Non- redeemable Non- Controlling Interests						Total Equity
Balance at March 31, 2021						$	—					$	555					$	554,168					$	(563,481)					$	1,669,751					$	(115,883)					$	(5,355)					$	1,539,755					$	3,821					$	1,543,576
Stock-based compensation						—						—						3,659						—						—						—						—						3,659						—						3,659
Exercise of stock options						—						1						386						—						—						—						—						387						—						387
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(4,803)						—						—						—						—						(4,803)						—						(4,803)
Purchase of common stock						—						—						—						(31,512)						—						—						—						(31,512)						—						(31,512)
Other						—						—						44						170						—						—						—						214						—						214
Net earnings						—						—						—						—						43,929						—						—						43,929						—						43,929
Dividends ($0.175 per common share)						—						—						173						—						(7,608)						—						—						(7,435)						—						(7,435)
Dissolution of joint venture						—						—						—						—						—						—						—						—						(47)						(47)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $68)						—						—						—						—						—						240						—						240						—						240
Net unrealized gain (loss) on derivative instruments (net of tax expense of $1,187)						—						—						—						—						—						3,897						—						3,897						—						3,897
Foreign currency translation adjustment						—						—						—						—						—						15,272						—						15,272						49						15,321
Balance at July 4, 2021						$	—					$	556					$	553,627					$	(594,823)					$	1,706,072					$	(96,474)					$	(5,355)					$	1,563,603					$	3,823					$	1,567,426
Stock-based compensation						—						—						5,765						—						—						—						—						5,765						—						5,765
Exercise of stock options						—						1						770						—						—						—						—						771						—						771
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(4,197)						—						—						—						—						(4,197)						—						(4,197)
Contra equity - adjustment to indemnification receivable for acquisition related tax liability						—						—						—						—						—						—						1,354						1,354						—						1,354
Purchase of common stock						—						—						—						—						—						—						—						—						—						—
Other						—						—						52						174						—						—						—						226						—						226
Net earnings						—						—						—						—						35,626						—						—						35,626						—						35,626
Dividends ($0.175 per common share)						—						—						185						—						(7,641)						—						—						(7,456)						—						(7,456)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $69)						—						—						—						—						—						233						—						233						—						233
Net unrealized gain (loss) on derivative instruments (net of tax benefit of $683)						—						—						—						—						—						(2,233)						—						(2,233)						—						(2,233)
Foreign currency translation adjustment						—						—						—						—						—						(23,673)						—						(23,673)						15						(23,658)
Balance at October 3, 2021						$	—					$	557					$	556,202					$	(594,649)					$	1,734,057					$	(122,147)					$	(4,001)					$	1,570,019					$	3,838					$	1,573,857

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Stock-based compensation						—						—						6,393						—						—						—						—						6,393						—						6,393
Exercise of stock options						—						—						115						—						—						—						—						115						—						115
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(120)						—						—						—						—						(120)						—						(120)
Contra equity - adjustment to indemnification receivable for acquisition related tax liability						—						—						—						—						—						—						381						381						—						381
Purchase of common stock						—						—						—						(83,022)						—						—						—						(83,022)						—						(83,022)
Other						—						—						31						195						—						—						—						226						—						226
Net earnings						—						—						—						—						36,264						—						—						36,264						—						36,264
Dividends ($0.175 per common share)						—						—						184						—						(7,480)						—						—						(7,296)						—						(7,296)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $69)						—						—						—						—						—						216						—						216						—						216
Net unrealized gain (loss) on derivative instruments (net of tax benefit of $241)						—						—						—						—						—						(786)						—						(786)						—						(786)
Foreign currency translation adjustment						—						—						—						—						—						(18,270)						—						(18,270)						56						(18,214)
Balance at January 2, 2022						$	—					$	557					$	562,805					$	(677,476)					$	1,762,841					$	(140,987)					$	(3,620)					$	1,504,120					$	3,894					$	1,508,014

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The following demonstrates the change in equity attributable to EnerSys stockholders and nonredeemable noncontrolling interests during the third quarter and nine months ended January 3, 2021:

(In Thousands, Except Per Share Data)						Preferred Stock						Common Stock						Additional Paid-in Capital						Treasury Stock						Retained Earnings						Accumulated Other Comprehensive Income (Loss)						Contra-Equity						Total EnerSys Stockholders’ Equity						Non- redeemable Non- Controlling Interests						Total Equity
Balance at March 31, 2020						$	—					$	551					$	529,100					$	(564,376)					$	1,556,980					$	(215,006)					$	(6,724)					$	1,300,525					$	3,537					$	1,304,062
Stock-based compensation						—						—						5,053						—						—						—						—						5,053						—						5,053
Exercise of stock options						—						2						479						—						—						—						—						481						—						481
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(3,135)						—						—						—						—						(3,135)						—						(3,135)
Purchase of common stock						—						—						—						—						—						—						—						—						—						—
Other						—						—						(123)						299						—						—						—						176						—						176
Net earnings						—						—						—						—						35,183						—						—						35,183						—						35,183
Dividends ($0.175 per common share)						—						—						172						—						(7,600)						—						—						(7,428)						—						(7,428)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $86)						—						—						—						—						—						291						—						291						—						291
Net unrealized gain (loss) on derivative instruments (net of tax expense of $726)						—						—						—						—						—						2,343						—						2,343						—						2,343
Foreign currency translation adjustment						—						—						—						—						—						28,139						—						28,139						8						28,147
Balance at July 5, 2020						$	—					$	553					$	531,546					$	(564,077)					$	1,584,563					$	(184,233)					$	(6,724)					$	1,361,628					$	3,545					$	1,365,173
Stock-based compensation						—						—						5,533						—						—						—						—						5,533						—						5,533
Exercise of stock options						—						1						1,284						—						—						—						—						1,285						—						1,285
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(1,467)						—						—						—						—						(1,467)						—						(1,467)
Contra equity - adjustment to indemnification receivable for acquisition related tax liability						—						—						—						—						—						—						1,451						1,451						—						1,451
Purchase of common stock						—						—						—						—						—						—						—						—						—						—
Other						—						—						(7)						224						—						—						—						217						—						217
Net earnings						—						—						—						—						35,731						—						—						35,731						—						35,731
Dividends ($0.175 per common share)						—						—						203						—						(7,654)						—						—						(7,451)						—						(7,451)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $86)						—						—						—						—						—						305						—						305						—						305
Net unrealized gain (loss) on derivative instruments (net of tax expense of $454)						—						—						—						—						—						1,470						—						1,470						—						1,470
Foreign currency translation adjustment						—						—						—						—						—						32,689						—						32,689						144						32,833
Balance at October 4, 2020						$	—					$	554					$	537,092					$	(563,853)					$	1,612,640					$	(149,769)					$	(5,273)					$	1,431,391					$	3,689					$	1,435,080
Stock-based compensation						—						—						6,396						—						—						—						—						6,396						—						6,396
Exercise of stock options						—						—						3,052						—						—						—						—						3,052						—						3,052
Shares issued under equity awards (taxes paid related to net share settlement of equity awards), net						—						—						(357)						—						—						—						—						(357)						—						(357)
Purchase of common stock						—						—						—						—						—						—						—						—						—						—
Other						—						—						(1)						191						—						—						—						190						—						190
Net earnings						—						—						—						—						38,624						—						—						38,624						—						38,624
Dividends ($0.175 per common share)						—						—						203						—						(7,681)						—						—						(7,478)						19						(7,459)
Other comprehensive income:
Pension funded status adjustment (net of tax benefit of $86)						—						—						—						—						—						269						—						269						—						269
Net unrealized gain (loss) on derivative instruments (net of tax expense of $845)						—						—						—						—						—						2,718						—						2,718						—						2,718
Foreign currency translation adjustment						—						—						—						—						—						52,752						—						52,752						149						52,901
Balance at January 3, 2021						$	—					$	554					$	546,385					$	(563,662)					$	1,643,583					$	(94,030)					$	(5,273)					$	1,527,557					$	3,857					$	1,531,414

