ENERSYS CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "Reform Act") provides a safe harbor for forward-looking statements made by or on behalf ofEnerSys .EnerSys and its representatives may, from time to time, make written or verbal forward-looking statements, including statements contained inEnerSys' filings with theSecurities and Exchange Commission and its reports to stockholders. Generally, the inclusion of the words "anticipate," "believe," "expect," "future," "intend," "estimate," "will," "plans," or the negative of such terms and similar expressions identify statements that constitute "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 and that are intended to come within the safe harbor protection provided by those sections. All statements addressing operating performance, events, or developments thatEnerSys expects or anticipates will occur in the future, including statements relating to sales growth, earnings or earnings per share growth, and market share, as well as statements expressing optimism or pessimism about future operating results, are forward-looking statements within the meaning of the Reform Act. The forward-looking statements are and will be based on management's then-current beliefs and assumptions regarding future events and operating performance and on information currently available to management, and are applicable only as of the dates of such statements. Forward-looking statements involve risks, uncertainties and assumptions. Although we do not make forward-looking statements unless we believe we have a reasonable basis for doing so, we cannot guarantee their accuracy. Actual results may differ materially from those expressed in these forward-looking statements due to a number of uncertainties and risks, including the risks described in the Company's 2019 Annual Report on Form 10-K (the "2019 Annual Report") and other unforeseen risks. You should not put undue reliance on any forward-looking statements. These statements speak only as of the date of this Quarterly Report on Form 10-Q, even if subsequently made available by us on our website or otherwise, and we undertake no obligation to update or revise these statements to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.
Our actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons, including the following factors: • general cyclical patterns of the industries in which our customers operate;
• the extent to which we cannot control our fixed and variable costs;
• the raw materials in our products may experience significant fluctuations
in market price and availability;
• certain raw materials constitute hazardous materials that may give rise to
costly environmental and safety claims;
• legislation regarding the restriction of the use of certain hazardous
substances in our products;
• risks involved in our operations such as disruption of markets, changes in
import and export laws, environmental regulations, currency restrictions
and local currency exchange rate fluctuations;
• our ability to raise our selling prices to our customers when our product
costs increase;
• the extent to which we are able to efficiently utilize our global
manufacturing facilities and optimize our capacity;
• general economic conditions in the markets in which we operate;
• competitiveness of the battery markets and other energy solutions for
industrial applications throughout the world;
• our timely development of competitive new products and product enhancements
in a changing environment and the acceptance of such products and product
enhancements by customers;
• our ability to adequately protect our proprietary intellectual property,
technology and brand names;
• litigation and regulatory proceedings to which we might be subject;
• our expectations concerning indemnification obligations;
• changes in our market share in the geographic business segments where we
operate;
• our ability to implement our cost reduction initiatives successfully and
improve our profitability;
• quality problems associated with our products;
• our ability to implement business strategies, including our acquisition
strategy, manufacturing expansion and restructuring plans;
• our acquisition strategy may not be successful in locating advantageous
targets;
• our ability to successfully integrate any assets, liabilities, customers,
systems and management personnel we acquire into our operations and our
ability to realize related revenue synergies, strategic gains, and cost
savings may be significantly harder to achieve, if at all, or may take
longer to achieve;
• potential goodwill impairment charges, future impairment charges and
fluctuations in the fair values of reporting units or of assets in the
event projected financial results are not achieved within expected time
frames;
• our debt and debt service requirements which may restrict our operational
and financial flexibility, as well as imposing unfavorable interest and
financing costs;
• our ability to maintain our existing credit facilities or obtain
satisfactory new credit facilities;
• adverse changes in our short and long-term debt levels under our credit
facilities;
• our exposure to fluctuations in interest rates on our variable-rate debt;
• our ability to attract and retain qualified management and personnel;
• our ability to maintain good relations with labor unions;
• credit risk associated with our customers, including risk of insolvency and
bankruptcy;
• our ability to successfully recover in the event of a disaster affecting
our infrastructure, supply chain, or our facilities, such as the
of insurance coverage and claims for both property damage, business
interruption and other insurable losses, strategy for business interruption
and revenue loss;
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• terrorist acts or acts of war, could cause damage or disruption to our
operations, our suppliers, channels to market or customers, or could cause
costs to increase, or create political or economic instability; and• the operation, capacity and security of our information systems and
infrastructure.
This list of factors that may affect future performance is illustrative, but by no means exhaustive. Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty.
