10-Q Exide Technologies
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2007
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
Commission File Number 1-11263
EXIDE TECHNOLOGIES
(Exact Name of Registrant as Specified in Its Charter)
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Delaware
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23-0552730 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification Number) |
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13000 Deerfield Parkway, |
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30004 |
Building 200 |
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(Zip Code) |
Alpharetta, Georgia
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(Address of principal executive offices)
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(678) 566-9000
(Registrant’s telephone number, including area code)
Indicate by a check mark whether the Registrant: (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer
in Rule 12b-2 of the Exchange Act. (check one):
Large Accelerated Filer o Accelerated Filer þ Non-Accelerated Filer o
Indicate by check mark whether the Registrant has filed all documents and reports required to
be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the
distribution of securities under a plan confirmed by a court. Yes
þ No o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as
of the latest practicable date:
As of August 3, 2007, 61,266,562 shares of common stock were outstanding.
EXIDE TECHNOLOGIES AND SUBSIDIARIES
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except per-share data)
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For the Three Months Ended |
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June 30, 2007 |
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June 30, 2006 |
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NET SALES |
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$ |
762,387 |
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$ |
683,190 |
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COST OF SALES |
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643,718 |
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573,511 |
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Gross profit |
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118,669 |
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109,679 |
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EXPENSES: |
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Selling, marketing and advertising |
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68,335 |
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68,506 |
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General and administrative |
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43,649 |
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45,994 |
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Restructuring |
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2,132 |
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8,884 |
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Other (income) expense, net |
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(3,541 |
) |
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(3,492 |
) |
Interest expense, net |
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21,352 |
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22,287 |
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Loss on early extinguishment of debt |
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21,342 |
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— |
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153,269 |
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142,179 |
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Loss before reorganization items, income taxes, and minority interest |
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(34,600 |
) |
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(32,500 |
) |
REORGANIZATION ITEMS, NET |
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442 |
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1,607 |
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INCOME TAX PROVISION |
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217 |
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3,578 |
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MINORITY INTEREST |
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423 |
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211 |
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Net loss |
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$ |
(35,682 |
) |
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$ |
(37,896 |
) |
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NET LOSS PER SHARE |
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Basic and Diluted |
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$ |
(0.59 |
) |
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$ |
(1.48 |
) |
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WEIGHTED AVERAGE SHARES |
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Basic and Diluted |
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60,926 |
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25,635 |
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The accompanying notes are an integral part of these statements.
3
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except per-share data)
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June 30, 2007 |
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March 31, 2007 |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
49,340 |
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$ |
76,211 |
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Receivables, net of allowance for doubtful accounts of $29,161 and $28,624 |
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629,967 |
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639,115 |
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Inventories |
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487,660 |
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411,554 |
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Prepaid expenses and other |
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22,624 |
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20,224 |
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Deferred financing costs, net |
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4,612 |
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3,411 |
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Deferred income taxes |
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26,413 |
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19,030 |
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Total current assets |
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1,220,616 |
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1,169,545 |
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Property, plant and equipment, net |
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639,341 |
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649,015 |
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Other assets: |
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Other intangibles, net |
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193,223 |
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191,762 |
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Investments in affiliates |
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6,040 |
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5,282 |
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Deferred financing costs, net |
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19,724 |
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12,908 |
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Deferred income taxes |
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66,518 |
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67,006 |
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Other |
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20,042 |
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24,706 |
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305,547 |
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301,664 |
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Total assets |
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$ |
2,165,504 |
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$ |
2,120,224 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY |
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Current liabilities: |
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Short-term borrowings |
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$ |
14,946 |
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$ |
13,951 |
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Current maturities of long-term debt |
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3,973 |
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3,996 |
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Accounts payable |
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358,684 |
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360,278 |
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Accrued expenses |
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297,550 |
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299,157 |
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Warrants liability |
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5,562 |
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5,297 |
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Total current liabilities |
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680,715 |
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682,679 |
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Long-term debt |
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736,858 |
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666,507 |
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Noncurrent retirement obligations |
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255,274 |
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263,290 |
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Deferred income tax liability |
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43,775 |
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41,232 |
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Other noncurrent liabilities |
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131,832 |
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121,433 |
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Total liabilities |
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1,848,454 |
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1,775,141 |
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Commitments and contingencies |
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— |
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— |
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Minority interest |
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15,137 |
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14,560 |
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STOCKHOLDERS’ EQUITY |
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Preferred stock, $0.01 par value, 1,000 shares authorized, 0 shares issued and outstanding |
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— |
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— |
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Common stock, $0.01 par value, 100,000 shares authorized, 61,210 and 60,676 shares issued and outstanding |
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612 |
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|
607 |
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Additional paid-in capital |
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1,009,802 |
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1,008,481 |
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Accumulated deficit |
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(785,403 |
) |
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(745,534 |
) |
Accumulated other comprehensive income |
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76,902 |
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66,969 |
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Total stockholders’ equity |
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301,913 |
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330,523 |
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Total liabilities and stockholders’ equity |
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$ |
2,165,504 |
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$ |
2,120,224 |
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The accompanying notes are an integral part of these statements.
4
EXIDE TECHNOLOGIES AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
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For the Three Months Ended |
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June 30, 2007 |
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June 30, 2006 |
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Cash Flows From Operating Activities: |
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Net loss |
|
$ |
(35,682 |
) |
|
$ |
(37,896 |
) |
Adjustments to reconcile net loss to net cash (used in) provided by operating activities— |
|
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Depreciation and amortization |
|
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26,393 |
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30,464 |
|
Unrealized loss (gain) on warrants |
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|
265 |
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(813 |
) |
Net (gain) loss on asset sales / impairments |
|
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(599 |
) |
|
|
2,804 |
|
Provision for doubtful accounts |
|
|
1,175 |
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|
|
1,956 |
|
Non-cash stock compensation |
|
|
1,356 |
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|
400 |
|
Reorganization items, net |
|
|
442 |
|
|
|
1,607 |
|
Minority interest |
|
|
423 |
|
|
|
211 |
|
Amortization of deferred financing costs |
|
|
999 |
|
|
|
814 |
|
Loss on early extinguishment of debt |
|
|
21,342 |
|
|
|
— |
|
Changes in assets and liabilities — |
|
|
|
|
|
|
|
|
Receivables |
|
|
17,719 |
|
|
|
47,526 |
|
Inventories |
|
|
(70,054 |
) |
|
|
(9,388 |
) |
Prepaid expenses and other |
|
|
(2,132 |
) |
|
|
4,643 |
|
Payables |
|
|
(5,980 |
) |
|
|
(19,520 |
) |
Accrued expenses |
|
|
9,175 |
|
|
|
(15,245 |
) |
Noncurrent liabilities |
|
|
(19,376 |
) |
|
|
(3,318 |
) |
Other, net |
|
|
(4,876 |
) |
|
|
(3,611 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
|
(59,410 |
) |
|
|
634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Cash Flows From Investing Activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(10,833 |
) |
|
|
(7,967 |
) |
Proceeds from sales of assets |
|
|
3,427 |
|
|
|
97 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(7,406 |
) |
|
|
(7,870 |
) |
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|
|
|
|
|
|
|
|
|
|
|
|
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Cash Flows From Financing Activities: |
|
|
|
|
|
|
|
|
Increase in short-term borrowings |
|
|
548 |
|
|
|
9 |
|
Borrowings under Senior Secured Credit Facility |
|
|
66,695 |
|
|
|
13,125 |
|
Increase (decrease) in other debt |
|
|
1,956 |
|
|
|
(1,968 |
) |
Financing costs and other |
|
|
(30,306 |
) |
|
|
4 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
38,893 |
|
|
|
11,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of Exchange Rate Changes on Cash and Cash Equivalents |
|
|
1,052 |
|
|
|
934 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (Decrease) Increase In Cash and Cash Equivalents |
|
|
(26,871 |
) |
|
|
4,868 |
|
Cash and Cash Equivalents, Beginning of Period |
|
|
76,211 |
|
|
|
32,161 |
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, End of Period |
|
$ |
49,340 |
|
|
$ |
37,029 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
5
EXIDE TECHNOLOGIES AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2007
(Unaudited)
(1) BASIS OF PRESENTATION
The Condensed Consolidated Financial Statements include the accounts of Exide Technologies
(referred to together with its subsidiaries, unless the context requires otherwise, as “Exide” or
the “Company”) and all of its majority-owned subsidiaries. These statements are presented in
accordance with the requirements of Form 10-Q and consequently do not include all of the
disclosures normally required by generally accepted accounting principles (“GAAP”), or those
disclosures normally made in the Company’s annual report on Form 10-K. Accordingly, the reader of
this Form 10-Q should refer to the Company’s annual report on Form 10-K for the fiscal year ended
March 31, 2007 for further information. The financial information contained herein is unaudited.
The financial information has been prepared in accordance with the Company’s customary
accounting practices. In the Company’s opinion, the accompanying condensed consolidated financial
information includes all adjustments of a normal recurring nature necessary for a fair statement of
the results of operations and financial position for the periods presented.
(2) COMPREHENSIVE LOSS
Total comprehensive loss and its components are as follows:
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|
|
|
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|
|
|
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For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
(In thousands) |
|
Net loss |
|
$ |
(35,682 |
) |
|
$ |
(37,896 |
) |
|
|
|
|
|
|
|
|
|
Additions and changes to pension liability |
|
|
(428 |
) |
|
|
(352 |
) |
Change in cumulative translation adjustment |
|
|
10,361 |
|
|
|
22,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
$ |
(25,749 |
) |
|
$ |
(16,128 |
) |
|
|
|
|
|
|
|
(3) REORGANIZATION ITEMS, NET
Reorganization items represent amounts the Company continues to incur as a result of the
Chapter 11 process, from which the Company emerged as of May 5, 2004, and are presented separately
in the Condensed Consolidated Statements of Operations. The following have been incurred:
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|
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For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
(In thousands) |
|
Professional fees |
|
$ |
398 |
|
|
$ |
830 |
|
Other (a) |
|
|
44 |
|
|
|
777 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reorganization items, net |
|
$ |
442 |
|
|
$ |
1,607 |
|
|
|
|
|
|
|
|
Net cash paid for reorganization items during the first quarter of fiscal 2008 and 2007 was $0.4
million and $1.6 million, respectively.
(a) |
|
Other primarily represents costs for the predecessor Company’s D&O (director & officer)
insurance coverage. |
6
(4) INTANGIBLE ASSETS
Intangible assets consist of:
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and |
|
|
Trademarks and |
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames (not |
|
|
Tradenames (subject to |
|
|
Customer |
|
|
|
|
|
|
|
|
|
subject to amortization) |
|
|
amortization) |
|
|
relationships |
|
|
Technology |
|
|
Total |
|
|
|
(In thousands) |
|
As of June 30, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount |
|
$ |
61,077 |
|
|
$ |
13,892 |
|
|
$ |
115,292 |
|
|
$ |
25,784 |
|
|
$ |
216,045 |
|
Accumulated Amortization |
|
|
— |
|
|
|
(3,474 |
) |
|
|
(15,299 |
) |
|
|
(4,049 |
) |
|
|
(22,822 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
61,077 |
|
|
$ |
10,418 |
|
|
$ |
99,993 |
|
|
$ |
21,735 |
|
|
$ |
193,223 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Amount |
|
$ |
60,056 |
|
|
$ |
13,660 |
|
|
$ |
113,361 |
|
|
$ |
25,354 |
|
|
$ |
212,431 |
|
Accumulated Amortization |
|
|
— |
|
|
|
(3,147 |
) |
|
|
(13,855 |
) |
|
|
(3,667 |
) |
|
|
(20,669 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
$ |
60,056 |
|
|
$ |
10,513 |
|
|
$ |
99,506 |
|
|
$ |
21,687 |
|
|
$ |
191,762 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of intangible assets for the first quarter of fiscal 2008 and 2007 was $1.8
million and $1.7 million, respectively. Excluding the impact of any future acquisitions (if any),
the Company anticipates annual amortization of intangible assets for each of the next five years to
average approximately $7 million. Intangible assets have been recorded at the proper legal entity
level and are subject to foreign currency fluctuation. The change in the gross amounts shown
above, from March 31, 2007 to June 30, 2007, result only from foreign currency translation. No
other activity has occurred.