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16. Earnings Per Share

The following table sets forth the reconciliation from basic to diluted weighted-average number of common shares outstanding and the calculations of net earnings per common share attributable to EnerSys stockholders.

 

						Quarter ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Net earnings attributable to EnerSys stockholders						$	36,264					$	38,624					$	115,819					$	109,538
Weighted-average number of common shares outstanding:
Basic						41,905,815						42,599,834						42,393,907						42,502,460
Dilutive effect of:
Common shares from exercise and lapse of equity awards, net of shares assumed reacquired						591,230						690,569						702,833						600,844
Diluted weighted-average number of common shares outstanding						42,497,045						43,290,403						43,096,740						43,103,304
Basic earnings per common share attributable to EnerSys stockholders						$	0.87					$	0.91					$	2.73					$	2.58
Diluted earnings per common share attributable to EnerSys stockholders						$	0.85					$	0.89					$	2.69					$	2.54
Anti-dilutive equity awards not included in diluted weighted-average common shares						835,192						120,048						429,532						218,642

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17. Business Segments

Summarized financial information related to the Company's reportable segments for the third quarter and nine months ended January 2, 2022 and January 3, 2021, is shown below:

						Quarter ended												Nine months ended
						January 2, 2022						January 3, 2021						January 2, 2022						January 3, 2021
Net sales by segment to unaffiliated customers (1)
Energy Systems						$	385,242					$	337,248					$	1,126,287					$	1,031,457
Motive Power						339,510						304,373						996,313						830,945
Specialty						119,254						109,446						327,694						301,991
Total net sales						$	844,006					$	751,067					$	2,450,294					$	2,164,393
Operating earnings by segment
Energy Systems						$	3,542					$	18,407					$	11,777					$	63,489
Motive Power						39,030						40,270						130,660						91,695
Specialty						11,065						12,590						33,443						29,224
Inventory adjustment relating to exit activities - Motive Power						—						—						(960)						—
Restructuring and other exit charges - Energy Systems						(682)						(868)						(1,331)						(2,711)
Restructuring and other exit charges - Motive Power						(1,679)						(14,348)						(12,888)						(16,791)
Restructuring and other exit charges - Specialty						(111)						20						1,058						(200)
Total operating earnings (2)						$	51,165					$	56,071					$	161,759					$	164,706

(1) Reportable segments do not record inter-segment revenues and accordingly there are none to report.

(2) The Company does not allocate interest expense or other (income) expense, net, to the reportable segments.

18. Subsequent Events

Between January 3, 2022 through February 9, 2022, the Company repurchased 446,969 shares for approximately $33,116.

On February 9, 2022, the Board of Directors approved a quarterly cash dividend of $0.175 per share of common stock to be paid on March 25, 2022, to stockholders of record as of March 11, 2022.

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ITEM 2.			MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

The Private Securities Litigation Reform Act of 1995 (the “Reform Act”) provides a safe harbor for forward-looking statements made by or on behalf of EnerSys. EnerSys and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained in EnerSys’ filings with the Securities and Exchange Commission (“SEC”) and its reports to stockholders. Generally, the inclusion of the words “anticipate,” “believe,” “expect,” “future,” “intend,” “estimate,” “will,” “plans,” or the negative of such terms and similar expressions identify statements that constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments that EnerSys expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management’s then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management, and are applicable only as of the dates of such statements.

Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2021 (our “2021 Annual Report”) and other unforeseen risks. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

Our actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including the following factors:

•economic, financial and other impacts of the COVID-19 pandemic, including global supply chain disruptions;

•general cyclical patterns of the industries in which our customers operate;

•the extent to which we cannot control our fixed and variable costs;

•the raw materials in our products may experience significant fluctuations in market price and availability;

•certain raw materials constitute hazardous materials that may give rise to costly environmental and safety claims;

•legislation regarding the restriction of the use of energy or certain hazardous substances in our products;

•risks involved in our operations such as supply chain issues, disruption of markets, changes in import and export laws, environmental regulations, currency restrictions and local currency exchange rate fluctuations;

•our ability to raise our selling prices to our customers when our product costs increase;

•the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity;

•changes in macroeconomic and market conditions and market volatility (including developments and volatility arising from the COVID-19 pandemic), including inflation, interest rates, the value of securities and other financial assets, transportation costs, costs and availability of electronic components, lead, plastic resins, steel, copper and other commodities used by us, and the impact of such changes and volatility on our financial position and business;

•competitiveness of the battery markets and other energy solutions for industrial applications throughout the world;

•our timely development of competitive new products and product enhancements in a changing environment and the acceptance of such products and product enhancements by customers;

•our ability to adequately protect our proprietary intellectual property, technology and brand names;

•litigation and regulatory proceedings to which we might be subject;

•our expectations concerning indemnification obligations;

•changes in our market share in the business segments where we operate;

•our ability to implement our cost reduction initiatives successfully and improve our profitability;

•quality problems associated with our products;

•our ability to implement business strategies, including our acquisition strategy, manufacturing expansion and restructuring plans;

•our acquisition strategy may not be successful in locating advantageous targets;

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•our ability to successfully integrate any assets, liabilities, customers, systems and management personnel we acquire into our operations and our ability to realize related revenue synergies, strategic gains, and cost savings may be significantly harder to achieve, if at all, or may take longer to achieve;

•potential goodwill impairment charges, future impairment charges and fluctuations in the fair values of reporting units or of assets in the event projected financial results are not achieved within expected time frames;