In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered "non-GAAP financial measures" underSecurities and Exchange Commission rules. These rules require supplemental explanation and reconciliation, which is provided in this Quarterly Report on Form 10-Q.EnerSys' management uses the non-GAAP measures "primary working capital" and "primary working capital percentage" in its evaluation of business segment cash flow and financial position performance. These disclosures have limitations as an analytical tool, should not be viewed as a substitute for cash flow determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Management believes that this non-GAAP supplemental information is helpful in understanding the Company's ongoing operating results.
Overview
EnerSys (the "Company," "we," or "us") is the world's largest manufacturer, marketer and distributor of industrial batteries. We also manufacture, market and distribute products such as battery chargers, power equipment, battery accessories, and outdoor cabinet enclosures. Additionally, we provide related aftermarket and customer-support services for our products. We market our products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force. We operate and manage our business in three geographic regions of the world-Americas , EMEA andAsia , as described below. Our business is highly decentralized with manufacturing locations throughout the world. More than half of our manufacturing capacity is located outsidethe United States , and approximately 40% of our net sales were generated outsidethe United States . The Company currently has three reportable business segments based on geographic regions, defined as follows: •Americas , which includesNorth and South America , with our segment headquarters inReading, Pennsylvania , U.S.A.;
• EMEA, which includes
headquarters in Zug, Switzerland ; and
• Asia , which includes Asia , Australia and Oceania , with our segment
headquarters in Singapore .
We did not change our reportable segments this quarter as previously disclosed. We are continuing to make our evaluation based on more current information.
Alpha Acquisition
OnDecember 7, 2018 , the Company completed the acquisition of all of the issued and outstanding common stock ofAlpha Technologies Services, Inc. ("ATS") andAlpha Technologies Ltd. ("ATL"), resulting in ATS and ATL becoming wholly-owned subsidiaries of the Company (the "Alpha share purchase"). Additionally, the Company acquired substantially all of the assets ofAlpha Technologies Inc. and certain assets ofAltair Advanced Industries, Inc. and other affiliates of ATS and ATL (all such sellers, together with ATS and ATL, "Alpha"), in each case in accordance with the terms and conditions of certain restructuring agreements (collectively, the "Alpha asset acquisition" and together with the Alpha share purchase, the "Alpha acquisition"). Based inBellingham, Washington , Alpha is a global industry leader in the comprehensive commercial-grade energy solutions for broadband, telecom, renewable, industrial and traffic customers around the world. The initial purchase consideration for the Alpha acquisition was$750.0 million of which$650.0 million was paid in cash and the balance was settled by issuing 1,177,630 shares ofEnerSys common stock. These shares were issued out of the Company's treasury stock and were valued at$84.92 per share, which was based on the thirty-day volume weighted average stock price of the Company's common stock at closing, in accordance with the purchase agreement. The 1,177,630 shares had a closing date fair value of$93.3 million , based upon theDecember 7, 2018 closing date spot rate of$79.20 . The total purchase consideration, consisting of cash paid of$650.0 million , shares valued at$93.3 million and adjustment for working capital (due from seller of$0.8 million ) was$742.5 million .
During the current quarter, we completed purchase accounting for the Alpha acquisition and a final allocation of the purchase price to the acquired assets, liabilities and goodwill was made. See Note 4 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for details.
The results of operations of Alpha have been included in our
NorthStar Acquisition
OnSeptember 30, 2019 , we completed the acquisition of NorthStar, headquartered inStockholm, Sweden , for$77.8 million in cash consideration and the assumption of$107.0 million in debt, which was funded using existing cash and credit facilities. NorthStar, through its direct and indirect subsidiaries, manufactures and distributes thin plate pure lead (TPPL) batteries and battery enclosures. The results of the NorthStar acquisition have been included in our results of operations from the date of acquisition. Pro forma earnings and earnings per share computations have not been presented as this acquisition was not considered material. 31
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The North American and European results of operations of NorthStar have been
included in our
Economic Climate
Recent indicators suggest a slowdown in economic activity among all the different geographical regions in which we do business.
Volatility of Commodities and Foreign Currencies
Our most significant commodity and foreign currency exposures are related to lead and the Euro, respectively. Historically, volatility of commodity costs and foreign currency exchange rates have caused large swings in our production costs. As the global economic climate changes, we anticipate that our commodity costs and foreign currency exposures may continue to fluctuate as they have in the past several years. Customer Pricing Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 30% of our revenue is currently subject to agreements that adjust pricing to a market-based index for lead. Lead prices rose for the most part of fiscal 2018 in response to increased lead and other commodity costs, peaked in the first quarter of fiscal 2019 and then declined sequentially in every quarter in fiscal 2019. In the nine months of our fiscal 2020, our selling prices declined in response to declining commodity costs. Based on current commodity markets, we will likely see continued year over year benefits in fiscal 2020 from declining commodity costs, with some related reduction in our selling prices in the upcoming year.