(5) INVENTORIES
Inventories, valued by the first-in, first-out (“FIFO”) method, consist of:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Raw materials |
|
$ |
62,845 |
|
|
$ |
53,337 |
|
Work-in-process |
|
|
115,399 |
|
|
|
89,339 |
|
Finished goods |
|
|
309,416 |
|
|
|
268,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
487,660 |
|
|
$ |
411,554 |
|
|
|
|
|
|
|
|
(6) OTHER ASSETS
Other assets consist of:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Deposits (a) |
|
$ |
11,272 |
|
|
$ |
15,596 |
|
Capitalized software, net |
|
|
2,847 |
|
|
|
2,495 |
|
Loan to affiliate |
|
|
2,736 |
|
|
|
3,702 |
|
Other |
|
|
3,187 |
|
|
|
2,913 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
20,042 |
|
|
$ |
24,706 |
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Deposits principally represent amounts held by beneficiaries as cash collateral for the
Company’s contingent obligations with respect to certain environmental matters, workers
compensation insurance and operating lease commitments. |
(7) DEBT
At June 30, 2007 and March 31, 2007, short-term borrowings of $14.9 million and $14 million,
respectively, consisted of various operating lines of credit and working capital facilities
maintained by certain of the Company’s non-U.S. subsidiaries. Certain of these borrowings are
collateralized by receivables, inventories and/or property. These borrowing facilities, which are
typically for one-year renewable terms, generally bear interest at current local market rates plus
up to one percent per annum. The weighted-average interest rate on short-term borrowings at June
30, 2007 and March 31, 2007 was 5.8% and 5.1%, respectively.
Total long-term debt consists of:
7
|
|
|
|
|
|
|
|
|
|
|
June 30, 2007 |
|
|
March 31, 2007 |
|
|
|
(In thousands) |
|
Senior Secured Credit Facility |
|
$ |
365,305 |
|
|
$ |
297,263 |
|
10.5% Senior Secured Notes due 2013 |
|
|
290,000 |
|
|
|
290,000 |
|
Floating Rate Convertible Senior Subordinated Notes due 2013 |
|
|
60,000 |
|
|
|
60,000 |
|
Other, including capital lease obligations and other loans at interest rates generally
ranging up to 11% due in installments through 2015 |
|
|
25,526 |
|
|
|
23,240 |
|
|
|
|
|
|
|
|
Total |
|
|
740,831 |
|
|
|
670,503 |
|
Less — current maturities |
|
|
3,973 |
|
|
|
3,996 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
736,858 |
|
|
$ |
666,507 |
|
|
|
|
|
|
|
|
Total debt including long-term debt and short-term borrowings at June 30, 2007 and March 31, 2007
was $755.8 million and $684.5 million, respectively.
On May 15, 2007, the Company entered into a $495 million senior secured credit agreement
(“Credit Agreement”). The Credit Agreement consists of a $200 million asset based revolving senior
secured credit facility (the “Revolving Loan Facility”) and a $295 million senior secured term loan
facility (the “Term Loan”). The proceeds of the Credit Agreement were used to fully pay off the
Company’s previous senior secured credit facility. The Company recorded a loss on the early
extinguishment of debt of $21.3 million. The weighted average interest rate on the senior secured
credit facility at June 30, 2007 and March 31, 2007 was 8.60% and 10.17%, respectively. The Credit
Agreement has no financial maintenance covenants.
The Revolving Loan
Borrowings under the Revolving Loan Facility bear interest at a rate equal to LIBOR plus
1.75%. The applicable spread on the Revolving Loan Facility will be subject to change and may
increase or decrease in accordance with a leverage-based pricing grid. The Revolving Loan Facility
includes a letter of credit sub-facility of $75 million and an accordion feature that allows the
Company to increase the facility size up to $250 million if it can obtain commitments from existing
or new lenders for the incremental amount. The Revolving Loan Facility will mature in May 2012, but
is prepayable at any time at par.
Availability under the Revolving Loan Facility is subject to a borrowing base comprised of up
to 85% of the Company’s eligible accounts receivable plus 85% of the net orderly liquidation value
of eligible North American inventory less, in each case, certain limitations and reserves.
Revolving loans made to the Company domestically under the Revolving Loan Facility are guaranteed
by substantially all domestic subsidiaries of the Company, and revolving loans made to Exide C.V.
under the Revolving Loan Facility are guaranteed by substantially all domestic subsidiaries of the
Company and certain foreign subsidiaries. These guarantee obligations are secured by a lien on
substantially all of the assets of such respective Borrowers and guarantors, including, subject to
certain exceptions, in the case of security provided by the domestic subsidiaries, a first priority
lien in current assets and a second priority lien in fixed assets.
The Revolving Loan Facility contains customary terms and conditions, including, without
limitation, limitations on liens, indebtedness, implementation of cash dominion and control
agreements, and other typical covenants. A springing fixed charge financial covenant of 1.0:1.0
will be triggered if the excess availability under the Revolving Loan Facility falls below $40
million. The Company is also required to pay an unused line fee that varies based on usage of the
Revolving Loan Facility.
The Term Loan
Borrowings under the Term Loan in U.S. dollars bear interest at a rate equal to LIBOR plus
3.25%, and borrowings under the Term Loan in Euros bear interest at a rate equal to LIBOR plus
3.50%; provided that such rates may decrease by 0.25% after December 31, 2007 if the Company
achieves certain corporate credit ratings. The Term Loan will mature in May 2012, but is prepayable
at any time at par value, provided that if a change in control or similar event occurs within the
first year, the Company must offer to prepay the Term Loan at a price equal to 101% of par.
The Term Loan will amortize as follows: 0.25% of the initial principal balance of the Term
Loan will be due and payable on a quarterly basis commencing in September 2007, with the balance
payable at maturity. Mandatory prepayment by the Company may be required under the Term Loan as a
result of excess cash flow, asset sales and casualty events, in each case, subject to certain
exceptions.
The portion of the Term Loan made to the Company is guaranteed by substantially all domestic
subsidiaries of the Company, and the portion of the Term Loan made to Exide C.V. is guaranteed by
substantially all domestic subsidiaries of the Company and certain foreign subsidiaries. These
obligations are secured by a lien on substantially all of the assets of such respective borrowers
8
and guarantors, including, subject to certain exceptions, in the case of security provided by the
domestic subsidiaries, a first priority lien in fixed assets and a second priority lien in current
assets.
The Term Loan contains customary terms and conditions, including, without limitation, (1)
limitations on debt (including a leverage or coverage based incurrence test), (2) limitations on
mergers and acquisitions, (3) limitations on restricted payments, (4) limitations on investments,
(5) limitations on capital expenditures, (6) limitations on asset sales with limited exceptions,
(7) limitations on liens and (8) limitations on transactions with affiliates.
(8) INTEREST EXPENSE, NET
Interest income of $0.3 million and $0.3 million is included in Interest expense, net for the
three months ended June 30, 2007 and 2006, respectively.
(9) OTHER (INCOME) EXPENSE, NET
Other (income) expense, net consist of:
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
(In thousands) |
|
Net (gain) loss on asset sales / impairments |
|
$ |
(599 |
) |
|
$ |
2,804 |
|
Equity income |
|
|
(183 |
) |
|
|
(19 |
) |
Currency remeasurement (gain) loss |
|
|
(2,518 |
) |
|
|
(5,588 |
) |
Loss (gain) on revaluation of warrants (a) |
|
|
265 |
|
|
|
(813 |
) |
Other |
|
|
(506 |
) |
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(3,541 |
) |
|
$ |
(3,492 |
) |
|
|
|
|
|
|
|
|
|
|
(a) |
|
The warrants entitle the holders to purchase up to 6.6 million shares of new common stock
at an exercise price of $30.31 per share. The warrants are exercisable through May 5, 2011. In
accordance with EITF 00-19 and SFAS 150, the warrants have been marked-to-market based upon quoted
market prices. Future results of operations may be subject to volatility from changes in the
market value of such warrants. |
(10) EMPLOYEE BENEFITS
The components of the Company’s net periodic pension and other post-retirement benefit cost
are as follows:
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits |
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
(In thousands) |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
1,531 |
|
|
$ |
2,223 |
|
Interest cost |
|
|
8,815 |
|
|
|
8,275 |
|
Expected return on plan assets |
|
|
(7,267 |
) |
|
|
(6,149 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
5 |
|
|
|
4 |
|
Actuarial gain |
|
|
(369 |
) |
|
|
(292 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
2,715 |
|
|
$ |
4,061 |
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
Other Post-Retirement Benefits |
|
|
|
For the Three Months Ended |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
|
(In thousands) |
|
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
Service cost |
|
$ |
47 |
|
|
$ |
42 |
|
Interest cost |
|
|
371 |
|
|
|
389 |
|
Amortization of: |
|
|
|
|
|
|
|
|
Actuarial loss |
|
|
18 |
|
|
|
53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
436 |
|
|
$ |
484 |
|
|
|
|
|
|
|
|
The estimated fiscal 2008 pension plan contributions are approximately $53.1 million and other
post-retirement contributions are approximately $2.5 million. Payments aggregating $14.5 million
were made during the three months ended June 30, 2007.
Cash contributions to the Company’s pension plans are generally made in accordance with
minimum regulatory requirements. The Company’s U.S. plans are currently significantly under-funded.
Based on current assumptions and regulatory requirements, the Company’s minimum future cash
contribution requirements for its U.S. plans are expected to remain relatively high for the next
few fiscal years. On November 17, 2004, the Company received written notification of a tentative
determination from the Internal Revenue Service (“IRS”) granting a temporary waiver of its minimum
funding requirements for its U.S. plans for calendar years 2003 and 2004, amounting to
approximately $50 million, net, under Section 412(d) of the Internal Revenue Code, subject to
providing a lien satisfactory to the Pension Benefit Guaranty Corporation (“PBGC”). On June 10,
2005, the Company reached agreement with the PBGC on a second priority lien on domestic personal
property, including stock of its U.S. and direct foreign subsidiaries to secure the unfunded
liability. The temporary waiver provides for deferral of the Company’s minimum contributions for
those years to be paid over a subsequent five-year period through 2010. At June 30, 2007 the
Company owed approximately $26.5 million relating to these amounts previously waived.
Based upon the temporary waiver and sensitivity to varying economic scenarios, the Company
expects the cumulative minimum future cash contributions to its U.S. pension plans will total
approximately $70 million to $125 million from fiscal 2008 to fiscal 2012, including $35 million in
fiscal 2008.
The Company expects that cumulative contributions to its non U.S. pension plans will total
approximately $93.2 million from fiscal 2008 to fiscal 2012, including $18.1 million in fiscal
2008. In addition, the Company expects that cumulative contributions to its other post-retirement
benefit plans will total approximately $13 million from fiscal 2008 to fiscal 2012, including $2.5
million in fiscal 2008.
(11) COMMITMENTS AND CONTINGENCIES
Claims Reconciliation
On April 15, 2002, the “Petition Date”, Exide Technologies, together with certain of its
subsidiaries (the “Debtors”), filed voluntary petitions for reorganization under Chapter 11 of the
federal bankruptcy laws (“Bankruptcy Code” or “Chapter 11”) in the United States Bankruptcy Court
for the District of Delaware (“Bankruptcy Court”). The Debtors continued to operate their
businesses and manage their properties as debtors-in-possession throughout the course of the
bankruptcy case. The Debtors, along with the Official Committee of Unsecured Creditors, filed a
Joint Plan of Reorganization (the “Plan”) with the Bankruptcy Court on February 27, 2004 and, on
April 21, 2004, the Bankruptcy Court confirmed the Plan.
Under the Plan, holders of general unsecured claims will receive collectively 2.5 million
shares of new common stock and warrants to purchase 6.6 million shares of new common stock at
$30.31 per share. Approximately 13.4% of such new common stock and warrants were initially
reserved for distribution for disputed claims. The Official Committee of Unsecured Creditors, in
consultation with the Company, established such reserve to provide for a pro rata distribution of
new common stock and warrants to holders of disputed claims as they become allowed. As claims are
evaluated and processed, the Company will object to some claims or portions thereof, and upward
adjustments (to the extent stock and warrants not previously distributed remain) or downward
adjustments to the reserve will be made pending or following adjudication of such objections.
Predictions regarding the allowance and classification of claims are difficult to make. With
respect to environmental claims in particular, it is difficult to assess the Company’s potential
liability due to the large number of other potentially responsible parties. For example, a demand
for the total cleanup costs of a landfill used by many entities may be asserted by the government
using joint and several liability theories. Although the Company believes that there is a
reasonable basis to believe that it will ultimately be responsible for only its proportional share
of these remediation costs, there can be no assurance that the Company will prevail on these
claims. In addition,
10
the scope of remedial costs, or other environmental injuries, is highly
variable and estimating these costs involves complex legal, scientific and technical judgments.
Many of the claimants who have filed disputed claims, particularly environmental and personal
injury claims, produce little or no proof of fault on which the Company can assess its potential
liability. Such claimants often either fail to specify a determinate amount of damages or provide
little or no basis for the alleged damages. In some cases, the Company is still seeking additional
information needed for a claims assessment and information that is unknown to the Company at the
current time may significantly affect the Company’s assessment regarding the adequacy of the
reserve amounts in the future.