•our debt and debt service requirements which may restrict our operational and financial flexibility, as well as imposing unfavorable interest and financing costs;

•our ability to maintain our existing credit facilities or obtain satisfactory new credit facilities;

•adverse changes in our short and long-term debt levels under our credit facilities;

•our exposure to fluctuations in interest rates on our variable-rate debt;

•risks related to the discontinuation of the London Interbank Offered Rate and other reference rates, including increased expenses and the effectiveness of hedging strategies;

•our ability to attract and retain qualified management and personnel;

•our ability to maintain good relations with labor unions;

•credit risk associated with our customers, including risk of insolvency and bankruptcy;

•our ability to successfully recover in the event of a disaster affecting our infrastructure, supply chain, or our facilities;

•delays or cancellations in shipments;

•occurrence of natural or man-made disasters or calamities, including health emergencies, the spread of infectious diseases, pandemics, vaccine mandates, outbreaks of hostilities or terrorist acts, or the effects of climate change, and our ability to deal effectively with damages or disruptions caused by the foregoing; and

•the operation, capacity and security of our information systems and infrastructure.

This list of factors that may affect future performance is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.

In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered “non-GAAP financial measures” under SEC rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q. EnerSys’ management uses the non-GAAP measures “primary working capital” and “primary working capital percentage” in its evaluation of cash flow and financial position performance. These disclosures have limitations as an analytical tool, should not be viewed as a substitute for cash flow determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes that this non-GAAP supplemental information is helpful in understanding the Company’s ongoing operating results.

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Overview

EnerSys (the “Company,” “we,” or “us”) is a world leader in stored energy solutions for industrial applications. We also manufacture and distribute energy systems solutions and motive power batteries, specialty batteries, battery chargers, power equipment, battery accessories and outdoor equipment enclosure solutions to customers worldwide. Energy Systems which combine enclosures, power conversion, power distribution and energy storage are used in the telecommunication and broadband, utility industries, uninterruptible power supplies, and numerous applications requiring stored energy solutions. Motive Power batteries and chargers are utilized in electric forklift trucks and other industrial electric powered vehicles. Specialty batteries are used in aerospace and defense applications, large over the road trucks, premium automotive and medical. We also provide aftermarket and customer support services to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force around the world.

The Company's three reportable segments, based on lines of business, are as follows:

•Energy Systems - uninterruptible power systems, or “UPS” applications for computer and computer-controlled systems, as well as telecommunications systems, switchgear and electrical control systems used in industrial facilities and electric utilities, large-scale energy storage and energy pipelines. Energy Systems also includes highly integrated power solutions and services to broadband, telecom, renewable and industrial customers, as well as thermally managed cabinets and enclosures for electronic equipment and batteries.

•Motive Power - power for electric industrial forklifts used in manufacturing, warehousing and other material handling applications as well as mining equipment, diesel locomotive starting and other rail equipment; and

•Specialty - premium starting, lighting and ignition applications in transportation, energy solutions for satellites, military aircraft, submarines, ships and other tactical vehicles as well as medical and security systems.

Economic Climate

The economic climate in North America and China experienced strong growth during calendar 2021 and is expected to grow strong in calendar 2022. EMEA’s economy grew moderately faster than normal in calendar 2021 and is forecasted to do the same in 2022. EMEA’s economic growth has been more impacted by the COVID-19 pandemic during calendar 2021. Inflation has increased in all regions during calendar 2021.

EnerSys is experiencing supply chain disruptions and cost spikes in certain materials such as plastic resins and electronic components along with transportation and related logistics challenges and broad-based cost increases. In addition, some locations are experiencing difficulty meeting hiring goals. Generally, our mitigation efforts and the recent economic recovery, have tempered the impact of the pandemic-related challenges. The overall market demand remains robust.

Volatility of Commodities and Foreign Currencies

Our most significant commodity and foreign currency exposures are related to lead and the Euro, respectively. Historically, volatility of commodity costs and foreign currency exchange rates have caused large swings in our production costs. As a result of the COVID-19 pandemic, lead cost dropped into the low 70 cents per pound during our first fiscal quarter of 2021 and has currently rallied to just below $1.10 per pound, which is above the pre-COVID-19 levels. We are experiencing increasing costs in some of our other raw materials such as plastic resins, steel, copper and electronics and increased freight costs.

Customer Pricing

Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 30% of our revenue is now subject to agreements that adjust pricing to a market-based index for lead. Customer pricing changes generally lag movements in lead prices and other costs by approximately six to nine months. In fiscal 2022, customer pricing has increased due to lead prices and other costs having increased throughout the year.

Based on current commodity markets, we will likely see year over year headwinds from increasing commodity prices, with some related increase in our selling prices in the upcoming year. As we concentrate more on energy systems and non-lead chemistries, the emphasis on lead will continue to decline.

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Liquidity and Capital Resources

During the second quarter of fiscal 2022, we entered into a second amendment to the Amended Credit Facility (as amended, the “Second Amended Credit Facility”). As a result, the Second Amended Credit Facility, now scheduled to mature on September 30, 2026, consists of a $130.0 million senior secured term loan (the “Second Amended Term Loan”), a CAD 106.4 million ($84.2 million) term loan and an $850.0 million senior secured revolving credit facility (the “Second Amended Revolver”). This amendment resulted in a decrease of the Amended Term Loan by $150.0 million and an increase of the Amended Revolver by $150.0 million.

We believe that our financial position is strong, and we have substantial liquidity to cover short-term liquidity requirements and anticipated growth in the foreseeable future, with $397 million of available cash and cash equivalents and available and undrawn committed credit lines of approximately $571 million at January 2, 2022, availability subject to credit agreement financial covenants.

A substantial majority of the Company’s cash and investments are held by foreign subsidiaries and are considered to be indefinitely reinvested and expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.

During the current quarter, the Company repurchased 1,093,561 shares of common stock for approximately $83.0 million. Between January 3, 2022 through February 9, 2022, the Company repurchased 446,969 shares for approximately $33.1 million.

We believe that our strong capital structure and liquidity affords us access to capital for future acquisition and stock repurchase opportunities and continued dividend payments.

Results of Operations

Net Sales

Net sales increased $92.9 million or 12.4% in the third quarter of fiscal 2022 as compared to the third quarter of fiscal 2021. This increase was the result of a 10% increase in organic volume resulting primarily from strong demand arising from robust markets and the easing of the pandemic and a 3% increase in pricing, partially offset by a 1% decrease in foreign currency translation impact.

Net sales increased $285.9 million or 13.2% in the nine months of fiscal 2022 as compared to the nine months of fiscal 2021. This increase was due to an 11% increase in organic volume resulting primarily from strong demand, and a 1% increase each in foreign currency translation impact and pricing.