Liquidity and Capital Resources
We believe that our financial position is strong, and we have substantial liquidity with$273 million of available cash and cash equivalents and available and undrawn credit lines of approximately$750 million atDecember 29, 2019 to cover short-term liquidity requirements and anticipated growth in the foreseeable future. During the current quarter, we issued$300 million in aggregate principal amount of our 4.375% Senior Notes due 2027 (the "2027 Notes"). Proceeds from this offering, net of debt issuance costs were$296.3 million and were utilized to pay down the balance outstanding on the revolver borrowings. A substantial majority of the Company's cash and investments are held by foreign subsidiaries and are considered to be indefinitely reinvested and expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity. We believe that our strong capital structure and liquidity affords us access to capital for future acquisition and stock repurchase opportunities and continued dividend payments. Results of OperationsNet Sales Net sales increased$83.7 million or 12.3% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019. This increase was the result of a 20% increase from the Alpha and NorthStar acquisitions, partially offset by a 5% decrease in organic volume, a 2% decrease in pricing and a 1% decrease in foreign currency translation impact. Net sales increased$294.6 million or 14.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019. This increase was the result of a 22% increase from the Alpha and NorthStar acquisitions, partially offset by a 4% decrease in organic volume, a 2% decrease in foreign currency translation impact and a 1% decrease in pricing. Organic volume decline in both the current quarter and nine months of fiscal 2020 reflects the impact of the recent fire and ERP execution challenges in ourRichmond, Kentucky facility and weakness in the European markets. 32
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Segment sales
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Americas $ 503.1 65.9 % $ 402.0 59.1 % $ 101.1 25.1 %
EMEA 202.3 26.5 217.8 32.0 (15.5 ) (7.1 )
Asia 58.3 7.6 60.2 8.9 (1.9 ) (3.1 )
Total net sales $ 763.7 100.0 % $ 680.0 100.0 % $ 83.7 12.3 %
Nine months ended Nine months ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Americas $ 1,545.1 67.0 % $ 1,183.1 58.8 % $ 362.0 30.6 %
EMEA 588.3 25.5 632.3 31.4 (44.0 ) (7.0 )
Asia 172.6 7.5 196.0 9.8
(23.4 ) (11.9 )
Total net sales
TheAmericas segment's net sales increased$101.1 million or 25.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 32% increase from the Alpha and NorthStar acquisitions, partially offset by a 4% decrease in organic volume, a 2% decrease in pricing and a 1% decrease in foreign currency translation impact. Net sales increased$362.0 or 30.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 36% increase from the Alpha and NorthStar acquisitions, partially offset by a 3% decrease in organic volume and a 1% decrease each in pricing and foreign currency translation impact. The EMEA segment's net sales decreased$15.5 million or 7.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 9% decrease in organic volume and a 2% decrease in foreign currency translation impact, partially offset by a 4% increase from the NorthStar acquisition. Net sales decreased$44.0 or 7.0% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 4% decrease each in organic volume and foreign currency translation impact, a 1% decrease in pricing, partially offset by a 2% increase from the NorthStar acquisition. TheAsia segment's net sales decreased$1.9 million or 3.1% in the third quarter of fiscal 2020 as compared to the third quarter of fiscal 2019, primarily due to a 2% decrease in pricing and a 1% decrease in foreign currency translation impact. Net sales decreased$23.4 or 11.9% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 9% decrease in organic volume and a 3% decrease in foreign currency translation impact.