As general unsecured claims have been allowed in the bankruptcy court, the Company has
distributed approximately one share of common stock of the Company per $383.00 in allowed claim
amount and approximately one warrant per $153.00 in allowed claim amount. These rates were
established based upon the assumption that the new common stock and warrants allocated to holders
of general unsecured claims on the effective date, including the reserve established for disputed
claims, would be fully distributed so that the recovery rates for all allowed unsecured claims
would comply with the Plan without the need for any redistribution or supplemental issuance of
securities. If the amount of general unsecured claims that is eventually allowed exceeds the
amount of claims anticipated in the setting of the reserve, additional common stock and warrants
will be issued for the excess claim amounts at the same rates as used for the other general
unsecured claims. If this were to occur, additional common stock would also be issued to the
holders of pre-petition secured claims to maintain the ratio of their distribution in common stock
at nine times the amount of common stock distributed for all unsecured claims.
On July 20, 2007, the Company made its thirteenth distribution of new common stock and
warrants for disputed general unsecured claims. Based on information available as of August 3,
2007, approximately 10.5% of new common stock and warrants reserved for this purpose have been
distributed. The Company also continues to resolve certain non-objected claims.
Historical Federal Plea Agreement
In 2001, the Company reached a plea agreement with the U.S. Attorney for the Southern District
of Illinois resolving an investigation into a scheme by former officers and certain corporate
entities involving fraudulent representations and promises in connection with the distribution,
sale and marketing of automotive batteries between 1994 and 1997. The Company agreed to pay a fine
of $27.5 million over five years, five-years probation and to cooperate with the U.S. Attorney in
its prosecution of the former officers. The Company was sentenced pursuant to the terms of the plea
agreement in February 2002. Generally, failure to comply with the provisions of the plea agreement,
including the obligation to pay the fine, would permit the U.S. Government to reopen the case
against the Company.
On May 31, 2006, the District Court approved a Joint Agreement and Proposed Joint Resolution
of Issues Raised in the government’s motion filed on November 18, 2005 regarding the payment of
criminal fine. The District Court entered an order consistent with the Joint Agreement and Proposed
Joint Resolution, and modified the Company’s schedule to pay the $27.5 million fine through
quarterly payments over the next five years, ending in 2011. The court’s order reflects that the
Company is not obligated to pay interest on outstanding amounts of unpaid fine if the Company is
current on all installment payments, and
allows for penalties and interest to be imposed if the Company does not comply with the modified
fine payment schedule. The Company’s five-year probation ended in February 2007.
Pre-Petition Litigation Settlements
The Company previously disclosed in its annual report on Form 10-K for fiscal 2006 tentative
settlements with various plaintiffs who alleged personal injury and/or property damage from the
release of hazardous materials used in the battery manufacturing process prior to the Company’s
filing for Chapter 11 bankruptcy protection. The Company has finalized a settlement of these
claims, as well as claims they could have asserted against third parties who may have had claims of
indemnification against the Company on a pre-petition or post-petition basis. The claims will be
paid in new common stock and warrants to be paid out of the reserve established under the claims
reconciliation process discussed above. The terms of the settlement are still subject to approval
of appropriate state courts.
Private Party Lawsuits and other Legal Proceedings
In 2003, the Company served notices to reject certain executory contracts with EnerSys,
including a 1991 Trademark and Trade Name License Agreement (the “Trademark License”), pursuant to
which the Company had licensed to EnerSys use of the “Exide” trademark on certain industrial
battery products in the United States and 80 foreign countries. EnerSys objected to the rejection
of certain of the executory contracts, including the Trademark License. In 2006, the Court granted
the Company’s request to reject the contracts, which EnerSys appealed. Unless the appeal is
successful, EnerSys will likely lose all rights to use the “Exide” trademark over time and the
Company will have greater flexibility in its ability to use that mark for industrial battery
products. Because the Bankruptcy Court authorized rejection of the Trademark License, as with other
executory contracts at issue, EnerSys will have a pre-petition general unsecured claim relating to
the alleged damages arising therefrom. The Company reserves the ability to consider payment in cash
of some portion of any settlement or ultimate award on EnerSys’ claim of alleged rejection damages.
In
11
2006, the Bankruptcy Court ordered a two year transition period and denied EnerSys’ motion for
a stay. EnerSys has appealed that order.
In July 2001, Pacific Dunlop Holdings (US), Inc. (“PDH”) and several of its foreign affiliates
under the various agreements through which Exide and its affiliates acquired GNB, filed a complaint
in the Circuit Court for Cook County, Illinois alleging breach of contract, unjust enrichment and
conversion against Exide and three of its foreign affiliates. The plaintiffs maintain they are
entitled to approximately $17 million in cash assets acquired by the defendants through their
acquisition of GNB. In December 2001, the Court denied the defendants’ motion to dismiss the
complaint, without prejudice. The defendants filed an answer and counterclaim. In, 2002, the Court
authorized discovery to proceed as to all parties except Exide. In August 2002, the case was
removed to the U.S. Bankruptcy Court for the Northern District of Illinois. In February 2003, the
U.S. Bankruptcy Court for the Northern District of Illinois transferred the case to the U.S.
Bankruptcy Court in Delaware. In November 2003, the Bankruptcy Court denied PDH’s motion to abstain
or remand the case and issued an opinion holding that the Bankruptcy Court had jurisdiction over
PDH’s claims and that liability, if any, would lie solely against Exide Technologies and not
against any of its foreign affiliates. The Bankruptcy Court denied PDH’s motion to reconsider,
which PDH then appealed to the United States District Court for the District of Delaware. In an
order dated March 22, 2007, the U.S. District Court for the District of Delaware denied PDH’s
appeal in its entirety, affirming the Orders of the Bankruptcy Court. PDH has noticed its appeal of
this Order to the United States Court of Appeals for the Third Circuit
In December 2001, PDH filed a separate action in the Circuit Court for Cook County, Illinois
seeking recovery of approximately $3.1 million for amounts allegedly owed by Exide under various
agreements between the parties. The claim arises from letters of credit and other security
allegedly provided by PDH for GNB’s performance of certain of GNB’s obligations to third parties
that PDH claims Exide was obligated to replace. Exide’s answer contested the amounts claimed by PDH
and Exide filed a counterclaim. Although this action has been consolidated with the Cook County
suit concerning GNB’s cash assets, the claims relating to this action have been transferred to the
U.S. Bankruptcy Court for the District of Delaware and are currently subject to a stay injunction
by that court. The Company plans to vigorously defend itself and pursue its counterclaims.
From 1957 to 1982, CEAC, the Company’s principal French subsidiary, operated a plant using
crocidolite asbestos fibers in the formation of battery cases, which, once formed, encapsulated the
fibers. Approximately 1,500 employees worked in the plant over the period. Since 1982, the French
governmental agency responsible for worker illness claims received 64 employee claims alleging
asbestos-related illnesses. For some of those claims, CEAC is obligated to and has indemnified the
agency in accordance with French law for approximately $0.4 million in calendar 2004. In addition,
CEAC has been adjudged liable to indemnify the agency for approximately $0.1 million during the
same period for the dependents of four such claimants. The Company was not required to indemnify or
make any payments subsequent to calendar year 2004. In 2007, CEAC has been adjudged to indemnify
the agency for approximately $0.3 million. No payment has yet been made to the agency. Although
the Company cannot predict the number or size of any future claims, the Company does not believe
resolution of the current or any future claims, individually or in the aggregate, will have a
material adverse effect on the Company’s financial condition, cash flows or results of operations.
In June 2005 two former stockholders, Aviva Partners LLC and Robert Jarman filed purported
class action lawsuits against the Company and certain of its current and former officers alleging
violations of certain federal securities laws in the United States District Court for the District
of New Jersey purportedly on behalf of those who purchased the Company’s stock between November 16,
2004 and May 17, 2005. The complaints allege that the named officers violated Sections 10(b) and
20(a) of the Securities Exchange Act and SEC Rule 10b-5 in connection with certain allegedly false
and misleading public statements made during this period by the Company and its officers. The
complaints did not specify an amount of damages sought. The Company denies the allegations in the
complaints and intends to vigorously pursue its defense.
United States District Judge Mary L. Cooper consolidated the Aviva Partners and Jarman cases
under the Aviva Partners v. Exide Technologies, Inc. caption. In 2006 Plaintiffs filed their
consolidated amended complaint in which they reiterated the claims described above but purported to
state a claim on behalf of those who purchased the Company’s stock between May 5, 2004 and May 17,
2005. On March 13, 2007, the Court denied Defendants’ motions to dismiss. Discovery in this
litigation is proceeding and is expected to continue throughout the remainder of 2007 and 2008. No
trial date has been set in this matter.
In October 2005, Murray Capital Management, Inc., filed suit against the Company, certain of
its current and former officers and Deutsche Bank Securities, Inc in the U.S. District Court for
the Southern District of New York alleging that the defendants violated Sections 10(b) and 20(a) of
the Securities Exchange Act and SEC Rule 10b-5, and related state laws, in connection with certain
allegedly false and misleading public statements made by the Company and its officers. While
Murray’s claims are largely duplicative of those set out in the Aviva and Jarman complaints, Murray
also claims that false and misleading statements were made in connection with the Company’s March
2005 issuance of convertible notes and concurrent issuance of senior notes. The complaint does not
specify the amount of damages sought in the suit. The Company is indemnifying Deutsche Bank
pursuant to the purchase agreement under which the notes were issued. The Court granted the
Company’s motion to dismiss the complaint and permitted the plaintiff to file an amended complaint,
which it did. Defendants moved to dismiss the amended complaint. The Court subsequently granted
Deutsche Bank’s motion to dismiss, but denied the Company’s motion and ordered that discovery
proceed in
12
connection with Plaintiff’s claims against the Company and certain of its current and
former officers. Discovery is proceeding and is expected to continue throughout the remainder of
2007 and the first half of 2008. No trial date has been set in this matter.
In August 2006, a shareholder derivative complaint was filed in the United States District
Court for the District of New Jersey by Marilyn Richardson against certain current and former
officers and directors. The suit alleges that named parties breached their fiduciary duties to the
Company by, among other things, making statements between November 2004 and July 2005 which
plaintiffs claim were false and misleading and by allegedly failing to implement adequate internal
controls and means of supervision at the Company. The suit seeks an unspecified amount of damages
from the named parties and modifications to the Company’s corporate governance policies. The
allegations in the complaint are similar to the Aviva Partners and Jarman shareholder class action
suits described above. The individual defendants intend to vigorously defend the suit. Individual
defendants have moved to dismiss the shareholder derivative complaint. In addition, the Company,
on whose behalf these claims purport to be brought, has moved to dismiss the shareholder derivative
complaint on the grounds that the derivative plaintiff did not file the claims in accordance with
applicable laws governing the filing of derivative suits.
In November 2006, the Company received a letter addressed to its directors from a law firm
representing investment funds or accounts managed by Stanfield Capital Partners LLC (“Stanfield”).
According to the letter, Stanfield holds major positions in the Company’s convertible notes and
also holds positions in the Company’s senior notes and its original senior secured credit facility.
Such letter stated, among other things, that Stanfield believed the Company was in default under
the original senior secured credit facility and the note indentures because the $27.5 million fine
described above under “Historical Federal Plea Agreement” constituted a judgment in excess of the
judgment amounts permitted under such indentures. The letter also said that Stanfield believed
there were breaches of the Company’s disclosure obligations in connection with the March 2005 note
issuances relating to the 2001 criminal fine, the status and value of certain product inventories
and statements as to likely fiscal 2005 results. The Company has discussed these allegations with
Stanfield. The Company believes that all such assertions are without merit.
On July 1, 2005, the Company was informed by the Enforcement Division of the Securities and
Exchange Commission (the “SEC”) that it commenced a preliminary inquiry into statements the Company
made in fiscal 2005 regarding its ability to comply with fiscal 2005 loan covenants and the going
concern modification in the audit report in the Company’s annual report on Form 10-K for fiscal
2005. The SEC noted that the inquiry should not be construed as an indication by the SEC or its
staff that any violations of law have occurred. The Company intends to fully cooperate with the
inquiry and continues to do so.
The Company’s Norwegian subsidiary, Exide Sonnak AS, has received notice of claims for
property damage in the approximate amount of $5.6 million allegedly as the result of a warehouse
fire occurring on or about July 8, 2005 in Trondheim, Norway due to an alleged malfunctioning
battery charger allegedly manufactured by the Company. The Company and its counsel are evaluating
those claims. The Company currently believes that any potential liability would be covered by
applicable insurance, subject to the relevant deductible.
Environmental Matters
As a result of its multinational manufacturing, distribution and recycling operations, the
Company is subject to numerous federal, state, and local environmental, occupational health, and
safety laws and regulations, including limits on employee blood lead levels, as well as similar
laws and regulations in other countries in which the Company operates (collectively, “EH&S laws”).