Segment sales

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Energy Systems						$	385.2					45.7		%				$	337.2					44.9		%				$	48.0					14.2		%
Motive Power						339.5						40.2						304.4						40.5						35.1						11.5
Specialty						119.3						14.1						109.5						14.6						9.8						9.0
Total net sales						$	844.0					100.0		%				$	751.1					100.0		%				$	92.9					12.4		%

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Energy Systems						$	1,126.2					46.0		%				$	1,031.4					47.7		%				$	94.8					9.2		%
Motive Power						996.3						40.6						831.0						38.4						165.3						19.9
Specialty						327.8						13.4						302.0						13.9						25.8						8.5
Total net sales						$	2,450.3					100.0		%				$	2,164.4					100.0		%				$	285.9					13.2		%

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Net sales of our Energy Systems segment in the third quarter of fiscal 2022 increased $48.0 million or 14.2% compared to the third quarter of fiscal 2021. This increase was due to a 14% increase in organic volume and a 1% increase in pricing / mix, partially offset by a 1% decrease in foreign currency translation impact. Net sales of our Energy Systems segment in the nine months of fiscal 2022 increased $94.8 million or 9.2% compared to the nine months of fiscal 2021. This increase was due to a 9% increase in organic volume and a 1% increase in foreign currency translation impact, partially offset by a 1% decrease in pricing / mix. Continued strong demand in telecommunications and broadband was offset by supply chain driven constraints for our power systems products.

Net sales of our Motive Power segment in the third quarter of fiscal 2022 increased by $35.1 million or 11.5% compared to the third quarter of fiscal 2021. This increase was primarily due to a 9% increase in organic volume and a 5% increase in pricing, partially offset by a 2% decrease in foreign currency translation impact. Net sales of our Motive Power segment in the nine months of fiscal 2022 increased by $165.3 million or 19.9% compared to the nine months of fiscal 2021. This increase was primarily due to a 17% increase in organic volume, a 2% increase in pricing and a 1% increase in foreign currency translation impact. The prior year's COVID-19 restrictions and related economic slowdown impacted this segment more than our other lines of business in the prior year.

Net sales of our Specialty segment in the third quarter of fiscal 2022 increased by $9.8 million or 9.0% compared to the third quarter of fiscal 2021. The increase was primarily due to a 6% increase in pricing and a 3% increase in organic volume. Net sales of our Specialty segment in the nine months of fiscal 2022 increased by $25.8 million or 8.5% compared to the nine months of fiscal 2021. The increase was primarily due to a 4% increase each in organic volume and pricing and a 1% increase in foreign currency translation impact. Continued strong demand from transportation was joined with a resurgence in aerospace and defense sales.

Gross Profit 

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Gross Profit						$	184.3					21.8		%				$	189.3					25.2		%				$	(5.0)					(2.6)		%

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Gross Profit						$	555.4					22.7		%				$	541.8					25.0		%				$	13.6					2.5		%

Gross profit decreased $5.0 million or 2.6% in the third quarter and increased $13.6 million or 2.5% in the nine months of fiscal 2022 compared to the comparable periods of fiscal 2021. Gross profit, as a percentage of net sales, decreased 340 basis points and 230 basis points in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021. The decrease in the gross profit margin in the current quarter and nine month period reflects the negative impact of higher freight costs and component shortages from our supply chain along with other inflationary pressures in raw materials, labor, supplies and utilities, in excess of pricing recoveries and organic volume growth. Energy Systems is most acutely impacted by these pressures. Motive Power and Specialty have also been impacted by higher costs but reacted more quickly in recovering price.

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Operating Items 

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Operating expenses						$	130.7					15.4		%				$	118.0					15.7		%				$	12.7					10.7		%
Restructuring and other exit charges						$	2.5					0.3		%				$	15.2					2.0		%				$	(12.7)					(83.7)		%

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Operating expenses						$	380.5					15.5		%				$	357.4					16.5		%				$	23.1					6.5		%
Restructuring and other exit charges						$	13.2					0.6		%				$	19.7					0.9		%				$	(6.5)					(33.2)		%

Operating expenses, as a percentage of sales, decreased 30 basis points and 100 basis points in the third quarter and nine months of fiscal 2022, compared to the comparable periods of fiscal 2021. We have benefited from limited travel and reduced selling expenses. While some of these benefits are COVID-19 related, we believe our operating expense levels have been reduced, the benefit of which continues as our revenue improves.

Selling expenses, our main component of operating expenses, increased $3.1 million or 6.0% in the third quarter of fiscal 2022 compared to the third quarter of fiscal 2021 but decreased 40 basis points. In the nine months of fiscal 2022, selling expenses increased by $9.3 million or 6.1% compared to the nine months of fiscal 2021 but decreased 40 basis points. The decrease in selling expenses as a percentage of sales in both the current quarter and nine months, demonstrates our ability to flex our selling expenses.

Restructuring and Other Exit Charges

Restructuring Programs

Included in our third quarter and nine months of fiscal 2022 operating results of Energy Systems were restructuring charges of $0.7 million and $1.8 million, respectively. Included in our third quarter and nine months of fiscal 2022 operating results of Motive Power were restructuring charges of $0.3 million and $1.5 million, respectively.

Included in our third quarter and nine months of fiscal 2021 operating results of Energy Systems were restructuring charges of $0.8 million and $2.6 million, respectively, primarily relating to Alpha. Included in our third quarter and nine months of fiscal 2021 operating results of Motive Power were restructuring charges of $2.7 million and $3.7 million, respectively.

Exit Charges

Hagen, Germany

During the third quarter of fiscal 2021, we committed to a plan to close substantially all of our facility in Hagen, Germany, which produces flooded motive power batteries for forklifts. Management determined that future demand for the motive power batteries produced at this facility was not sufficient, given the conversion from flooded to maintenance free batteries by customers, the existing number of competitors in the market, as well as the near term decline in demand and increased uncertainty from the pandemic. We plan to retain the facility with limited sales, service and administrative functions along with related personnel for the foreseeable future.

We currently estimate that the total charges for these actions will amount to approximately $60.0 million, the majority of which has been recorded as of January 2, 2022. Cash charges for employee severance related payments, cleanup related to the facility, contractual releases and legal expenses are estimated to be $40.0 million and non-cash charges from inventory and equipment write-offs are estimated to be $20.0 million. These actions resulted in the reduction of approximately 200 employees. During fiscal 2021, the Company recorded cash charges relating to severance of $23.3 million and non-cash charges of $7.9 million primarily relating to fixed asset write-offs.

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During the nine months of fiscal 2022, the Company recorded cash charges, primarily relating to severance of $7.9 million and non-cash charges of $3.8 million primarily relating to fixed asset write-offs. The Company also recorded a non-cash write off relating to inventories of $1.0 million, which was reported in cost of goods sold.