Product line sales
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Reserve power $ 448.2 58.7 % $ 329.5 48.5 % $ 118.7 36.0 %
Motive power 315.5 41.3 350.5 51.5 (35.0 ) (10.0 )
Total net sales $ 763.7 100.0 % $ 680.0 100.0 % $ 83.7 12.3 %
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Nine months ended Nine months ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Reserve power $ 1,310.8 56.8 % $ 966.9 48.1 % $ 343.9 35.6 %
Motive power 995.2 43.2 1,044.5 51.9
(49.3 ) (4.7 )
Total net sales
Net sales of our reserve power products in the third quarter of fiscal 2020 increased$118.7 million or 36.0% compared to the third quarter of fiscal 2019. The increase was primarily due to a 41% increase from the Alpha and NorthStar acquisitions, partially offset by a 2% decrease each in organic volume and pricing and a 1% decrease in foreign currency translation impact. Net sales increased$343.9 or 35.6% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 45% increase from the Alpha and NorthStar acquisitions, partially offset by a 7% decrease in organic volume, a 1% decrease each in foreign currency translation impact and pricing. The decrease in organic volume in both the current quarter and nine months is primarily from the deferral of spending by telecom and broadband customers and the conclusion of a large enclosure order a year ago. Net sales of our motive power products segment in the third quarter of fiscal 2020 decreased by$35.0 million or 10.0% compared to the third quarter of fiscal 2019. The decrease was primarily due to an 8% decrease in organic volume and a 1% decrease each in foreign currency translation impact and pricing. Net sales decreased$49.3 or 4.7% in the nine months of fiscal 2020 as compared to the nine months of fiscal 2019, primarily due to a 2% decrease each in organic volume and foreign currency translation impact and a 1% decrease in pricing. The motive power product organic volume decline reflects the impact of the weakness in the European markets and the recent fire and ERP execution challenges in ourRichmond, Kentucky facility. Gross Profit Quarter ended Quarter ended December 29, 2019 December 30, 2018 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Gross Profit$ 185.3 24.3 %$ 164.6 24.2 %$ 20.7 12.6 % Nine months ended Nine months ended December 29, 2019 December 30, 2018 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Gross Profit$ 584.1 25.3 %$ 490.8 24.4 %$ 93.3 19.0 % Gross profit increased$20.7 million or 12.6% in the third quarter and increased$93.3 million or 19.0% in the nine months of fiscal 2020 compared to the comparable periods of fiscal 2019. Gross profit, as a percentage of net sales, increased 10 basis points and 90 basis points in the third quarter and nine months of fiscal 2020 compared to the third quarter and nine months of fiscal 2019, respectively. This increase in the gross profit margin in both the third quarter and nine months is largely a function of declines in commodity costs relative to pricing, partially offset by higher manufacturing costs. Operating Items Quarter ended Quarter ended December 29, 2019 December 30, 2018 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Operating expenses$ 132.8 17.4 %$ 112.0 16.5 %$ 20.8 18.5 % Restructuring charges$ 9.4 1.3 %$ 5.4 0.8 %$ 4.0 74.7 % Legal proceedings settlement income $ - - %$ (2.8 ) (0.4 )%$ 2.8 NM NM = not meaningful 34
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Nine months ended Nine months ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Operating expenses $ 395.9 17.1 % $ 307.8 15.3 % $ 88.1 28.6 %
Restructuring charges $ 18.1 0.8 % $ 8.3 0.4 % $ 9.8 NM
Legal proceedings
settlement income $ - - % $ (2.8 ) (0.1 )% $ 2.8 NM
NM = not meaningful
Operating expenses, as a percentage of sales, increased 90 basis points and 180 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the comparable periods of fiscal 2019. Excluding the impact of the foreign currency translation, the increase in dollars reflects the inclusion of Alpha and the additional investments in new product development. Selling expenses, our main component of operating expenses, was 44.7% of total operating expenses in both the third quarter and nine months, respectively, compared to 44.0% and 47.0% of total operating expenses in the third quarter and nine months of fiscal 2019.
Restructuring, Exit and Other Charges
Included in our third quarter of fiscal 2020 operating results are restructuring charges of$1.3 million in theAmericas and$5.5 million in EMEA, both primarily relating to the recent NorthStar acquisition and$0.4 million inAsia . Also included in the third quarter of fiscal 2020 operating results are cash exit charges of$2.2 million in EMEA, relating to the closure of our facility in Targovishte,Bulgaria . Included in our third quarter of fiscal 2019 operating results were restructuring charges of$0.6 million inAmericas ,$4.4 million in EMEA and$0.4 million inAsia . The charges in theAmericas related to improving efficiencies of our general operations. Of the$4.4 million charges in EMEA,$0.9 million related to improving efficiencies of our general operations and$3.5 million related to the sale of 100% of the shares in GAZ Geräte- undAkkumulatorenwerk Zwickau GmbH , a wholly-owned German subsidiary, which closed in the fourth quarter of fiscal 2019. The exit is a consequence of the Company's strategic decision to streamline its product portfolio and focus its efforts on new technologies. The charges inAsia primarily related to improving efficiencies inthe People's Republic of China ("PRC").