The Company is exposed to liabilities under such EH&S laws arising from its past handling,
release, storage and disposal of materials now designated as hazardous substances and hazardous
wastes. The Company previously has been advised by the U.S. Environmental Protection Agency (“EPA”)
or state agencies that it is a “Potentially Responsible Party” under the Comprehensive
Environmental Response, Compensation and Liability Act (“CERCLA”) or similar state laws at 98
federally defined Superfund or state equivalent sites. At 45 of these sites, the Company has paid
its share of liability. While the Company believes it is probable its liability for most of the
remaining sites will be treated as disputed unsecured claims under the Plan, there can be no
assurance these matters will be discharged. If the Company’s liability is not discharged at one or
more sites, the government may be able to file claims for additional response costs in the future,
or to order the Company to perform remedial work at such sites. In addition, the EPA, in the course
of negotiating this pre-petition claim, had notified the Company of the possibility of additional
clean-up costs associated with Hamburg, Pennsylvania properties of approximately $35 million, as
described in more detail below. The EPA has provided summaries of past costs and an estimate of
future costs that approximate the amounts in its notification; however, the Company disputes
certain elements of the claimed past costs, has not received sufficient information supporting the
estimated future costs, and is in negotiations with the EPA. To the extent the EPA or other
environmental authorities dispute the pre-petition nature of these claims, the Company would intend
to resist any such effort to evade the bankruptcy law’s intended result, and believes there are
substantial legal defenses to be asserted in that case. However, there can be no assurance that the
Company would be successful in challenging any such actions.
The Company is also involved in the assessment and remediation of various other properties,
including certain Company owned or operated facilities. Such assessment and remedial work is being
conducted pursuant to applicable EH&S laws with varying
13
degrees of involvement by appropriate legal
authorities. Where probable and reasonably estimable, the costs of such projects have been accrued
by the Company, as discussed below. In addition, certain environmental matters concerning the
Company are pending in various courts or with certain environmental regulatory agencies with
respect to these currently or formerly owned or operating locations. While the ultimate outcome of
the foregoing environmental matters is uncertain, after consultation with legal counsel, the
Company does not believe the resolution of these matters, individually or in the aggregate, will
have a material adverse effect on the Company’s financial condition, cash flows or results of
operations.
On September 6, 2005, the U.S. Court of Appeals for the Third Circuit issued an opinion in
U.S. v. General Battery/Exide (No. 03-3515) affirming the district court’s holding that the Company
is liable, as a matter of federal common law of successor liability, for lead contamination at
certain sites in the vicinity of Hamburg, Pennsylvania. This case involves several of the
pre-petition environmental claims of the federal government for which the Company, as part of its
Chapter 11 proceeding, had established a reserve of common stock and warrants. The amount of the
government claims for these sites at the time reserves were established was approximately $14
million. On October 2, 2006, the United States Supreme Court denied review of the appellate
decision, leaving Exide subject to a stipulated judgment for approximately $6.5 million, based on
the ruling that Exide has successor liability for these EPA cost recovery claims. The judgment will
be a general unsecured claim payable in common stock and warrants. Additionally, the EPA has
asserted a general unsecured claim for costs related to other Hamburg, Pennsylvania sites. The
current amount of the government’s claims for the aforementioned sites (including the stipulated
judgment discussed above) is approximately $20 million. A reserve of new common stock and warrants
for the estimated value of all claims, including the aforementioned claims, was established as part
of the Plan.
In October 2004, the EPA, in the course of negotiating a comprehensive settlement of all its
environmental claims against the Company, had notified the Company of the possibility of additional
clean-up costs associated with other Hamburg, Pennsylvania properties of approximately $35 million.
The EPA has provided cost summaries for past costs and an estimate of future costs that approximate
the amounts in its notification; however, the Company disputes certain elements of the claimed
past costs, has not received sufficient information supporting the estimated future costs, and is
in negotiations with the EPA.
As unsecured claims are allowed in the Bankruptcy Court, the Company is required to distribute
common stock and warrants to the holders of such claims. To the extent the government is able to
prove the Company is responsible for the alleged contamination at the other Hamburg, Pennsylvania
properties and substantiate its estimated $35 million of additional clean-up costs discussed above,
these claims would ultimately result in an inadequate reserve of new common stock and warrants to
the extent not offset by the reconciliation of all other claims for lower amounts than the
aggregate reserve. The Company would still retain the right to perform and pay for such cleanup
activities, which would preserve the existing reserved new common stock and warrants. Except for
the government’s cost recovery claim resolved by the U.S. v. General Battery/Exide case discussed
above, it remains the Company’s position that it is not liable for the contamination of this area,
and that any liability it may have derives from pre-petition events which would be administered as
a general, unsecured claim, and consequently no provisions have been recorded in connection
therewith.
The Company is conducting an investigation and risk assessment of lead exposure near its
Reading recycling plant from past facility emissions and non-Company sources such as lead paint.
This is being performed under a consent order with the EPA. The Company has previously removed soil
from properties with the highest soil lead content, and is in negotiations and proceedings with the
EPA to resolve differences regarding the need for, and extent of, further actions by the Company.
Alternatives have been reviewed and appropriate reserve estimates made. At this time the Company
cannot determine from available information whether additional cleanup will occur and, if so, the
extent of any cleanup and costs that may finally be incurred.
The Company has established reserves for on-site and off-site environmental remediation costs
where such costs are probable and reasonably estimable and believes that such reserves are
adequate. As of June 30, 2007 and March 31, 2007, the amount of such reserves on the Company’s
Condensed Consolidated Balance Sheets were approximately $35.3 million and $34.7 million,
respectively. Because environmental liabilities are not accrued until a liability is determined to
be probable and reasonably estimable, not all potential future environmental liabilities have been
included in the Company’s environmental reserves and, therefore, additional earnings charges are
possible. Also, future findings or changes in estimates could have a material adverse effect on the
recorded reserves and cash flows.
The sites that currently have the largest reserves include the following:
Tampa, Florida
The Tampa site is a former secondary lead recycling plant, lead oxide production facility, and
sheet lead-rolling mill that operated from 1943 to 1989. Under a RCRA Part B Closure Permit and a
Consent Decree with the State of Florida, Exide is required to investigate and remediate certain
historic environmental impacts to the site. Cost estimates for remediation (closure and
post-closure) range from $12.5 million to $20.5 million depending on final State of Florida
requirements. The remediation activities are expected to occur over the course of several years.
14
Columbus, Georgia
The Columbus site is a former secondary lead recycling plant that was mothballed in 1999,
which is part of a larger facility that includes an operating lead-acid battery manufacturing
facility. Groundwater remediation activities began in 1988. Costs for supplemental investigations,
remediation and site closure are currently estimated at $6 million to $9 million.
Azambuja (SONALUR) Portugal
The Azambuja (SONALUR) facility is an active secondary lead recycling plant. Materials from
past operations present at the site are stored in above-ground concrete containment vessels and in
underground storage deposits. The Company finalized the process of obtaining site characterization
data to evaluate remediation alternatives agreeable to local authorities. Costs for remediation are
currently estimated at $2 million to $4 million.
Guarantees
At June 30, 2007, the Company had outstanding letters of credit with a face value of $45.3
million and surety bonds with a face value of $4.5 million. The majority of the letters of credit
and surety bonds have been issued as collateral or financial assurance with respect to certain
liabilities the Company has recorded, including but not limited to environmental remediation
obligations and self-insured workers compensation reserves. Failure of the Company to satisfy its
obligations with respect to the primary obligations secured by the letters of credit or surety
bonds could entitle the beneficiary of the related letter of credit or surety bond to demand
payments pursuant to such instruments. The letters of credit generally have terms up to one year.
Collateral held by the surety in the form of letters of credit at June 30, 2007, pursuant to the
terms of the agreement, totaled approximately $4.5 million.
Certain of the Company’s European subsidiaries have bank guarantees outstanding, which have
been issued as collateral or financial assurance in connection with environmental obligations,
income tax claims and customer contract requirements. At June 30, 2007, bank guarantees with a face
value of $19.9 million were outstanding.
Sales Returns and Allowances
The Company provides for an allowance for product returns and/or allowances. Based upon its
manufacturing re-work process, the Company believes that the majority of its product returns are
not the result of product defects. The Company recognizes the estimated cost of product returns as
a reduction of sales in the period in which the related revenue is recognized. The product return
estimates are based upon historical trends and claims experience, and include assessment of the
anticipated lag between the date of sale and claim/return date.
A reconciliation of changes in the Company’s sales returns and allowances liability follows
(in thousands):
|
|
|
|
|
Balance at March 31, 2007 |
|
$ |
48,526 |
|
Accrual for sales returns and allowances provided during the period |
|
|
12,529 |
|
Settlements made (in cash or credit), and currency translation during the period |
|
|
(10,967 |
) |
|
|
|
|
Balance at June 30, 2007 |
|
$ |
50,088 |
|
|
|
|
|
(12) INCOME TAXES
The Company or one of its subsidiaries files income tax returns in the U.S. federal
jurisdiction and various state and foreign jurisdictions. The Company is no longer subject to U.S.
federal income tax examinations by tax authorities for years ended before March 31, 2004.
With respect to state and local jurisdictions and countries outside of the United States, with
limited exceptions, the Company and its subsidiaries are no longer subject to income tax audits for
years ended before March 31, 2001. Although the outcome of tax audits is always uncertain, the
Company believes that adequate amounts of tax, interest and penalties have been provided for any
adjustments that could result from these years.
The Company adopted the provisions of FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes – An Interpretation of SFAS 109,” (“FIN 48”) effective April 1, 2007. FIN 48
clarifies the accounting for income taxes by prescribing a minimum recognition threshold a tax
position is required to meet before being recognized in the financial statements. FIN 48 also
provides guidance on derecognition, measurement, classification, interest and penalties, accounting
in interim periods, disclosure and transition. As a result of the implementation of FIN 48, the
Company recognized a $4.2 million increase in the liability for unrecognized tax benefits and the
related liability for interest and penalties. This amount was accounted for entirely as a
reduction
15
to the April 1, 2007 balance of accumulated deficit.
As of April 1, 2007, after implementation of FIN 48, the Company’s unrecognized tax benefits
were $66.2 million. The amount, if recognized, that would affect the Company’s effective tax rate
is $19.6 million at April 1, 2007.
The Company classifies interest and penalties on uncertain tax benefits as income tax expense.
At April 1, 2007, before any tax benefits, the Company had $3.1 million of accrued interest and
penalties on unrecognized tax benefits.
During the next twelve months, the Company does not expect the resolution of any tax audits
which could potentially reduce unrecognized tax benefits by a material amount. As of June 30,
2007, there were no material changes to the amount of unrecognized tax benefits or the related
accrued interest and penalties.
(13) RESTRUCTURING
During the first quarter of fiscal 2008, the Company has continued to implement operational
changes to streamline and rationalize its structure in an effort to simplify the organization and
eliminate redundant and/or unnecessary costs. As part of these restructuring programs, the nature
of the positions eliminated range from plant employees and clerical workers to operational and
sales management.
During the three months ended June 30, 2007, the Company recognized restructuring charges of
$2.1 million, representing $1.1 million for severance and $1 million for related closure
costs. These charges resulted from consolidation efforts in the Industrial Energy Europe and Rest
of World (“ROW”) segment, headcount reductions in the Transportation Europe and ROW segment, and
corporate severance. Approximately 20 positions have been eliminated in connection with fiscal
2008 restructuring activities.
Summarized restructuring reserve activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Severance Costs |
|
|
Closure Costs |
|
|
Total |
|
|
|
|
(In thousands) |
|
Balance at March 31, 2007 |
|
$ |
1,860 |
|
|
$ |
3,803 |
|
|
$ |
5,663 |
|
|
Restructuring Charges |
|
|
1,139 |
|
|
|
993 |
|
|
|
2,132 |
|
Payments and Currency Translation |
|
|
(1,214 |
) |
|
|
(1,136 |
) |
|
|
(2,350 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2007 |
|
$ |
1,785 |
|
|
$ |
3,660 |
|
|
$ |
5,445 |
|
|
|
|
|
|
|
|
|
|
|
Remaining expenditures principally represent (i) severance and related benefits payable per
employee agreements and/or regulatory requirements, (ii) lease commitments for certain closed
facilities, branches and offices, as well as leases for excess and permanently idle equipment
payable in accordance with contractual terms, and (iii) certain other closure costs including
dismantlement and costs associated with removal obligations incurred in connection with the exit of
facilities.
(14) NET LOSS PER SHARE
Basic net loss per share is computed using the weighted average number of common shares
outstanding for the period, while diluted net loss per share is computed assuming conversion of all
dilutive securities. Shares which are contingently issuable under the Company’s plan of
reorganization have been included as outstanding common shares for purposes of calculating net loss
per share.