Targovishte, Bulgaria

During fiscal 2019, the Company committed to a plan to close its facility in Targovishte, Bulgaria, which produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. During the nine months of fiscal 2022, the Company sold this facility for $1.5 million. A net gain of $1.2 million was recorded as a credit to exit charges in the Consolidated Condensed Statement of Income.

Vijayawada, India

During fiscal 2021, we also committed to a plan to close our facility in Vijayawada, India to align with the strategic vision for our new line of business structure and footprint. We recorded exit charges of $1.5 million primarily relating to asset write-offs.

Fiscal 2022 Program

Zamudio, Spain

During the nine months of fiscal 2022, the Company closed a minor assembling plant in Zamudio, Spain and sold the same for $1.8 million. A net gain of $0.7 million was recorded as a credit to exit charges in the Consolidated Condensed Statement of Income.

Richmond, Kentucky Plant Fire

During fiscal 2021, the Company settled its claims with its insurance carrier relating to the fire that broke out in the battery formation area of the Company's Richmond, Kentucky motive power production facility in fiscal 2020.

During the nine months of fiscal 2021, the Company recorded a charge of $16.6 million for cleanup and received $18.4 million from the insurance carrier. In addition to the property damage claim, the Company also received $7.5 million in business interruption claims that was credited to cost of goods sold.

Operating Earnings

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales (1)						In Millions						Percentage of Total Net Sales (1)						In Millions						%
Energy Systems						$	3.5					0.9		%				$	18.5					5.5		%				$	(15.0)					(80.8)		%
Motive Power						39.0						11.5						40.2						13.2						(1.2)						(3.1)
Specialty						11.1						9.3						12.6						11.5						(1.5)						(12.1)
Subtotal						53.6						6.4						71.3						9.5						(17.7)						(24.7)
Restructuring and other exit charges - Energy Systems						(0.7)						(0.2)						(0.8)						(0.3)						0.1						(21.4)
Restructuring and other exit charges - Motive Power						(1.7)						(0.5)						(14.4)						(4.7)						12.7						(88.3)
Restructuring and other exit charges - Specialty						(0.1)						(0.1)						—						—						(0.1)						NM
Total operating earnings						$	51.1					6.1		%				$	56.1					7.5		%				$	(5.0)					(8.8)		%

NM = not meaningful

(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.

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						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales (1)						In Millions						Percentage of Total Net Sales (1)						In Millions						%
Energy Systems						$	11.8					1.0		%				$	63.3					6.2		%				$	(51.5)					(81.5)		%
Motive Power						130.6						13.1						91.7						11.0						38.9						42.5
Specialty						33.5						10.2						29.4						9.7						4.1						14.4
Subtotal						175.9						7.2						184.4						8.5						(8.5)						(4.6)
Inventory adjustment relating to exit activities - Motive Power						(1.0)						(0.1)						—						—						(1.0)						NM
Restructuring and other exit charges - Energy Systems						(1.4)						(0.1)						(2.6)						(0.3)						1.2						(50.9)
Restructuring and other exit charges - Motive Power						(12.9)						(1.3)						(16.9)						(2.0)						4.0						(23.2)
Restructuring and other exit charges - Specialty						1.1						0.3						(0.2)						(0.1)						1.3						NM
Total operating earnings						$	161.7					6.6		%				$	164.7					7.6		%				$	(3.0)					(1.8)		%

NM = not meaningful

(1) The percentages shown for the segments are computed as a percentage of the applicable segment’s net sales.

Operating earnings decreased $5.0 million or 8.8% and decreased $3.0 million or 1.8% in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021. Operating earnings, as a percentage of net sales, decreased 140 basis points and 100 basis points in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021.

The Energy Systems operating earnings, as a percentage of sales, decreased 460 basis points and 520 basis points in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021. Higher lead and freight costs along with lack of component availability negatively impacted the performance and sales mix of this line of business.

The Motive Power operating earnings, as a percentage of sales, decreased 170 basis points but increased 210 basis points in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021. The strong recovery in organic growth along with price increases improved the performance of this line of business. However, the prior year period benefited from $6.7 million of insurance recoveries.

The Specialty operating earnings, as a percentage of sales, decreased 220 basis points but increased 50 basis points in the third quarter and nine months of fiscal 2022, respectively, compared to the third quarter and nine months of fiscal 2021. Revenue growth and cost controls mitigated supply chain disruptions in the transportation portion of the business, while defense and aerospace margins declined mildly due to specific project performance.

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Interest Expense

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Interest expense						$	9.7					1.2		%				$	9.4					1.3		%				$	0.3					4.2		%

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Interest expense						$	28.4					1.2		%				$	29.4					1.3		%				$	(1.0)					(3.1)		%

Interest expense of $9.7 million in the third quarter of fiscal 2022 (net of interest income of $0.6 million) was $0.3 million higher than the interest expense of $9.4 million in the third quarter of fiscal 2021 (net of interest income of $0.6 million).

Interest expense of $28.4 million in the nine months of fiscal 2022 (net of interest income of $1.7 million) was $1.0 million lower than the interest expense of $29.4 million in the nine months of fiscal 2021 (net of interest income of $1.6 million).

The increase in interest expense in the third quarter of fiscal 2022 is primarily due to higher borrowing, partially offset by lower interest rates and the decrease in interest expense in the nine months of fiscal 2022 is primarily due to lower interest rates and borrowing. Our average debt outstanding was $1,184.0 million and $1,105.8 million in the third quarter and nine months of fiscal 2022, respectively, compared to $1,086.5 million and $1,118.0 million in the third quarter and nine months of fiscal 2021.

In connection with the Second Amended Credit Facility, we capitalized $3.0 million in debt issuance costs and wrote off

$0.1 million of unamortized debt issuance costs. Included in interest expense are non-cash charges for deferred financing fees of $0.5 million and $1.6 million in the third quarter and nine months of fiscal 2022, respectively, compared to $0.5 million and $1.5 million in the third quarter and nine months of fiscal 2021.

Other (Income) Expense, Net

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Other (income) expense, net						$	(1.4)					(0.2)		%				$	2.9					0.4		%				$	(4.3)					NM

NM = not meaningful

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Other (income) expense, net						$	(1.7)					(0.1)		%				$	8.4					0.4		%				$	(10.1)					NM

NM = not meaningful

Other (income) expense, net in the third quarter of fiscal 2022 was income of $1.4 million compared to expense of $2.9 million in the third quarter of fiscal 2021. Other (income) expense, net in the nine months of fiscal 2022 was income of $1.7 million compared to expense of $8.4 million in the nine months of fiscal 2021. Foreign currency impact resulted in a gain of $2.2 million and a gain of $3.1 million in the third quarter and nine months of fiscal 2022, respectively, compared to a foreign currency loss of $2.4 million and $7.2 million in the third quarter and nine months of fiscal 2021, respectively.