OnSeptember 19, 2019 , a fire broke out in the battery formation area of ourRichmond, Kentucky motive power production facility. We maintain insurance policies for both property damage and business interruption and are in the process of cleanup and repair. We believe that the total claim, including the replacement of inventory and equipment, the cleanup and repairs to the building, as well as the claim for business interruption may exceed$50 million . As ofDecember 29, 2019 , we incurred$10.0 million of costs associated with the damage caused to our fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire. We also received$12.0 million of advances related to our initial claims for recovery from our property and casualty insurance carriers, a substantial part of which has been reflected as operating cash flows in the Consolidated Condensed Statements of Cash Flows included in this Quarterly Report on Form 10-Q. 35
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Operating Earnings
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales (1) Millions Net Sales (1) Millions %
Americas $ 43.1 8.6 % $ 38.0 9.4 % $ 5.1 13.5 %
EMEA 12.6 6.2 17.6 8.1 (5.0 ) (28.6 )
Asia 0.6 1.1 0.7 1.0 (0.1 ) 4.8
Subtotal 56.3 7.4 56.3 8.3 - 0.2
Inventory step up to fair
value relating to acquisitions
- Americas (2.5 ) (0.5 ) (3.7 ) (0.9 ) 1.2 (33.9 )
Inventory step up to fair
value relating to acquisition
- EMEA (1.3 ) (0.7 ) - - (1.3 ) NM
Restructuring charges -
Americas (1.3 ) (0.3 ) (0.6 ) (0.2 ) (0.7 ) NM
Restructuring and other exit
charges - EMEA (7.7 ) (3.8 ) (4.4 ) (2.0 ) (3.3 ) 74.7
Restructuring charges - Asia (0.4 ) (0.7 ) (0.4 ) (0.6 ) - 10.2
Legal proceedings settlement
income - - 2.8 1.3 (2.8 ) NM
Total operating earnings $ 43.1 5.6 % $ 50.0 7.3 % $ (6.9 ) (13.7 )%
NM = not meaningful
(1) The percentages shown for the segments are computed as a percentage of the
applicable segment's net sales.
Nine months ended Nine months ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales (1) Millions Net Sales (1) Millions %
Americas $ 149.6 9.7 % $ 134.1 11.3 % $ 15.5 11.6 %
EMEA 41.6 7.1 48.6 7.7 (7.0 ) (14.5 )
Asia 0.8 0.5 4.5 2.3 (3.7 ) (80.8 )
Subtotal 192.0 8.3 187.2 9.3 4.8 2.6
Inventory step up to fair
value relating to
acquisitions - Americas (2.5 ) (0.2 ) (3.7 ) (0.3 ) 1.2 (51.4 )
Inventory step up to fair
value relating to acquisition
- EMEA (1.3 ) (0.2 ) - - (1.3 ) NM
Restructuring charges -
Americas (2.4 ) (0.2 ) (0.6 ) (0.1 ) (1.8 ) NM
Restructuring and other exit
charges - EMEA (9.0 ) (1.5 ) (6.6 ) (1.0 ) (2.4 ) 36.6
Restructuring charges - Asia (1.2 ) (0.7 ) (1.1 ) (0.5 ) (0.1 ) 13.4
Fixed asset write-off
relating to exit activities
and other - Americas (5.5 ) (0.4 ) - - (5.5 ) NM
Inventory write-off relating
to exit activities - Asia - - (0.5 ) (0.3 ) 0.5 NM
Legal proceedings settlement
income - - 2.8 0.4 (2.8 ) NM
Total operating earnings $ 170.1 7.4 % $ 177.5 8.8 %
NM = not meaningful (1) The percentages shown for the segments are computed as a percentage of the applicable segment's net sales. Operating earnings decreased$6.9 million or 13.7% and decreased$7.4 million or 4.1% in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. Operating earnings, as a percentage of net sales, decreased 170 basis points and 140 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019, primarily due to the recent fire and ERP execution challenges at ourRichmond, Kentucky facility which continued to result in missed sales opportunities and higher manufacturing costs, as well as the decline in our organic volume in EMEA andAsia . TheAmericas segment's operating earnings, excluding inventory step up relating to recent acquisitions, restructuring, exit and other charges, decreased 80 basis points and 160 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. The decrease is primarily due to the recent fire and ERP execution challenges at ourRichmond, Kentucky , facility which continued to result in missed sales opportunities, tariffs and higher manufacturing costs. This negative impact was partially 36
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offset by the impact of lower commodity costs and Alpha's contribution to
operating earnings of