Due to a net loss in the three months ended June 30, 2007, 1,492,719 shares of securities
issuable in connection with stock option and restricted stock (unvested) plans have been excluded
from the diluted loss per share calculation because their effect would be anti-dilutive.
(15) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements” (“SFAS
157”). SFAS 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157
applies under other accounting pronouncements that require or permit fair value measurements, the
FASB having previously concluded in those accounting pronouncements that fair value is the relevant
measurement attribute. Accordingly, SFAS 157 does not require any new fair value measurements.
However, for some entities, the application of SFAS 157 will change current practice. SFAS 157 is
effective for fiscal years beginning after November 15, 2007 (the Company’s fiscal 2009), and
interim periods within those years. The Company will assess the effect of this pronouncement on
its financial
16
statements, but at this time, no material effect is expected.
In February 2007, the FASB issued SFAS No. 159 “The Fair Value Option for Financial Assets and
Financial Liabilities, Including an Amendment of FASB Statement No. 115” (“SFAS 159”). SFAS 159
permits entities to choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring related assets and liabilities
differently without having to apply complex hedge accounting provisions. SFAS 159 is expected to
expand the use of fair value measurement, which is consistent with the FASB’s long-term measurement
objectives for accounting for financial instruments. SFAS 159 is effective for fiscal years
beginning after November 15, 2007 (the Company’s fiscal 2009). The Company will assess the effect
of this pronouncement on its financial statements, but at this time, no material effect is
expected.
(16) SEGMENT INFORMATION
The Company reports its results for four business segments, Transportation Americas,
Transportation Europe and Rest of World (“ROW”), Industrial Energy Americas and Industrial Energy
Europe and ROW. The Company will continue to evaluate its reporting segments pending future
organizational changes that may take place. The Company is a global producer and recycler of
lead-acid batteries. The Company’s four business segments provide a comprehensive range of stored
electrical energy products and services for transportation and industrial applications.
Transportation markets include original-equipment and aftermarket automotive, heavy-duty
truck, agricultural and marine applications, and new technologies for hybrid vehicles and 42-volt
automotive applications. Industrial markets include batteries for telecommunications systems,
electric utilities, railroads, uninterruptible power supply (UPS), lift trucks and other material
handling
equipment, mining and other commercial vehicles.
The Company’s four reportable segments are determined based upon the nature of the markets
served and the geographic regions in which they operate. The Company’s chief decision-maker
monitors and manages the financial performance of these four business groups.
Certain asset information otherwise required to be disclosed is not reflected below as it is
not allocated by segment nor utilized by management in the Company’s operations.
Selected financial information concerning the Company’s reportable segments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2007 |
|
|
Transportation |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
Europe |
|
Other |
|
|
|
|
Americas |
|
and ROW |
|
Americas |
|
and ROW |
|
(a) |
|
Consolidated |
|
|
|
(In thousands) |
Net sales |
|
$ |
251,029 |
|
|
$ |
212,709 |
|
|
$ |
65,274 |
|
|
$ |
233,375 |
|
|
$ |
— |
|
|
$ |
762,387 |
|
Gross profit |
|
|
47,725 |
|
|
|
22,149 |
|
|
|
16,111 |
|
|
|
32,684 |
|
|
|
— |
|
|
|
118,669 |
|
Expenses |
|
|
31,027 |
|
|
|
25,856 |
|
|
|
10,106 |
|
|
|
34,106 |
|
|
|
52,174 |
|
|
|
153,269 |
|
Income (loss)
before
reorganization
items, income
taxes, and minority
interest |
|
|
16,698 |
|
|
|
(3,707 |
) |
|
|
6,005 |
|
|
|
(1,422 |
) |
|
|
(52,174 |
) |
|
|
(34,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended June 30, 2006 |
|
|
Transportation |
|
Industrial |
|
|
|
|
|
|
|
|
|
|
|
|
Europe |
|
|
|
|
|
Europe |
|
Other |
|
|
|
|
|
|
Americas |
|
and ROW |
|
Americas |
|
and ROW |
|
(a) |
|
Consolidated |
|
|
|
(In thousands) |
Net sales |
|
$ |
214,509 |
|
|
$ |
182,753 |
|
|
$ |
72,949 |
|
|
$ |
212,979 |
|
|
|
— |
|
|
$ |
683,190 |
|
Gross profit |
|
|
32,934 |
|
|
|
19,607 |
|
|
|
17,611 |
|
|
|
39,527 |
|
|
|
— |
|
|
|
109,679 |
|
Expenses |
|
|
37,746 |
|
|
|
25,750 |
|
|
|
10,120 |
|
|
|
35,892 |
|
|
|
32,671 |
|
|
|
142,179 |
|
Income (loss)
before
reorganization
items, income
taxes, and minority
interest |
|
|
(4,812 |
) |
|
|
(6,143 |
) |
|
|
7,491 |
|
|
|
3,635 |
|
|
|
(32,671 |
) |
|
|
(32,500 |
) |
|
|
|
(a) |
|
Other includes unallocated corporate expenses, interest
expense, currency remeasurement loss (gain), and loss (gain)
on revaluation of warrants. Other also includes loss on
early extinguishment of debt for the three months ended June
30, 2007. |
17
(17) SUBSEQUENT EVENT
On July 6th, 2007, the Upper House of the German Parliament (Bundesrat) passed into
law the German Business Tax Reform 2008 bill. The law would reduce the Company’s German
subsidiaries’ marginal tax rate from approximately 37% to 28%. In accordance with SFAS No. 109,
the effect of this change in tax law will be reflected in the Company’s financial statements for
the period ending September 30, 2007 as changes in tax law must be reflected in the period of
enactment. The Company estimates this new law will reduce its net deferred tax asset and result in
a charge to tax expense related to its German subsidiaries of $17 to $18 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis provides information which management believes is
relevant to an assessment and understanding of the Company’s consolidated results of operation and
financial condition. The discussion should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto contained in this Report on Form 10-Q.
Some of the statements contained in the following discussion of the Company’s financial
condition and results of operations
refer to future expectations or include other “forward-looking” information. Those statements
are subject to known and unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived from numerous assumptions. See “Cautionary
Statement for Purposes of the Safe Harbor Provision of the Private Securities Litigation Reform Act
of 1995,” included in this Report on Form 10-Q for risk factors that should be considered when
evaluating forward-looking information detailed below. These factors could cause our actual results
to differ materially from the forward looking statements. For a discussion of certain legal
contingencies, see Note 11 to the Condensed Consolidated Financial Statements.
Executive Overview
The Company is a global producer and recycler of lead-acid batteries. The Company’s four
business segments, Transportation Americas, Transportation Europe and ROW, Industrial Energy
Americas, and Industrial Energy Europe and ROW, provide a comprehensive range of stored electrical
energy products and services for transportation and industrial applications.
Transportation markets include original-equipment (“OE”) and aftermarket automotive,
heavy-duty truck, agricultural and marine applications, and new technologies for hybrid vehicles
and 42-volt automotive applications. Industrial markets include batteries for telecommunications
systems, electric utilities, railroads, uninterruptible power supply (UPS), lift trucks, mining,
and other commercial vehicles.
The Company’s four reportable segments are determined based upon the nature of the markets
served and the geographic regions in which they operate. The Company’s chief decision-maker
monitors and manages the financial performance of these four business groups.
Factors Which Affect the Company’s Financial Performance
Lead and other Raw Materials. Lead represents approximately 42% of the Company’s cost of goods
sold. The market price of lead fluctuates. Generally, when lead prices decrease, customers may seek
disproportionate price reductions from the Company, and when lead prices increase, customers may
resist price increases. Both of these situations may cause customer demand for the Company’s
products to be reduced and the Company’s net sales and gross margins to decline. The average of the
lead prices quoted on the London Metal Exchange (“LME”) have increased almost 100% from $1,100 per
metric ton for the three months ended June 30, 2006 to $2,176 for the three months ended June 30,
2007. At August 3, 2007, the quoted price on the LME was $3,389 per metric ton. To the extent
that lead prices continue to be volatile, and the Company is unable to pass higher material costs
resulting from this volatility on to its customers, its financial performance and liquidity will be
adversely impacted.
Energy Costs. The Company relies on various sources of energy to support its manufacturing and
distribution process, principally natural gas at its recycling plants and diesel fuel for
distribution of its products. The Company seeks to recoup these increased energy costs through
price increases or surcharges. To the extent the Company is unable to pass on these higher energy
costs to its customers, its financial performance will be adversely impacted.
Competition. The global transportation and industrial energy battery markets are highly
competitive. In recent years, competition has continued to intensify and has impacted the Company’s
ability to pass along increased prices to keep pace with rising production costs. The effect of
this competition has been heightened by excess capacity and fluctuating lead prices as well as
low-priced Asian imports impacting our markets.
18
Exchange Rates. The Company is exposed to foreign currency risk in most European countries,
principally from fluctuations in the Euro and British Pound. For the first quarter of fiscal 2008,
the exchange rate of the Euro to the U.S. Dollar has increased 7.2% on a weighted average basis to
$1.35 compared to $1.26 for the first quarter of fiscal 2007. The British Pound is up 8.7% for the
same period. The Euro and British Pound are up 1.3% and 2%, respectively, at June 30, 2007 as
compared to March 31, 2007.
The Company is also exposed, to a lesser extent, to foreign currency risk in Australia and the
Pacific Rim. Movements of exchange rates against the U.S. dollar can result in variations in the
U.S. dollar value of non-U.S. sales, expenses, assets and liabilities. In some instances, gains in
one currency may be offset by losses in another. Movements in European currencies impacted the
Company’s results for the periods presented herein. For the three months ended June 30, 2007,
approximately 59% of the Company’s net sales was generated in Europe and ROW. Further,
approximately 71% of the Company’s aggregate accounts receivable and inventory as of June 30, 2007
was held by its European subsidiaries.
Markets. The Company is subject to concentrations of customers and sales in a few geographic
locations and is dependent on customers in certain industries, including the automotive,
communications and data and material handling markets. Economic difficulties experienced in these
markets and geographic locations impact the Company’s financial results.
Seasonality and Weather. The Company sells a disproportionate share of its transportation
aftermarket batteries during the fall and early winter (the Company’s third and portions of its
fourth fiscal quarters). Retailers and distributors buy automotive batteries during these periods
so they will have sufficient inventory for cold weather periods. In addition, many of the Company’s
industrial battery customers in Europe do not place their battery orders until the end of the
calendar year. The impact of seasonality on sales has the effect of increasing the Company’s
working capital requirements and also makes the Company more sensitive to fluctuations in the
availability of liquidity.
Unusually cold winters or hot summers may accelerate battery failure and increase demand for
transportation replacement batteries. Mild winters and cool summers may have the opposite effect.
As a result, if the Company’s sales are reduced by an unusually warm winter or cool summer, it is
not possible for the Company to recover these sales in later periods. Further, if the Company’s
sales are adversely affected by the weather, the Company cannot make offsetting cost reductions to
protect its liquidity and gross margins in the short-term because a large portion of the Company’s
manufacturing and distribution costs are fixed.
Interest Rates. The Company is exposed to fluctuations in interest rates on its variable rate
debt.
First Quarter of Fiscal 2008 Highlights and Outlook
The Company’s reported results continue to be impacted in fiscal 2008 by increases in the
price of lead and other commodity costs that are primary components in the manufacture of batteries
and energy costs used in the manufacturing and distribution of the Company’s products.
In the Americas market, the Company obtains the vast majority of its lead requirements from
six Company-owned and operated secondary lead recycling plants. These facilities reclaim lead by
recycling spent lead-acid batteries, which are obtained for recycling from the Company’s customers
and outside spent-battery collectors. Recycling helps the Company in the Americas control the cost
of its principal raw material as compared to purchasing lead at prevailing market prices. Similar
to the rise in lead prices, however, the cost of spent batteries has also increased. For the first
quarter of fiscal 2008, the average cost of spent batteries increased approximately 28% versus the
first quarter of fiscal 2007. Therefore, the higher market price of lead with respect to
manufacturing in the Americas continues to impact results. The Company continues to take selective
pricing actions and attempts to secure higher captive spent battery return rates to help mitigate
these risks.
In Europe, the Company’s lead requirements are mainly obtained from third-party suppliers.
Because of the Company’s exposure to lead market prices in Europe, and based on historical price
increases and apparent volatility in lead prices, the Company has implemented several measures to
offset higher lead prices, including selective pricing actions, and lead price escalators. In
addition, the Company has automatic price escalators with many OEM customers. The Company currently
recycles a small portion of its lead requirements in its European facilities.
The Company expects that these higher lead and other commodity costs, which affect all
business segments, will continue to put pressure on the Company’s financial performance. However,
selective pricing actions, lead price escalators in certain contracts and fuel surcharges are
intended to help mitigate these risks. The implementation of selective pricing actions and price
escalators generally lags the rise in market prices of lead and other commodities. Both price
escalators and fuel surcharges are subject to the risk of customer acceptance.