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Earnings Before Income Taxes

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Earnings before income taxes						$	42.8					5.1		%				$	43.8					5.8		%				$	(1.0)					(2.3)		%

						Nine months ended January 2, 2022												Nine months ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Earnings before income taxes						$	135.0					5.5		%				$	126.9					5.9		%				$	8.1					6.4		%

As a result of the above, earnings before income taxes in the third quarter of fiscal 2022 decreased $1.0 million, or 2.3%, compared to the third quarter of fiscal 2021 and increased $8.1 million, or 6.4% in the nine months of fiscal 2022 compared to the nine months of fiscal 2021.

Income Tax Expense 

						Quarter ended January 2, 2022												Quarter ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Income tax expense						$	6.5					0.8		%				$	5.2					0.7		%				$	1.3					25.5		%
Effective tax rate						15.3%												11.9%												3.4%

						Nine months ended January 2, 2022												Nine Months Ended January 3, 2021												Increase (Decrease)
						In Millions						Percentage of Total Net Sales						In Millions						Percentage of Total Net Sales						In Millions						%
Income tax expense						$	19.2					0.8		%				$	17.4					0.8		%				$	1.8					10.6		%
Effective tax rate						14.2%												13.7%												0.5%

The Company’s income tax provision consists of federal, state and foreign income taxes. The tax provision for the third quarter of fiscal 2022 and 2021 was based on the estimated effective tax rates applicable for the full years ending March 31, 2022 and March 31, 2021, respectively, after giving effect to items specifically related to the interim periods. Our effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions, in which we operate, change in tax laws and the amount of our consolidated earnings before taxes.

On May 19, 2019, a public referendum held in Switzerland approved the Federal Act on Tax Reform and AHV (Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures were effective January 1, 2020. The Company recorded an income tax benefit of $1.9 million during the nine months of fiscal 2021.

The consolidated effective income tax rates for the third quarter of fiscal 2022 and 2021 were 15.3% and 11.9%, respectively and were 14.2% and 13.7% for the nine months of fiscal 2022 and 2021, respectively. The rate increase in the third quarter compared to the prior quarter is primarily due to Hagen, Germany exit charges and changes in the mix of earnings among tax jurisdictions. The rate increase in the nine months of fiscal 2022 compared to the prior year period is primarily due to changes in mix of earnings among tax jurisdictions.

Foreign income as a percentage of worldwide income is estimated to be 79% for fiscal 2022 compared to 67% for fiscal 2021. The foreign effective income tax rate for the nine months of fiscal 2022 and 2021 were 10.2% and 5.0%, respectively. Income from the Company's Swiss subsidiary comprised a substantial portion of our overall foreign mix of income for both fiscal 2022 and fiscal 2021 and were taxed at an effective income tax rate of approximately 8% in both periods.

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Critical Accounting Policies and Estimates

There have been no material changes to our critical accounting policies from those discussed under the caption “Critical Accounting Policies and Estimates” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our 2021 Annual Report.

Liquidity and Capital Resources

Cash Flow and Financing Activities

Operating activities used cash of $78.0 million in the nine months of fiscal 2022 compared to $272.1 million of cash generated in the nine months of fiscal 2021, with the decrease in operating cash resulting mainly due to changes in our primary working capital, details of which can be found below. In the nine months of fiscal 2022, primary working capital, net of currency translation changes, resulted in an outflow of funds of $213.1 million. In the nine months of fiscal 2022, net earnings were $115.8 million, depreciation and amortization $72.3 million, stock-based compensation $15.8 million, non-cash charges relating to exit charges $3.9 million, primarily relating to the Hagen, Germany plant closure, allowance for doubtful debts of $1.9 million and non-cash interest of $1.6 million. Prepaid and other current assets were a use of funds of $18.3 million, primarily from an increase of $14.4 million in other prepaid expenses, such as taxes, insurance and other advances, as well as an increase of $3.9 million of contract assets. Accrued expenses were a use of funds of $58.2 million primarily from payroll related payments of $23.1 million, income tax payments of $20.4 million, Hagen severance payments of $19.6 million and interest payments net of accrual of $7.0 million, partially offset by customer advances of $11.7 million.

In the nine months of fiscal 2021, operating activities provided cash of $272.1 million and primary working capital, net of currency translation changes, resulted in a source of funds of $58.2 million. In the nine months of fiscal 2021, net earnings were $109.5 million, depreciation and amortization $70.2 million, stock-based compensation $17.0 million, non-cash charges relating to exit charges $7.3 million, primarily relating to the Hagen, Germany plant closure, net gain from the disposal of assets of $4.0 million ($4.4 million from the insurance settlement relating to the Richmond fire claim), deferred tax benefit of $1.8 million and non-cash interest of $1.5 million. Prepaid and other current assets provided a source of funds of $15.0 million, primarily from the receipt of $23.4 million towards the insurance receivable relating to the Richmond plant claim in fiscal 2020 and the receipt of a working capital adjustment claim of $2.0 million, relating to an acquisition made several years ago, partially offset by an increase of $10.4 million in other prepaid expenses. Other assets decreased by $3.0 million. Accrued expenses provided a source of funds of $9.8 million primarily from payroll related accruals of $14.5 million and selling and other expenses of $7.4 million, partially offset by payments relating to interest of $7.5 million and warranty of $4.5 million. Other liabilities decreased by $14.2 million primarily relating to income taxes.

As explained in the discussion of our use of “non-GAAP financial measures,” we monitor the level and percentage of primary working capital to sales. Primary working capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable. The resulting net amount is divided by the trailing three month net sales (annualized) to derive a primary working capital percentage. Primary working capital was $989.9 million (yielding a primary working capital percentage of

29.3%) at January 2, 2022, $797.9 million (yielding a primary working capital percentage of 24.5%) at March 31, 2021 and $793.9 million at January 3, 2021 (yielding a primary working capital percentage of 26.4%). The primary working capital percentage of 29.3% at January 2, 2022 is 480 basis points higher than that for March 31, 2021 and 290 basis points higher than that for January 3, 2021. The large increase in primary working capital dollars, compared to the nine months of fiscal 2021 reflects the increase in all components of inventory due to supply chain delays, new products and higher inventory costs from higher raw material costs, manufacturing and freight costs and to address the high backlog of customer orders. In addition, trade receivables increased due to higher revenue during the current nine months of fiscal 2022, as compared to a COVID-19 restricted revenue in the prior year. The increase in primary working capital dollars compared to March 31, 2021 is primarily due to increased inventory levels for similar reasons as stated above, as well as trade receivable increase due to higher seasonal days sales outstanding at the current fiscal quarter end.