The EMEA segment's operating earnings, excluding inventory step up relating to recent acquisition, restructuring and other exit charges, decreased 190 basis points and 60 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019 due to lower volume driven in part by the return of a competitor to the market in fiscal 2020. This competitor was absent in fiscal 2019. TheAsia segment's operating earnings, excluding restructuring charges, increased 10 basis points and decreased 180 basis points in the third quarter and nine months of fiscal 2020, respectively, compared to the third quarter and nine months of fiscal 2019. The slight improvement in the third quarter of fiscal 2020 is due to favorable commodity costs. The decrease of 180 basis points in the nine months of fiscal 2020 is primarily due to lower organic volume caused by the slowdown in the Chinese economy. Interest Expense Quarter ended Quarter ended December 29, 2019 December 30, 2018 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Interest expense$ 11.1 1.4 %$ 7.1 1.0 %$ 4.0 56.6 % Nine months ended Nine months ended December 29, 2019 December 30, 2018 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Interest expense$ 32.1 1.4 %$ 20.0 1.0 %$ 12.1 60.3 % Interest expense of$11.1 million in the third quarter of fiscal 2020 (net of interest income of$0.5 million ) was$4.0 million higher than the interest expense of$7.1 million in the third quarter of fiscal 2019 (net of interest income of$0.5 million ). Interest expense of$32.1 million in the nine months of fiscal 2020 (net of interest income of$1.6 million ) was$12.1 million higher than the interest expense of$20.0 million in the nine months of fiscal 2019 (net of interest income of$1.5 million ). The increase in interest expense in the third quarter and nine months of fiscal 2020 is primarily due to higher average debt. Our average debt outstanding was$1,149.3 million and$1,084.8 million in the third quarter and nine months of fiscal 2020, respectively, compared to$664.7 million and$636.8 million in the third quarter and nine months of fiscal 2019. The increased borrowings were primarily to fund the Alpha acquisition in the third quarter of fiscal 2019. In connection with the issuance of the 2027 Notes, we capitalized$4.6 million of debt issuance costs. Included in interest expense are non-cash charges for deferred financing fees of$0.4 million and$1.1 million in the third quarter and nine months of fiscal 2020 compared to$0.3 million and$0.9 million , in the third quarter and nine months of fiscal 2019.
Other (Income) Expense, Net
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Other (income) expense, net
- % $ (0.6 ) NM
NM = not meaningful
Nine months ended Nine months ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Other (income) expense, net $ (1.6 ) - % $ (0.9 ) (0.1 )% $ (0.7 ) 48.2 %
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Other (income) expense, net in the third quarter of fiscal 2020 was income of$0.6 million compared to$0.0 million in the third quarter of fiscal 2019. Other (income) expense, net in the nine months of fiscal 2020 was income of$1.6 million compared to income of$0.9 million in the nine months of fiscal 2019. Foreign currency impact resulted in a loss of$0.1 million and a gain of$1.0 million , in the third quarter and nine months of fiscal 2020, respectively, compared to a foreign currency gain of$1.0 million and$3.2 million in the third quarter and nine months of fiscal 2019.
Earnings Before Income Taxes
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Earnings before income taxes
6.3 %$ (10.3 ) (24.1 )% Nine months ended Nine months ended December 29, 2019 December 29, 2019 Increase (Decrease) Percentage Percentage In of Total In of Total In Millions Net Sales Millions Net Sales Millions % Earnings before income taxes$ 139.6 6.0 %$ 158.4 7.9 %$ (18.8 ) (11.9 )% As a result of the above, earnings before income taxes in the third quarter of fiscal 2020 decreased$10.3 million , or 24.1%, compared to the third quarter of fiscal 2019 and decreased$18.8 million or 11.9%, in the nine months of fiscal 2020, compared to the nine months of fiscal 2019.
Income Tax Expense (Benefit)
Quarter ended Quarter ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Income tax expense (benefit) $ 5.3 0.7 % $ (5.7 ) (0.8 )% $ 11.0 NM
Effective tax rate 16.2% (13.3)% 29.5%
NM = not meaningful
Nine months ended Nine Months Ended
December 29, 2019 December 30, 2018 Increase (Decrease)
Percentage Percentage
In of Total In of Total In
Millions Net Sales Millions Net Sales Millions %
Income tax expense $ 1.0 - % $ 16.4 0.8 % $ (15.4 ) (94.1 )%
Effective tax rate 0.7% 10.4% (9.7)%
The Company's income tax provision consists of federal, state and foreign income
taxes. The tax provision for the third quarter of fiscal 2020 and 2019 was based
on the estimated effective tax rates applicable for the full years ending
March 31, 2020 and March 31, 2019 , respectively, after giving effect to items
specifically related to the interim periods. Our effective income tax rate with
respect to any period may be volatile based on the mix of income in the tax
jurisdictions in which we operate, change in tax laws and the amount of our
consolidated income before taxes.