In addition to managing the impact of higher lead and other commodity costs on the Company’s
results, the key elements of the Company’s underlying business plans and continued strategies are:
19
(i) Successful execution and completion of the Company’s ongoing restructuring plans, and
organizational realignment of divisional and corporate functions resulting in further headcount
reductions, principally in selling, general and administrative functions globally.
(ii) Actions designed to improve the Company’s liquidity and operating cash flow through working
capital reduction plans, the sales of non-strategic assets and businesses, streamlining cash
management processes, implementing plans to minimize the cash costs of the Company’s restructuring
initiatives and closely managing capital expenditures.
(iii) Continued factory and distribution productivity improvements through its established Take
Charge! initiative, which is now installed in 12 of its 28 manufacturing locations, including
continuing a focused relationship with the principal consultant. This year will see further
integration of the Excell initiative.
(iv) The Company will continue to review and rationalize the various brand offerings of product in
its markets to gain efficiencies in manufacturing and distribution, and better leverage of its
marketing spending.
(v) The Company will gain further product and process efficiencies with implementation of the
Global Procurement structure. This initiative focuses on leveraging existing relationships and
creating an infrastructure for global search for products and components.
Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are
based upon the Company’s Condensed Consolidated Financial Statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these financial statements requires the Company to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses, and the related
disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its
estimates based on historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or conditions.
The Company believes that the critical accounting policies and estimates disclosed in the
Company’s annual report on Form 10-K for the fiscal year ended March 31, 2007 (the “Annual Report”)
affect the preparation of its Condensed Consolidated Financial Statements. The reader of this
report should refer to the Annual Report for further information.
Results of Operations
Three months ended June 30, 2007 compared with three months ended June 30, 2006
Net Sales
Net sales were $762.4 million for the first quarter of fiscal 2008 versus $683.2 million in the
first quarter of fiscal 2007. Currency translation (primarily the strengthening of the Euro against
the U.S. dollar) favorably impacted net sales in the first quarter of fiscal 2008 by approximately
$31.7 million. Excluding the currency translation impact, net sales increased by approximately
$47.5 million or 7% primarily as a result of higher Transportation demand worldwide and better
overall pricing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAVORABLE (UNFAVORABLE) |
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
Currency |
|
|
Non-Currency |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
TOTAL |
|
|
Related |
|
|
Related |
|
|
|
|
(In thousands) |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
251,029 |
|
|
$ |
214,509 |
|
|
$ |
36,520 |
|
|
$ |
— |
|
|
$ |
36,520 |
|
Europe & ROW |
|
|
212,709 |
|
|
|
182,753 |
|
|
|
29,956 |
|
|
|
15,097 |
|
|
|
14,859 |
|
Industrial Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
65,274 |
|
|
|
72,949 |
|
|
|
(7,675 |
) |
|
|
— |
|
|
|
(7,675 |
) |
Europe & ROW |
|
|
233,375 |
|
|
|
212,979 |
|
|
|
20,396 |
|
|
|
16,564 |
|
|
|
3,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
762,387 |
|
|
$ |
683,190 |
|
|
$ |
79,197 |
|
|
$ |
31,661 |
|
|
$ |
47,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation Americas net sales were $251 million for the first quarter of fiscal 2008
versus $214.5 million for the first quarter of fiscal 2007. Net sales for the first quarter of
fiscal 2008 were $36.5 million or 17.0% higher than the first quarter of fiscal 2007 due to an
increase in aftermarket volumes and the favorable impact of price increases.
Transportation Europe and ROW net sales were $212.7 million for the first quarter of fiscal
2008 versus $182.8 million for the
20
first quarter of fiscal 2007. Net sales, before the favorable
impact of $15.1 million in foreign currency translation, were higher by $14.9 million or 8.1%
mainly due to higher OE volumes and the overall impact of favorable pricing actions in both the OE
and aftermarket channels.
Industrial Energy Americas net sales were $65.3 million for the first quarter of fiscal 2008
versus $72.9 million for the first quarter of fiscal 2007. Net sales were $7.7 million or 10.5%
lower due to a sizable motive power build for a particular customer in fiscal 2007 that was not
repeated in fiscal 2008 as well as continued softness in the telecom wireless market, offset
partially by higher average selling prices.
Industrial Energy Europe and ROW net sales were $233.4 million for the first quarter of fiscal
2008 versus $213 million for the first quarter of fiscal 2007. Net sales, before a favorable
currency translation impact of $16.6 million, increased $3.8 million or 1.8% due to higher average
selling prices related to lead and other pricing actions, partially offset by lower volumes in both
the motive power and network power markets.
Gross Profit
Gross profit was $118.7 million in the first quarter of fiscal 2008 versus $109.7 million in
the first quarter of fiscal 2007. Gross margin decreased 0.5% to 15.6% in the first quarter of
fiscal 2008 from 16.1% in the first quarter of fiscal 2007. Gross profit in each of the Company’s
business segments was negatively impacted by significantly higher lead costs (average LME prices
were $2,176 per metric ton in the first quarter of fiscal 2008 versus $1,100 per metric ton in the
first quarter of fiscal 2007), and was only partially recovered by higher average selling prices,
along with improved production efficiencies. Currency translation favorably impacted gross profit
in the first quarter of fiscal 2008 by $3.8 million.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended |
|
|
For the Three Months Ended |
|
|
|
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
FAVORABLE / (UNFAVORABLE) |
|
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Percent of |
|
|
|
|
|
|
Currency |
|
|
Non-Currency |
|
|
|
TOTAL |
|
|
Net Sales |
|
|
TOTAL |
|
|
Net Sales |
|
|
TOTAL |
|
|
Related |
|
|
Related |
|
|
|
|
|
(In thousands) |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
47,725 |
|
|
|
19.0 |
% |
|
$ |
32,934 |
|
|
|
15.4 |
% |
|
$ |
14,791 |
|
|
$ |
— |
|
|
$ |
14,791 |
|
Europe & ROW |
|
|
22,149 |
|
|
|
10.4 |
% |
|
|
19,607 |
|
|
|
10.7 |
% |
|
|
2,542 |
|
|
|
1,531 |
|
|
|
1,011 |
|
Industrial Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
16,111 |
|
|
|
24.7 |
% |
|
|
17,611 |
|
|
|
24.1 |
% |
|
|
(1,500 |
) |
|
|
— |
|
|
|
(1,500 |
) |
Europe & ROW |
|
|
32,684 |
|
|
|
14.0 |
% |
|
|
39,527 |
|
|
|
18.6 |
% |
|
|
(6,843 |
) |
|
|
2,227 |
|
|
|
(9,070 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
118,669 |
|
|
|
15.6 |
% |
|
$ |
109,679 |
|
|
|
16.1 |
% |
|
$ |
8,990 |
|
|
$ |
3,758 |
|
|
$ |
5,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation Americas gross profit was $47.7 million or 19.0% of net sales in the first
quarter of fiscal 2008 versus $32.9 million or 15.4% of net sales in the first quarter of fiscal
2007. This increase is partially due to higher sales volumes in the aftermarket channel combined
with higher overall average selling prices. In addition, this segment continued to realize
incremental productivity savings from its ongoing Take Charge! initiative.
Transportation Europe and ROW gross profit was $22.1 million or 10.4% of net sales in the
first quarter of fiscal 2008 versus $19.6 million or 10.7% of net sales in the first quarter of
fiscal 2007. Currency translation favorably impacted gross profit during the first quarter of
fiscal 2008 by approximately $1.5 million. The remaining increase in gross profit was primarily due
to the impact of favorable pricing actions, but was substantially offset by higher raw material
costs and lower relative sales to the aftermarket channels, which tend to be at higher margins.
Industrial Energy Americas gross profit was $16.1 million or 24.7% of net sales in the first
quarter of fiscal 2008 versus $17.6 million or 24.1% of net sales in the first quarter of fiscal
2007. The decrease in gross profit was primarily due to lower sales volumes, while the increased
gross profit percentage was primarily due to higher average selling prices and cost reduction
initiatives, partially offset by higher lead costs.
Industrial Energy Europe and ROW gross profit was $32.7 million or 14.0% of net sales in the
first quarter of fiscal 2008 versus $39.5 million or 18.6% of net sales in the first quarter of
fiscal 2007. Currency translation favorably impacted Industrial Energy Europe and ROW gross profit
in the first quarter of fiscal 2008 by approximately $2.2 million. The overall decrease in gross
profit was primarily due to the delayed impact of lead price escalator provisions in contracts with
major customers in relation to the rapid increase in lead costs, partially offset by manufacturing
cost reductions resulting from installation of Take Charge! initiatives at 3 of the 6 major
manufacturing facilities.
Expenses
21
Expenses were $153.3 million in the first quarter of fiscal 2008 versus $142.2 million in the
first quarter of fiscal 2007. First quarter fiscal 2008 expenses include a loss on early
extinguishment of debt of $21.3 million, the details of which are discussed in Note 7 of the
Condensed Consolidated Financial Statements. Foreign currency translation unfavorably impacted
expenses by approximately $5.9 million in the first quarter of fiscal 2008. General and
administrative expenses decreased by $2.4 million, from $46.0 million in the first quarter of
fiscal 2007 to $43.6 million in the first quarter of fiscal 2008. Also, restructuring charges
declined $6.8 million, from $8.9 million in the first quarter of fiscal 2007 to $2.1 million in the
first quarter of fiscal 2008. Fiscal 2007 restructuring expenses included the financial impact of
closing our Shreveport, Louisiana transportation battery plant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FAVORABLE / (UNFAVORABLE) |
|
|
|
For the Three Months Ended |
|
|
|
|
|
|
Currency |
|
|
Non-Currency |
|
|
|
June 30, 2007 |
|
|
June 30, 2006 |
|
|
TOTAL |
|
|
Related |
|
|
Related |
|
|
|
|
(In thousands) |
|
Transportation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
$ |
31,027 |
|
|
$ |
37,746 |
|
|
$ |
6,719 |
|
|
|
— |
|
|
$ |
6,719 |
|
Europe & ROW |
|
|
25,856 |
|
|
|
25,750 |
|
|
|
(106 |
) |
|
|
(1,883 |
) |
|
|
1,777 |
|
Industrial Energy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Americas |
|
|
10,106 |
|
|
|
10,120 |
|
|
|
14 |
|
|
|
— |
|
|
|
14 |
|
Europe & ROW |
|
|
34,106 |
|
|
|
35,892 |
|
|
|
1,786 |
|
|
|
(2,394 |
) |
|
|
4,180 |
|
|
Unallocated expenses |
|
|
52,174 |
|
|
|
32,671 |
|
|
|
(19,503 |
) |
|
|
(1,667 |
) |
|
|
(17,836 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL |
|
$ |
153,269 |
|
|
$ |
142,179 |
|
|
$ |
(11,090 |
) |
|
$ |
(5,944 |
) |
|
$ |
(5,146 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transportation Americas expenses were $31.0 million in the first quarter of fiscal 2008
versus $37.7 million in the first quarter of fiscal 2007. The decrease was primarily due to prior
year expenses which included $6 million of restructuring charges and $2.9 million of asset
impairments related to the closure of the Shreveport, Louisiana Battery Plant, partially offset by
higher selling expenses.
Transportation Europe and ROW expenses were $25.9 million in the first quarter of fiscal 2008
versus $25.8 million in the first quarter of fiscal 2007. Currency translation unfavorably impacted
expenses in the first quarter of fiscal 2008 by approximately $1.9 million. Excluding the impact
of foreign exchange, expenses declined by $1.8 million due to the favorable impact of ongoing cost
reduction programs and lower restructuring expense.
Industrial Energy Americas expenses were $10.1 million in the first quarter of fiscal 2008
versus $10.1 million in the first quarter of fiscal 2007. The business continues to manage
spending closely to offset the impact of economics in the face of lower year-to-date volumes.
Industrial Energy Europe and ROW expenses were $34.1 million in the first quarter of fiscal
2008 versus $35.9 million in the first quarter of fiscal 2007. Expenses, before an unfavorable
currency translation impact of approximately $2.4 million, decreased by $4.2 million primarily due
to a $1.6 million gain on asset sale, lower selling and advertising costs, and the positive impact
of cost reduction programs implemented in the second half of fiscal 2007.