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Primary working capital and primary working capital percentages at January 2, 2022, March 31, 2021 and January 3, 2021 are computed as follows:

($ in Millions)
Balance At						Trade Receivables						Inventory						Accounts Payable						Total						Quarter Revenue Annualized						Primary Working Capital %
January 2, 2022						$	636.0					$	671.4					$	(317.5)					$	989.9					$	3,376.0					29.3		%
March 31, 2021						603.6						518.2						(323.9)						797.9						3,254.2						24.5
January 3, 2021						547.5						515.4						(269.0)						793.9						3,004.3						26.4

Investing activities used cash of $47.7 million in the nine months of fiscal 2022 which primarily consisted of capital expenditures of $52.4 million relating to plant improvements. We also received $3.3 million from the sale of two of our facilities in Europe.

Investing activities used cash of $48.8 million in the nine months of fiscal 2021 which primarily consisted of capital expenditures of $53.7 million relating to plant improvements. We also received $4.8 million from the insurance settlement relating to the Richmond plant fire claim for the replacement of property, plant and equipment.

During the second quarter of fiscal 2022, we entered into the Second Amended Credit Facility. As a result, financing activities provided cash of $76.4 million in the nine months of fiscal 2022. During the nine months of fiscal 2022, we borrowed $424.8 million under the Second Amended Revolver and repaid $39.8 million of the Second Amended Revolver. Repayment on the Second Amended Term Loan was $161.4 million and net repayments on short-term debt were $0.3 million. Treasury stock open market purchases were $114.5 million, payment of cash dividends to our stockholders were $22.2 million and payment of taxes related to net share settlement of equity awards were $9.1 million. Debt issuance costs relating to the refinancing of the Credit Facility was $3.0 million. Proceeds from stock options were $1.3 million.

Financing activities used cash of $92.6 million in the nine months of fiscal 2021. During the nine months of fiscal 2021, we borrowed $90.0 million under the Amended 2017 Revolver and repaid $123.0 million of the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was $28.2 million and net payments on short-term debt were $9.4 million. Proceeds from stock options during the nine months of fiscal 2021 were $4.8 million. Payment of cash dividends to our stockholders were $22.3 million, payment of taxes related to net share settlement of equity awards were $5.0 million.

Currency translation had a negative impact of $5.4 million on our cash balance in the nine months of fiscal 2022 compared to the positive impact of $30.9 million in the nine months of fiscal 2021. In the nine months of fiscal 2022, principal currencies in which we do business such as the Euro, Polish zloty and British pound generally weakened versus the U.S. dollar while the Swiss franc was stronger.

As a result of the above, total cash and cash equivalents decreased by $54.7 million to $397.1 million, in the nine months of fiscal 2022 compared to an increase by $161.7 million to $488.7 million, in the nine months of fiscal 2021.

Compliance with Debt Covenants

On July 15, 2021, we entered into a second amendment to our Amended Credit Facility that resulted in the extension of the maturity date for the Second Amended Credit Facility to September 30, 2026, resetting of the principal amortization with respect to the Amended Term Loan, refinancing and reducing the existing Amended Term Loan, increasing the revolving line of credit limit, and certain other modifications.

All obligations under our Second Amended Credit Facility are secured by, among other things, substantially all of our U.S. assets. The Second Amended Credit Facility contains various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions. There are no prepayment penalties on loans under this credit facility.

We are in compliance with all covenants and conditions under our Second Amended Credit Facility and Senior Notes. We believe that we will continue to comply with these covenants and conditions, and that we have the financial resources and the capital available to fund the foreseeable organic growth in our business and to remain active in pursuing further acquisition opportunities. See Note 10 to the Consolidated Financial Statements included in our 2021 Annual Report and Note 12 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for a detailed description of our debt.

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Contractual Obligations and Commercial Commitments

A table of our obligations is contained in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Contractual Obligations of our 2021 Annual Report. On July 15, 2021, the Company entered into a second amendment to its existing Amended Credit Facility. The Second Amended Credit Facility, scheduled to mature on September 30, 2026, consists of a $130.0 million senior secured term loan, a CAD 106.4 million ($84.2 million) senior secured term loan and an $850.0 million senior secured revolving credit facility. The second amendment resulted in a decrease of the Amended Term Loan by $150.0 million and an increase of the Amended Revolver by $150.0 million. As of January 2, 2022, the principal and interest payments due under the Second Amended Credit Facility are as follows: $3.3 million in fiscal 2022, $11.9 million in fiscal 2023, $17.1 million in fiscal 2024, $19.6 million in fiscal 2025, $24.7 million in fiscal 2026 and $438.9 in fiscal 2027.

ITEM 3.			QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risks

Our cash flows and earnings are subject to fluctuations resulting from changes in raw material costs, foreign currency exchange rates and interest rates. We manage our exposure to these market risks through internally established policies and procedures and, when deemed appropriate, through the use of derivative financial instruments. Our policy does not allow speculation in derivative instruments for profit or execution of derivative instrument contracts for which there are no underlying exposures. We do not use financial instruments for trading purposes and are not a party to any leveraged derivatives. We monitor our underlying market risk exposures on an ongoing basis and believe that we can modify or adapt our hedging strategies as needed.

Counterparty Risks

We have entered into lead forward purchase contracts, foreign exchange forward and purchased option contracts and cross currency fixed interest rate swaps to manage the risk associated with our exposures to fluctuations resulting from changes in raw material costs, foreign currency exchange rates and interest rates. The Company’s agreements are with creditworthy financial institutions. Those contracts that result in a liability position at January 2, 2022 are $6.1 million (pre-tax). Those contracts that result in an asset position at January 2, 2022 are $1.1 million (pre-tax). The impact on the Company due to nonperformance by the counterparties has been evaluated and not deemed material.

During the third quarter of fiscal 2022, the Company entered into cross currency fixed interest rate swap agreements, with aggregate notional amounts of $300 million, to hedge its net investments in foreign operations against future volatility in the exchange rates between U.S. Dollars and Euros. These swaps mature on December 15, 2027. Depending on the movement in the exchange rates between U.S. Dollars and Euros at maturity, the Company may owe the counterparties an amount that is different from the original notional amount of $300 million.

Excluding the cross currency fixed interest rate swap agreements, the vast majority of these contracts will settle within one year.

Interest Rate Risks

We are exposed to changes in variable U.S. interest rates on borrowings under our credit agreements as well as short-term borrowings in our foreign subsidiaries.

A 100 basis point increase in interest rates would have increased annual interest expense, by approximately $6.3 million on the variable rate portions of our debt.