On May 19, 2019 , a public referendum held in Switzerland approved the Federal
Act on Tax Reform and AHV (Old-Age and Survivors Insurance ) Financing (TRAF) as
adopted by the Swiss Federal Parliament on September 28, 2018 . The Swiss tax
reform measures are effective January 1, 2020 . Certain provisions of the TRAF
were enacted during the second quarter of fiscal 2020. Significant changes in
the tax reform include the abolishment of preferential tax regimes for holding
companies, domicile companies and mixed companies at the cantonal level. The
transitional provisions of the TRAF allow companies to elect tax basis
adjustments to fair value, which is used for tax depreciation and amortization
purposes resulting in a deduction over the transitional period. We recorded a
deferred tax asset of $21.0 million during the second quarter of fiscal 2020,
related to the amortizable goodwill, subject to final negotiations with the
Swiss federal and cantonal tax authority.
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The consolidated effective income tax rates for the third quarter of fiscal 2020
and 2019 were 16.2% and (13.3)%, respectively and were 0.7% and 10.4% for the
nine months of fiscal 2020 and 2019, respectively. The rate increase in the
third quarter of fiscal 2020 compared to the comparable prior year quarter is
primarily due changes in mix of earnings among tax jurisdictions and items
related to the Tax Cuts and Jobs Act ("Tax Act"), including a $13.5 million
benefit in fiscal 2019. The rate decrease in the nine months of fiscal 2020
compared to the prior year period is primarily due to changes in mix of earnings
among tax jurisdictions, Swiss tax reform, and items related to the Tax Act in
fiscal 2019.
Foreign income as a percentage of worldwide income is estimated to be 76% for
fiscal 2020 compared to 74% for fiscal 2019. The foreign effective income tax
rates for the nine months of fiscal 2020 and 2019 were (3.9)% and 11.8%,
respectively. The rate decrease compared to the prior year period is primarily
due to Swiss tax reform and changes in the mix of earnings among tax
jurisdictions. Income from the Company's Swiss subsidiary comprised a
substantial portion of our overall foreign mix of income and is taxed at an
effective income tax rate of approximately 6% in both the current and prior year
quarter of fiscal 2020 and fiscal 2019.
Critical Accounting Policies and Estimates
There have been no material changes to our critical accounting policies from those discussed under the caption "Critical Accounting Policies and Estimates" in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" in our 2019 Annual Report. The adoption of ASC 842 did not result in a material change to our current critical accounting estimates. See Recently Adopted Accounting Pronouncements in Note 1 - Basis of Presentation, to the Consolidated Condensed Financial Statements, for further information on the adoption of ASC 842.
Liquidity and Capital Resources
Cash Flow Analysis
Operating activities provided cash of$175.8 million in the nine months of fiscal 2020 compared to$166.4 million in the comparable period of fiscal 2019. In the nine months of fiscal 2020, cash provided by operating activities was primarily from net earnings of$138.6 million , depreciation and amortization of$65.8 million , non-cash charges relating to restructuring, exit and other charges of$10.0 million , stock-based compensation of$14.8 million , provision for doubtful debts of$2.9 million and non-cash interest of$1.2 million , partially offset by deferred taxes of$21.0 million resulting from the Swiss Tax Reform. Cash provided by earnings adjusted for non-cash items were partially offset by the increase in primary working capital of$11.0 million , net of currency translation changes. Accrued expenses decreased by$7.3 million primarily for payments of$7.3 million related to the German competition authority matter (See Note 10 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q) and$6.1 million paid to the seller in connection with the Alpha acquisition, for certain reimbursable pre-acquisition items, partially offset by payroll related accruals of$6.1 million and exit activities of$2.3 million . Prepaid and other current assets increased by$7.0 million , primarily due to contract assets of$14.8 million , insurance receivable of$9.8 million relating to theRichmond plant claim, partially offset by insurance proceeds of$12.0 million and VAT refund of$7.0 million . Other liabilities decreased by$14.7 million due to income taxes. In the nine months of fiscal 2019, cash provided by operating activities was primarily from net earnings of$142.0 million , depreciation and amortization of$42.5 million , stock-based compensation of$14.6 million , non-cash charges relating to write-off of assets of$4.5 million and non-cash interest of$0.9 million . Cash provided by earnings as adjusted for non-cash items were partially offset by the increase in primary working capital of$15.2 million , net of currency translation changes, and an outflow primarily related to taxes of$12.5 million in prepaid assets and$23.5 million in other liabilities. Accrued expenses provided a source of funds of$14.3 million primarily relating to acquisition costs and payroll and incentives. As explained in the discussion of our use of "non-GAAP financial measures," we monitor the level and percentage of primary working capital to sales. Primary working capital for this purpose is trade accounts receivable, plus inventories, minus