Unallocated expenses were $52.2 million in the first quarter of fiscal 2008 versus $32.7
million in the first quarter of fiscal 2007, and include unallocated corporate costs, interest
expense, currency remeasurement loss (gain), and loss (gain) on revaluation of warrants. The
increase in unallocated expenses was largely attributable to the $21.3 million loss on early
extinguishment of debt in the first quarter of 2008, which is discussed in Note 7 of the Condensed
Consolidated Financial Statements. In addition, unallocated expenses were impacted by the
following matters:
|
(i) |
|
interest expense, net decreased $0.9 million principally due to lower interest rates
under the Company’s new credit facility; |
|
|
(ii) |
|
currency translation unfavorably impacted unallocated expenses in the first quarter of
fiscal 2008 by approximately $1.7 million; |
|
|
(iii) |
|
corporate expenses in the first quarter of fiscal 2008 and 2007 were $12.1 million and
$16.8 million respectively. The decrease was primarily due to the inclusion in prior year expense
of $3.5 million of expenses for professional fees related to the potential sale of the Industrial
Europe and ROW business segment which the Company did not pursue further, and lower general and
administrative cost resulting from the Company’s continued restructuring efforts. |
22
|
(iv) |
|
included in Other (income) expense, net in the first quarter of fiscal 2008 and 2007,
respectively: |
|
• |
|
foreign currency remeasurement gain of $2.5 million and $5.6 million; |
|
|
• |
|
loss (gain) on revaluation of warrants of $0.3 million and ($0.8) million. |
Reorganization Items
Reorganization items represent amounts the Company continues to incur subsequent to its
emergence from Chapter 11 filing in May 2004 and are presented separately in the Condensed
Consolidated Statements of Operations. Reorganization items for the first quarter of fiscal 2008
and 2007 were $0.4 million and $1.6 million, respectively. These items include professional fees
including financial and legal services. See Note 3 to the Condensed Consolidated Financial
Statements.
Income Taxes
In the first quarter of fiscal 2008, the Company recorded an income tax provision of $0.2
million on pre-tax loss of $35.0 million. In the first quarter of fiscal 2007, the Company
recorded an income tax provision of $3.6 million on a pre-tax loss of $34.1 million. The effective
tax rate was (0.6%) and (10.5%) in the first quarter of fiscal 2008 and 2007, respectively. The
effective tax rate for the first quarter of both periods was impacted by the generation of income
in tax-paying jurisdictions, principally certain countries in Europe, New Zealand, and Canada, with
limited or no offset on a consolidated basis as a result of recognition of valuation allowances on
tax benefits generated from current period losses in the U.S., the United Kingdom, Italy, Spain,
Australia, and France. The effective tax rate for the first quarter of fiscal 2008 and 2007,
respectively, was impacted by the recognition of $11.0 million and $28.7 million of valuation
allowances on current year tax benefits generated primarily in the U.S., United Kingdom, France,
Spain, and Italy.
Liquidity and Capital Resources
As of June 30, 2007, the Company had total liquidity of $139.5 million consisting of cash and
cash equivalents of $49.3 million and availability under the Company’s revolving loan facility and
other loan facilities of $43.1 million and $47.1 million, respectively. This compared to
a total liquidity position of $145.9 million at March 31, 2007 consisting of cash and cash
equivalents of $76.2 million and availability under the Revolving Loan Facility and other credit
facilities of $59.3 million and $10.4 million, respectively. On August 3, 2007, total liquidity
was approximately $157 million, consisting of availability under the Company’s revolving loan
facility and other loan facilities of $57 million and $47 million, respectively, and an estimated
$53 million in cash and cash equivalents. It should be noted that cash and cash equivalents
fluctuate substantially on a daily basis due in part to the timing of account receivable
collections, and mid-period balances are subject to the monthly reconciliation process of the
Company’s numerous global accounts.
On May 15, 2007, the Company entered into a $495 million senior secured credit agreement (“Credit
Agreement”). The Credit Agreement consists of a $200 million asset based revolving senior secured
credit facility (the “Revolving Loan Facility”) and a $295 million senior secured term loan
facility (the “Term Loan”). The proceeds of the Credit Agreement were used to fully pay off the
Company’s previous senior secured credit facility. The Company recorded a loss on the early
extinguishment of debt of $21.3 million. The weighted average interest rate on the senior secured
credit facility at June 30, 2007 and March 31, 2007 was 8.60% and 10.17%, respectively. The Credit
Agreement has no financial maintenance covenants.
The Revolving Loan
Borrowings under the Revolving Loan Facility bear interest at a rate equal to LIBOR plus
1.75%. The applicable spread on the Revolving Loan Facility will be subject to change and may
increase or decrease in accordance with a leverage-based pricing grid. The Revolving Loan Facility
includes a letter of credit sub-facility of $75 million and an accordion feature that allows the
Company to increase the facility size up to $250 million if it can obtain commitments from existing
or new lenders for the incremental amount. The Revolving Loan Facility will mature in May 2012, but
is prepayable at any time at par.
Availability under the Revolving Loan Facility is subject to a borrowing base comprised of up
to 85% of the Company’s eligible accounts receivable plus 85% of the net orderly liquidation value
of eligible North American inventory less, in each case, certain limitations and reserves.
Revolving loans made to the Company domestically under the Revolving Loan Facility are guaranteed
by substantially all domestic subsidiaries of the Company, and revolving loans made to Exide C.V.
under the Revolving Loan Facility are guaranteed by substantially all domestic subsidiaries of the
Company and certain foreign subsidiaries. These guarantee obligations are secured by a lien on
substantially all of the assets of such respective Borrowers and guarantors, including, subject to
certain exceptions, in the case of security provided by the domestic subsidiaries, a first priority
lien in current assets and a second priority lien in fixed assets.
23
The Revolving Loan Facility contains customary terms and conditions, including, without
limitation, limitations on liens, indebtedness, implementation of cash dominion and control
agreements, and other typical covenants. A springing fixed charge financial covenant of 1.0:1.0
will be triggered if the excess availability under the Revolving Loan Facility falls below $40
million. The Company is also required to pay an unused line fee that varies based on usage of the
Revolving Loan Facility.
The Term Loan
Borrowings under the Term Loan in U.S. dollars bear interest at a rate equal to LIBOR plus
3.25%, and borrowings under the Term Loan in Euros bear interest at a rate equal to LIBOR plus
3.50%; provided that such rates may decrease by 0.25% after December 31, 2007 if the Company
achieves certain corporate credit ratings. The Term Loan will mature in May 2012, but is prepayable
at any time at par value, provided that if a change in control or similar event occurs within the
first year, the Company must offer to prepay the Term Loan at a price equal to 101% of par.
The Term Loan will amortize as follows: 0.25% of the initial principal balance of the Term
Loan will be due and payable on a quarterly basis commencing in September, 2007, with the balance
payable at maturity. Mandatory prepayment by the Company may be required under the Term Loan as a
result of excess cash flow, asset sales and casualty events, in each case, subject to certain
exceptions.
The portion of the Term Loan made to the Company is guaranteed by substantially all domestic
subsidiaries of the Company, and the portion of the Term Loan made to Exide C.V. is guaranteed by
substantially all domestic subsidiaries of the Company and certain foreign subsidiaries. These
obligations are secured by a lien on substantially all of the assets of such respective borrowers
and guarantors, including, subject to certain exceptions, in the case of security provided by the
domestic subsidiaries, a first priority lien in fixed assets and a second priority lien in current
assets.
The Term Loan contains customary terms and conditions, including, without limitation, (1)
limitations on debt (including a leverage or coverage based incurrence test), (2) limitations on
mergers and acquisitions, (3) limitations on restricted payments, (4) limitations on investments,
(5) limitations on capital expenditures, (6) limitations on asset sales with limited exceptions,
(7) limitations on liens and (8) limitations on transactions with affiliates.
In March 2005, the Company issued $290 million in aggregate principal amount of 10.5% Senior
Secured Notes due in 2013. Interest of $15.2 million is payable semi-annually on March 15 and
September 15. The 10.5% Senior Secured Notes are redeemable at the option of the Company, in whole
or in part, on or after March 15, 2009, initially at 105.25% of the principal amount, plus accrued
interest, declining to 100% of the principal amount, plus accrued interest on or after March 15,
2011. The 10.5% Senior Secured Notes are redeemable at the option of the Company, in whole or in
part, subject to payment of a make whole premium, at any time prior to March 15, 2009. In addition,
until May 15, 2008, up to 35% of the 10.5% Senior Secured Notes are redeemable at the option of the
Company, using the net proceeds of one or more qualified equity offerings. In the event of a change
of control or the sale of certain assets, the Company may be required to offer to purchase the
10.5% Senior Secured Notes from the note holders. Those notes are secured by a junior priority lien
on the assets of the U.S. parent company, including the stock of its subsidiaries. The indenture
governing the terms of these notes contains financial covenants which limit the ability of the
Company and its subsidiaries to among other things incur debt, grant liens, pay dividends, invest
in non-subsidiaries, engage in related party transactions and sell assets. Under the indenture,
proceeds from asset sales (to the extent in excess of a $5 million threshold) must be applied to
offer to repurchase notes to the extent such proceeds exceed $20 million in the aggregate and are
not applied within 365 days to retire senior secured credit agreement borrowings or the Company’s
pension contribution obligations that are secured by a first priority lien on the Company’s assets
or to make investments or capital expenditures.
Also, in March 2005, the Company issued Floating Rate Convertible Senior Subordinated Notes
due in 2013, with an aggregate principal amount of $60 million. These notes bear interest at a per
annum rate equal to the 3-month LIBOR, adjusted quarterly, minus a spread of 1.5%. The interest
rate at June 30 and March 31, 2007 was 3.9% and 3.4%, respectively. Interest is payable quarterly.
The notes are convertible into the Company’s common stock at a conversion rate of 57.5705 shares
per one thousand dollars principal amount at maturity, subject to adjustments for any common stock
splits, dividends on the common stock, tender and exchange offers by the Company for the common
stock and third party tender offers, and in the case of a change in control in which 10% or more of
the consideration for the common stock is cash or non-traded securities, the conversion rate
increases, depending on the value offered and timing of the transaction, to as much as 70.2247
shares per one thousand dollars principal amount.
At June 30, 2007, the Company was in compliance in all material respects with covenants
contained in the Credit Agreement and indenture agreements that cover the 10.5% senior secured
notes and floating rate convertible subordinated notes.
At June 30, 2007, the Company had outstanding letters of credit with a face value of $45.3
million and surety bonds with a face value of $4.5 million. The majority of the letters of credit
and surety bonds have been issued as collateral or financial assurance
24
with respect to certain
liabilities the Company has recorded, including, but not limited to, environmental remediation
obligations and self-insured workers compensation reserves. Failure of the Company to satisfy its
obligations with respect to the primary obligations secured by the letters of credit or surety
bonds could entitle the beneficiary of the related letter of credit or surety bond to demand
payments pursuant to such instruments. The letters of credit generally have terms up to one year.
Collateral held by the surety in the form of letters of credit at June 30, 2007, pursuant to the
terms of the agreement, was $4.5 million.
Risks and uncertainties could cause the Company’s performance to differ from management’s
estimates. As discussed under “Factors Which Affect the Company’s Financial Performance –
Seasonality and Weather,” the Company’s business is seasonal. During the Company’s first and second
fiscal quarters, the Company builds inventory in anticipation of increased sales in the winter
months. This inventory build increases the Company’s working capital needs. During these quarters,
because working capital needs are already high, unexpected costs or increases in costs beyond
predicted levels would place a strain on the Company’s liquidity.
Sources Of Cash
The Company’s liquidity requirements have been met historically and will continue
to be met through cash provided by operations, borrowed funds, the proceeds of sales of accounts
receivable, and the sale of non-core assets. The Credit Agreement allows the Company to retain the
first $60 million from proceeds from the sale of non-core assets.
The Company generated $3.4 million and $0.01 million in cash from the sale of
non-core assets in the first quarter of fiscal 2008 and fiscal 2007, respectively. These sales
principally relate to the sale of surplus land and buildings.
Cash flows provided by financing activities were $38.9 million and $11.2 million in
the first quarter of fiscal 2008 and fiscal 2007, respectively. This increase relates primarily to
incremental borrowings under the Company’s Credit Agreement, partially offset by costs associated
with the extinguishment of the Company’s previous credit facility.
Total debt at June 30, 2007 was $755.8 million, as compared to $684.5 million at March 31,
2007. See Note 7 to the Condensed Consolidated Financial Statements for the composition of such
debt.
Uses Of Cash
The Company’s liquidity needs arise primarily from the funding of working capital
needs, obligations on indebtedness and capital expenditures. Because of the seasonality of the
Company’s business, more cash has been typically generated in the third and fourth fiscal quarters
than the first and second fiscal quarters. Greatest cash demands from operations have historically
occurred during the months of June through October.
The decrease in net cash flow from operations versus the first quarter of fiscal 2007 relates
primarily to seasonality related increases in inventory levels as operating units prepare for
heavier sales in the third and fourth quarters, partially driven by higher lead prices.
Restructuring costs of $2.4 million and $10 million were paid during the first
quarter of fiscal 2008 and 2007, respectively. The Company anticipates that it will have ongoing
liquidity needs to support its operational restructuring programs during fiscal 2008, which include
payment of remaining accrued restructuring costs of approximately $5.4 million as of June 30, 2007.