Commodity Cost Risks – Lead Contracts

We have a significant risk in our exposure to certain raw materials. Our largest single raw material cost is for lead, for which the cost remains volatile. In order to hedge against increases in our lead cost, we have entered into forward contracts with financial institutions to fix the price of lead. A vast majority of such contracts are for a period not extending beyond one year. We had the following contracts outstanding at the dates shown below:

 

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Date						$’s Under Contract (in millions)						# Pounds Purchased (in millions)						Average Cost/Pound						Approximate % of Lead Requirements (1)
January 2, 2022						$	49.9					48.0						$	1.04					8		%
March 31, 2021						50.6						54.5						0.93						10
January 3, 2021						44.1						50.0						0.88						9

(1) Based on the fiscal year lead requirements for the periods then ended.

For the remaining one quarter of this fiscal year, we believe approximately 100% of the cost of our lead requirements is known. This takes into account the hedge contracts in place at January 2, 2022, lead purchased by January 2, 2022 that will be reflected in future costs under our FIFO accounting policy, and the benefit from our lead tolling program.

We estimate that a 10% increase in our cost of lead would have increased our cost of goods sold by approximately $19 million and $52 million in the third quarter and nine months of fiscal 2022, respectively.

Foreign Currency Exchange Rate Risks

We manufacture and assemble our products globally in the Americas, EMEA and Asia. Approximately 40% of our sales and related expenses are transacted in foreign currencies. Our sales revenue, production costs, profit margins and competitive position are affected by the strength of the currencies in countries where we manufacture or purchase goods relative to the strength of the currencies in countries where our products are sold. Additionally, as we report our financial statements in U.S. dollars, our financial results are affected by the strength of the currencies in countries where we have operations relative to the strength of the U.S. dollar. The principal foreign currencies in which we conduct business are the Euro, Swiss franc, British pound, Polish zloty, Chinese renminbi, Canadian dollar, Brazilian Real and Mexican peso.

We quantify and monitor our global foreign currency exposures. Our largest foreign currency exposure is from the purchase and conversion of U.S. dollar based lead costs into local currencies in Europe. Additionally, we have currency exposures from intercompany financing and intercompany and third party trade transactions. On a selective basis, we enter into foreign currency forward contracts and purchase option contracts to reduce the impact from the volatility of currency movements; however, we cannot be certain that foreign currency fluctuations will not impact our operations in the future.

We hedge approximately 5% - 10% of the nominal amount of our known foreign exchange transactional exposures. We primarily enter into foreign currency exchange contracts to reduce the earnings and cash flow impact of the variation of non-functional currency denominated receivables and payables. The vast majority of such contracts are for a period not extending beyond one year.

Gains and losses resulting from hedging instruments offset the foreign exchange gains or losses on the underlying assets and liabilities being hedged. The maturities of the forward exchange contracts generally coincide with the settlement dates of the related transactions. Realized and unrealized gains and losses on these contracts are recognized in the same period as gains and losses on the hedged items. We also selectively hedge anticipated transactions that are subject to foreign exchange exposure, primarily with foreign currency exchange contracts, which are designated as cash flow hedges in accordance with Topic 815 - Derivatives and Hedging. During the current quarter, we also entered into cross currency fixed interest rate swap agreements, to hedge our net investments in foreign operations against future volatility in the exchange rates between U.S. Dollars and Euros.

At January 2, 2022 and January 3, 2021, we estimate that an unfavorable 10% movement in the exchange rates would have adversely changed our hedge valuations by approximately $42.2 million and $3.8 million, respectively.

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ITEM 4.			CONTROLS AND PROCEDURES

(a) Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

(b) Internal Control Over Financial Reporting. The Company's management, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, evaluated any change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) and determined that there was no change in our internal control over financial reporting during the quarter to which this report relates that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II			OTHER INFORMATION

Item 1.			Legal Proceedings

From time to time, we are involved in litigation incidental to the conduct of our business. See Litigation and Other Legal Matters in Note 10 - Commitments, Contingencies and Litigation to the Consolidated Condensed Financial Statements, which is incorporated herein by reference.

Item 1A.			Risk Factors

In addition to the other information set forth in this Form 10-Q, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in our 2021 Annual Report, which could materially affect our business, financial condition or future results.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table summarizes the number of shares of common stock we purchased from participants in our equity incentive plans, as well as repurchases of common stock authorized by the Board of Directors. As provided by the Company’s equity incentive plans, (a) vested options outstanding may be exercised through surrender to the Company of option shares or vested options outstanding under the Company’s equity incentive plans to satisfy the applicable aggregate exercise price (and any withholding tax) required to be paid upon such exercise and (b) the withholding tax requirements related to the vesting and settlement of restricted stock units and market and performance condition-based share units may be satisfied by the surrender of shares of the Company’s common stock.

Purchases of Equity Securities

Period						(a) Total number of shares (or units) purchased						(b) Average price paid per share (or unit)						(c) Total number of shares (or units) purchased as part of publicly announced plans or programs						(d) Maximum number (or approximate dollar value) of shares (or units) that may be purchased under the plans or programs (1) (2) (3)
October 4 – October 31, 2021						742,811						$	76.74					742,811						$	1,307,083
November 1 – November 28, 2021						89,233						74.46						89,233						94,662,534
November 29 – January 2, 2022						265,531						74.18						261,517						75,285,157
Total						1,097,575						$	75.93					1,093,561

(1) The Company's Board of Directors has authorized the Company to repurchase up to such number of shares as shall equal the dilutive effects of any equity based award granted during such fiscal year under the 2017 Equity Incentive Plan and the number of shares exercised through stock option awards during such fiscal year. This program has been completed for fiscal 2022.

(2) On November 8, 2017, the Company announced the establishment of a $100 million stock repurchase authorization, with no expiration date, which was utilized. This authorization is in addition to the existing stock repurchase programs and has been completed for fiscal 2022.

(3) On November 10, 2021, the Company announced the establishment of a $100 million stock repurchase authorization, with no expiration date. This authorization is in addition to the existing stock repurchase programs. Between January 3, 2022 and February 9, 2022, the Company repurchased 446,969 shares for $33.1 million, and has a remaining authorization of $42 million.

Item 4.			Mine Safety Disclosures

Not applicable.

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ITEM 6.			EXHIBITS

 

Exhibit Number						Description of Exhibit
3.1						Fifth Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (File No. 333-115553) filed on July 13, 2004).
3.2						Third Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-32253) filed on August 3, 2016).
31.1						Certification of Principal Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith).
31.2						Certification of Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) Under the Securities Exchange Act of 1934 (filed herewith).
32.1						Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
101.INS						XBRL Instance Document - The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.
101.SCH						XBRL Taxonomy Extension Schema Document
101.CAL						XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						XBRL Taxonomy Extension Label Linkbase Document
101.PRE						XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ENERSYS (Registrant)
By			/s/ Michael J. Schmidtlein
			Michael J. Schmidtlein
			Chief Financial Officer

Date: February 9, 2022

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