trade accounts payable. The resulting net amount is divided by the trailing three month net sales (annualized) to derive a primary working capital percentage. Primary working capital was$857.1 million (yielding a primary working capital percentage of 28.1%) atDecember 29, 2019 ,$835.6 million (yielding a primary working capital percentage of 26.2%) atMarch 31, 2019 and$827.8 million atDecember 30, 2018 (yielding a primary working capital percentage of 24.9%). The primary working capital percentage of 28.1% atDecember 29, 2019 is 190 basis points higher than that forMarch 31, 2019 , and 320 basis points higher than that for the prior year period. The increase in primary working capital compared to the prior year periods is primarily due to the build up of inventories in theAmericas due to disruption caused by theRichmond fire. 39
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Primary working capital and primary working capital percentages at
($ in Millions)
Quarter Primary
Trade Accounts Revenue Working
Balance At (1) Receivables Inventory Payable Total Annualized Capital %
December 29, 2019 $ 578.4 $ 557.5 $ (278.8 ) $ 857.1 $ 3,054.8 28.1 %
March 31, 2019 624.1 503.9 (292.4 ) 835.6 3,186.4 26.2
December 30, 2018 607.4 501.3 (280.9 ) 827.8 3,330.4 24.9
(1) The Company acquired NorthStar on September 30, 2019 , as disclosed in Note 4
to the Consolidated Condensed Financial Statements included in this Quarterly
Report on Form 10-Q. Therefore, the Primary working capital and related
calculations as of December 30, 2018 and March 31, 2019 , do not include
NorthStar's primary working capital and its components. The inclusion of
NorthStar's Primary working capital did not have a material impact on the
Company's consolidated Primary working capital as of December 29, 2019 .
Investing activities used cash of
Investing activities used cash of
Financing activities provided cash of$33.4 million in the nine months of fiscal 2020. During the nine months of fiscal 2020, we issued our 2027 Notes for$300 million , the proceeds of which were utilized to pay down the existing revolver borrowings. We borrowed$326.7 million under the Amended 2017 Revolver and repaid$497.7 million of the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was$11.3 million and net payments on short-term debt were$17.6 million .Treasury stock open market purchases were$34.6 million , payment of cash dividends to our stockholders were$22.3 million and payment of taxes related to net share settlement of equity awards were$6.3 million . Financing activities provided cash of$451.2 million in the nine months of fiscal 2019. During the nine months of fiscal 2019, we borrowed$454.5 million under the Amended 2017 Revolver and$299.1 million under the Amended 2017 Term Loan, primarily to fund the Alpha acquisition and repaid$246.0 million of the Amended 2017 Revolver.Treasury stock open market purchases were$25.0 million , payment of cash dividends to our stockholders were$22.3 million and payment of taxes related to net share settlement of equity awards were$3.4 million . Proceeds from stock options were$9.0 million and net payments on short-term debt were$13.6 million . Currency translation had a negative impact of$1.6 million on our cash balance in the nine months of fiscal 2020 compared to a negative impact of$40.5 million in the nine months of fiscal 2019. In the nine months of fiscal 2020, principal currencies in which we do business such as the Euro, Swiss franc, Polish zloty and British Pound generally trended stronger versus theU.S. dollar. As a result of the above, total cash and cash equivalents decreased by$26.7 million to$272.5 million , in the nine months of fiscal 2020 compared to a decrease by$125.0 million to$397.2 million , in the comparable period of fiscal 2019.
Compliance with Debt Covenants
All obligations under our Amended Credit Facility are secured by, among other things, substantially all of ourU.S. assets. The Amended Credit Facility contains various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions. There are no prepayment penalties on loans under this credit facility. We are in compliance with all covenants and conditions under our Amended Credit Facility and Senior Notes. We believe that we will continue to comply with these covenants and conditions, and that we have the financial resources and the capital available to fund the foreseeable organic growth in our business and to remain active in pursuing further acquisition opportunities. See Note 8 to the Consolidated Financial Statements included in our 2019 Annual Report and Note 12 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for a detailed description of our debt.
Contractual Obligations and Commercial Commitments
A table of our obligations is contained in Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations - Contractual Obligations of our 2019 Annual Report for the year endedMarch 31, 2019 . OnDecember 11, 2019 , the Company issued its 2027 Notes, in an aggregate principal amount of$300 million . The proceeds, net of fees, were utilized in paying down the borrowings on our Amended 2017 Revolver, which after such repayment is outstanding in the amount of$68 million , as ofDecember 29, 2019 . The 2027 Notes mature onDecember 15, 2027 , unless redeemed or repurchased earlier. See Note 12 to the Consolidated Condensed Financial Statements included in this Quarterly Report on Form 10-Q for a detailed description of the 2027 Notes. 40
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