The Company’s ability to successfully implement these restructuring strategies on a timely basis
may be impacted by its access to sources of liquidity. For further discussion see Note 13 to the
Consolidated Financial Statements.
Capital expenditures were $10.8 million and $8.0 million in the first quarter of
fiscal 2008 and 2007, respectively.
The estimated fiscal 2008 pension plan contributions are approximately $53.1 million and other
post-retirement contributions are approximately $2.5 million. Payments aggregating $14.5 million
were made during the three months ended June 30, 2007.
Cash contributions to the Company’s pension plans are generally made in accordance with
minimum regulatory requirements. The Company’s U.S. plans are currently significantly under-funded.
Based on current assumptions and regulatory requirements, the Company’s minimum future cash
contribution requirements for its U.S. plans are expected to remain relatively high for the next
few fiscal years. On November 17, 2004, the Company received written notification of a tentative
determination from the Internal Revenue Service (“IRS”) granting a temporary waiver of its minimum
funding requirements for its U.S. plans for calendar years 2003 and 2004, amounting to
approximately $50 million, net, under Section 412(d) of the Internal Revenue Code, subject to
providing a lien satisfactory to the Pension Benefit Guaranty Corporation (“PBGC”). On June 10,
2005, the Company reached agreement with the PBGC on a second priority lien on domestic personal
property, including stock of its U.S. and direct foreign subsidiaries to secure the unfunded
liability. The temporary waiver provides for deferral of the Company’s minimum contributions for
those years to be paid over a subsequent five-year period through 2010. At June 30, 2007 the
Company owed approximately $26.5 million relating to these amounts previously waived.
25
Based upon the temporary waiver and sensitivity to varying economic scenarios, the Company
expects the cumulative minimum future cash contributions to its U.S. pension plans will total
approximately $70 million to $125 million from fiscal 2008 to fiscal 2012, including $35 million in
fiscal 2008.
The Company expects that cumulative contributions to its non U.S. pension plans will total
approximately $93.2 million from fiscal 2008 to fiscal 2012, including $18.1 million in fiscal
2008. In addition, the Company expects that cumulative contributions to its other post-retirement
benefit plans will total approximately $13 million from fiscal 2008 to fiscal 2012, including $2.5
million in fiscal 2008.
Financial Instruments and Market Risk
From time to time, the Company uses forward contracts to economically hedge certain currency
exposures and certain lead purchasing requirements. The forward contracts are entered into for
periods consistent with related underlying exposures and do not constitute positions independent of
those exposures. The Company expects that it may increase the use of financial instruments,
including fixed and variable rate debt as well as swap, forward and option contracts to finance its
operations and to hedge interest rate, currency and certain lead purchasing requirements in the
future. The swap, forward, and option contracts would be entered into for periods consistent with
related underlying exposures and would not constitute positions independent of those exposures. The
Company has not, and does not intend to enter into contracts for speculative purposes nor be a
party to any leveraged instruments.
The Company’s ability to utilize financial instruments may be restricted because of
tightening, and/or elimination of credit availability with counter-parties. If the Company is
unable to utilize such instruments, the Company may be exposed to greater risk with respect to its
ability to manage exposures to fluctuations in foreign currencies, interest rates, and lead prices.
Accounts Receivable Factoring Arrangements
In the ordinary course of business, the Company utilizes accounts receivable factoring
arrangements in countries where programs of this type are typical. Under these arrangements, the
Company may sell certain of its trade accounts receivable to financial institutions. The
arrangements in virtually all cases do not contain recourse provisions against the Company for its
customers’ failure to pay. The Company sold approximately $58.5 million and $45.2 million of
foreign currency trade accounts receivable as of June 30, 2007 and March 31, 2007, respectively.
Changes in the level of receivables sold from year to year are included in the change in accounts
receivable within cash flow from operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
Changes to the quantitative and qualitative market risks as of June 30, 2007 are described in
Item 2 above, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations—Liquidity and Capital Resources”. Also, see the Company’s Annual Report on Form 10-K for
the fiscal year ended March 31, 2007 for further information.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains “disclosure controls and procedures,” as such term is defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”), that are
designed to ensure that information required to be disclosed by the Company in reports that it
files or submits under the Exchange Act is recorded, processed, summarized, and reported within the
time periods specified in Securities and Exchange Commission rules and forms, and that such
information is accumulated and communicated to the Company’s management, including the Company’s
chief executive officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of senior management, including the chief
executive officer and the chief financial officer, of the effectiveness of the design and operation
of the Company’s disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(b) and
15d-15(b). Based upon, and as of the date of this evaluation, the chief executive officer and the
chief financial officer concluded that the Company’s disclosure controls and procedures were
effective.
The certifications of our principal executive officer and principal financial officer required
in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this
quarterly report on Form 10-Q. The disclosures set forth in this Item 4 contain information
concerning the evaluation of the Company’s disclosure controls and procedures, internal control
over financial reporting and changes in internal control over financial reporting referred to in
those certifications. Those certifications should be read in conjunction with this Item 4 for a
more complete understanding of the matters covered by the certifications.
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Changes in Internal Control Over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during
the quarter ended June 30, 2007 that have materially affected or are reasonably likely to
materially affect the Company’s internal control over financial reporting.
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CAUTIONARY STATEMENT FOR PURPOSES OF THE SAFE HARBOR
PROVISION OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for historical information, this report may be deemed to contain “forward-looking”
statements. The Company desires to avail itself of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 (the “Act”) and is including this cautionary statement for
the express purpose of availing itself of the protection afforded by the Act.
Examples of forward-looking statements include, but are not limited to (a) projections of
revenues, cost of raw materials, income or loss, earnings or loss per share, capital expenditures,
growth prospects, dividends, the effect of currency translations, capital structure, and other
financial items, (b) statements of plans and objectives of the Company or its management or Board
of Directors, including the introduction of new products, or estimates or predictions of actions by
customers, suppliers, competitors or regulating authorities, (c) statements of future economic
performance, and (d) statements of assumptions, such as the prevailing weather conditions in the
Company’s market areas, underlying other statements and statements about the Company or its
business.
Factors that could cause actual results to differ materially from these forward looking
statements include, but are not limited to, the following general factors such as: (i) the
Company’s ability to implement and fund based on current liquidity business strategies and
restructuring plans, (ii) unseasonable weather (warm winters and cool summers) which adversely
affects demand for automotive and some industrial batteries, (iii) the Company’s substantial debt
and debt service requirements which may restrict the Company’s operational and financial
flexibility, as well as imposing significant interest and financing costs, (iv) the litigation
proceedings to which the Company is subject, the results of which could have a material adverse
effect on the Company and its business, (v) the realization of the tax benefits of the Company’s
net operating loss carry forwards, which is dependent upon future taxable income, (vi) the fact
that lead, a major constituent in most of the Company’s products, experiences significant
fluctuations in market price and is a hazardous material that may give rise to costly environmental
and safety claims, (vii) competitiveness of the battery markets in the Americas and Europe, (viii)
the substantial management time and financial and other resources needed for the Company’s
consolidation and rationalization of acquired entities, (ix) risks involved in foreign operations
such as disruption of markets, changes in import and export laws, currency restrictions, currency
exchange rate fluctuations and possible terrorist attacks against U.S. interests, (x) the Company’s
exposure to fluctuations in interest rates on its variable debt, (xi) the Company’s ability to
maintain and generate liquidity to meet its operating needs, (xii) general economic conditions,
(xiii) the ability to acquire goods and services and/or fulfill labor needs at budgeted costs,
(xiv) the Company’s reliance on a single supplier for its polyethylene battery separators, (xv) the
Company’s ability to successfully pass along increased material costs to its customers, and (xvi)
the loss of one or more of the Company’s major customers for its industrial or transportation
products.
The Company cautions each reader of this report to carefully consider those factors
hereinabove set forth. Such factors have, in some instances, affected and in the future could
affect the ability of the Company to achieve its projected results and may cause actual results to
differ materially from those expressed herein.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings
See Note 11 to the Condensed Consolidated Financial Statements in this document.
Item 1A. Risk Factors
The following risk factors, which were disclosed in the Company’s fiscal 2007 Form 10-K, have
not materially changed since we filed our fiscal 2007 Form 10-K. See Item 1A to Part I of the
Company’s fiscal 2007 Form 10-K for a complete discussion of these risk factors. (in thousands,
except per share data)
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The Company remains subject to a preliminary SEC inquiry. |
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The Company is subject to fluctuations in exchange rates and other risks associated with
its non-U.S. operations which could adversely affect the Company’s results of operations. |
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The Company’s liquidity is affected by the seasonality of its business. Warm winters and
cool summers adversely affect the Company. |
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Decreased demand in the industries in which the Company operates may adversely affect
its business. |
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The loss of the Company’s sole supplier of polyethylene battery separators would have a
material adverse effect on the Company’s business. |
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Many of the industries in which the Company operates are cyclical. |
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The Company is subject to pricing pressure from its larger customers. |
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The Company faces increasing competition and pricing pressure from other companies in
its industries, and if the Company is unable to compete effectively with these competitors,
the Company’s sales and profitability could be adversely affected. |
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If the Company is not able to develop new products or improve upon its existing products
on a timely basis, the Company’s business and financial condition could be adversely
affected. |
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The Company may be adversely affected by the instability and uncertainty in the world
financial markets and the global economy, including the effects of turmoil in the Middle
East. |
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The Company may be unable to successfully implement its business strategy, which could
adversely affect its results of operations and financial condition. |
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The Company is subject to costly regulation in relation to environmental, health and
safety matters, which could adversely affect its business and results of operations. |
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The Environmental Protection Agency (“EPA”) or state environmental agencies could take
the position that the Company has liability under environmental laws that were not
discharged in bankruptcy. To the extent these authorities are successful in disputing the
pre-petition nature of these claims, the Company could be required to perform remedial work
that has not yet been performed for alleged pre-petition contamination, which would have a
material adverse effect on the Company’s financial condition, cash flows or results of
operations. |
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The Company may be adversely affected by legal proceedings to which the Company is, or
may become, a party. |
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Holders of the Company’s common stock are subject to the risk of dilution of their
investment as the result of the issuance of additional shares of common stock and warrants
to purchase common stock to holders of pre-petition claims to the extent the reserve of
common stock and warrants established to satisfy such claims is insufficient. |
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The Company has experienced significant increases in raw material prices, particularly
lead and further charges in the price of raw materials or in energy costs could have a
material adverse impact on the Company. |
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The cost of resolving the Company’s pre-petition disputed claims, including legal and
other professional fees involved in settling or litigating these matters, could have a
material adverse effect on its financial condition, cash flows and results of operations. |
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Work stoppages or other labor issues at the Company’s facilities or its customers’ or
suppliers’ facilities could adversely affect the Company’s operations. The Company’s
substantial indebtedness could adversely affect its financial condition. |
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Restrictive covenants limit the Company’s ability to operate its business and to pursue
its business strategies, and its failure to comply with these covenants could result in an
acceleration of its indebtedness. Holders of the Company’s common stock are subject to the
risk of dilution of their investment as the result of the issuance of additional shares of
common stock and warrants to purchase common stock to holders of pre-petition claims to the
extent the reserve of common stock and warrants established to satisfy such claims is
insufficient. |
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Holders of the Company’s common stock are subject to the risk of dilution of their
investment as the result of the issuance of additional shares of common stock and warrants
to purchase common stock to holders of pre-petition claims to the extent the reserve of
common stock and warrants established to satisfy such claims is insufficient. |
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The Company’s Ability to Recognize the Benefits of Deferred Tax Assets is Dependent on
Future Cash Flows and Taxable Income |
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
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On April 20, 2007, the Company issued 12,443 shares of common stock and 31,208 warrants to
purchase common stock at a price of $30.31 per share. The shares and warrants were issued pursuant
to the Plan of Reorganization under Section 1145 of the U.S. Bankruptcy Code.
Item 3. Defaults Upon Senior Securities
None
Item 4.Submission of Matters to a Vote of Security Holders
None
Item 5.Other Information
None
Item 6. Exhibits
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31.1
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Certification of Gordon Ulsh, President and Chief Executive Officer,
pursuant to Section 302 of Sarbanes-Oxley Act of 2002. |
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31.2
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Certification of Francis M. Corby, Jr., Executive Vice President and
Chief Financial Officer, pursuant to Section 302 of Sarbanes-Oxley
Act of 2002. |
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Certifications pursuant to Section 906 of Sarbanes-Oxley Act of 2002. |
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.
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EXIDE TECHNOLOGIES |
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By:
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/S/ Francis M. Corby, Jr. |
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Francis M. Corby, Jr. |
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Executive Vice President and |
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Chief Financial Officer |
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Date: August 7, 2007 |
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