Annual Report

 

 

 

(678) 566-9000

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:

 

 

 

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes  o      No  þ

 

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes  o      No  þ

 

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K  o

 

Indicate by check mark whether the registrant is a large accelerated filer, and accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Ruler 12b-2 of the Exchange Act. (Check one):

 

 

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

 

The aggregate market value of common stock held by non-affiliates of the Registrant as of September 28, 2007 was $278,991,310

 

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of June 3, 2008, 75,296,301 shares of common stock were outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

The definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders to be held on September 9, 2008 is incorporated by reference in Part III to the extent described therein.

 

 

EXIDE TECHNOLOGIES

 

TABLE OF CONTENTS

 

EXIDE TECHNOLOGIES

PART I

 

Inc., Tractor Supply, Canadian Tire, ADI, and GAUI. In addition, the Company is also a supplier of authorized replacement batteries for major manufacturers including John Deere, Renault/Nissan, and PACCAR.

 

OEM sales are driven in large part by new vehicle manufacturing rates, which are driven by consumer demand for vehicles. The OEM market is characterized by an increasing preference by OEMs for suppliers with established global production capabilities that can meet their needs as they expand internationally and increase platform standardization across multiple markets. The Company supplies batteries for three of the 10 top-selling vehicles in the United States of America (“U.S.”) and five of the 10 top-selling vehicles in Europe. Select customers include Ford, International Truck & Engine, Fiat, the PSA group (Peugeot S.A./Citroën), Case/New Holland, BMW, John Deere, Renault Nissan, Scania, Volvo Trucks, Volkswagen, and Toyota.

 

Transportation Americas

 

In the Americas, the Company sells aftermarket transportation products through various distribution channels, including mass merchandisers, auto parts outlets, wholesale distributors, and battery specialists, and sells OEM transportation products through dealer networks. The Company’s operations in the U.S. and Canada include a network of 82 branches that sell and distribute batteries and other products to the Company’s distributor channel network, battery specialists, national account customers, retail stores, and OEM dealers. In addition, these branches collect spent-batteries for the Company’s six recycling centers. The company also has a strong portfolio of OEM customers who receive products shipped directly for use in cars, trucks, off-road vehicles, military vehicles, agricultural and construction vehicles, boats, and other applications.

 

With its six recycling centers, the Company is the largest recycler of lead in North America. The Company’s recycling centers supply secondary lead that is present in greater than 98.2% of Exide’s Transportation and Industrial Energy products manufactured in North America as well as supplying lead to a variety of external customers. These operations also recover and recycle plastic materials that are used to produce new Exide battery covers and cases. With a constant focus on environmental compliance, safety, and technology, Exide is committed to being a leader in the successful and responsible activity of recycling lead and plastic to produce products that provide value to consumers and industry.

 

In the Americas, the Company’s transportation aftermarket battery products include the following:

 

 

Transportation Europe and ROW

 

The Company sells aftermarket batteries primarily through automotive parts and battery wholesalers, OEM dealer networks, mass-merchandisers, auto-centers, service installers, and oil companies. Wholesalers and OEM dealers have traditionally represented the majority of this market, but hypermarkets chains and automotive parts stores, most often integrated in European or global buying groups, have become increasingly important. Many automotive parts wholesalers are also increasingly organized in European organizations active in purchasing and merchandising programs. Battery wholesalers sell and distribute batteries to a network of automotive parts retailers, service stations, independent retailers, and garages throughout Europe.

 

In Europe, the Company has six major Company-owned brands: Exide, which is promoted as a pan-European brand, and Tudor, Centra, Fulmen, Sonnak and Deta, which have very strong country or regional recognition levels and market shares. In the European markets, the Company offers transportation batteries in four categories:

 

 

Industrial Energy

 

The Company’s Industrial Energy segments supply both motive power and network power applications. Industrial Energy batteries represented 38.3% of the Company’s net sales in fiscal 2008. Within the Industrial Energy segments, Motive Power sales and Network Power sales represented approximately 63.1% and 36.9% of Industrial Energy net sales, respectively.

 

Motive power batteries are used in the material handling industry for Class I, II and III electric forklift trucks, and in other industries, including machinery in the floor cleaning market, the powered wheelchair market, the mining, locomotives market, and the electric road vehicles market. The Company also offers a complete range of battery chargers and related equipment for the operation and maintenance of battery-powered vehicles.

The Company’s Motive Power product offerings range from batteries composed of two-volt cells assembled in numerous configurations and sizes to provide capacities ranging from 30 Ah to 1700 Ah, to bloc batteries ranging from 1.2 Ah to 280 Ah. The battery technology for the motive power markets includes flooded flat plate, tubular plate products, AGM, and gelled electrolyte products. The Company pioneered the development of valve-regulated lead acid batteries in both AGM and gel constructions. These technologies provide advantages to users by eliminating the need to add water, reducing maintenance expenses, and providing a safer work environment.

 

The Company’s motive power products also include systems solutions such as intelligent chargers, fleet management devices, and automatic watering systems. These ancillary devices are designed to aid customers in improving their productivity and asset utilization.

 

Network power batteries are used for back-up power applications to ensure continuous power supply in case of a temporary power failure or outage. Network power batteries are used to provide back-up power for use with telecommunications systems, computer installations, hospitals, air traffic control, security systems, utility, railway and military applications. Telecommunications applications include central and local switching systems, satellite stations, wireless base stations and mobile switches, optical fiber repeating boxes, cable TV transmission boxes, and radio transmission stations.

 

There are two primary network power lead acid battery technologies: valve-regulated (“VRLA” or sealed) and vented (flooded). There are two types of VRLA technologies — absorbed glass mat (“AGM”) and gelled electrolyte. The AGM batteries are low maintenance, offer a high energy density and are particularly suited for high-rate applications. They are well-suited for telecommunications installations and uninterruptible power systems. The gelled electrolyte batteries are low maintenance and offer a wide range of capabilities including heat resistance, deep discharge resistance, long shelf life, and high-cyclic performance.

 

The Company’s dominant network power battery brands, Absolyte and Sonnenschein , offer customers the choice of AGM and gelled electrolyte valve regulated battery technologies and deliver among the highest energy and power densities in their class.

 

Industrial Energy Americas

 

Motive Power

 

The Company distributes motive power products and services through multiple channels. These include sales and service locations owned by the Company which are augmented by a network of independent manufacturers’ representatives. The Company serves a wide range of customers including OEM suppliers of lift trucks, large industrial companies, retail distribution, warehousing, and manufacturing operations. The Company’s primary motive power customers in the Americas include Crown, NACCO, Toyota, Jungheinrich, Wal-Mart, Target, and Kroger.

 

Network Power

 

The Company distributes network power products and services through sales and service locations owned by the Company that are augmented by a network of independent manufacturers’ representatives. The Company’s primary network power customers in the Americas include AT&T, Emerson Electric, Verizon Wireless, and Nortel.

 

Industrial Energy Europe and ROW

 

Motive Power

 

The Company distributes motive power products and services in Europe through in-house sales and service organizations in each country and utilizes distributors and agents for the export of products from Europe to ROW. Motive Power products in Europe are also sold to a wide range of customers in the aftermarket, ranging from large industrial companies and retail distributors to small warehousing and manufacturing operations. Motive Power batteries are also sold in complete packages, including batteries,

chargers and, increasingly through on-site service. The Company’s major OEM motive power customers include the KION Group and Jungheinrich.

 

Network Power

 

The Company distributes network power products and services in Europe and batteries and chargers in Australia and New Zealand through in-house sales and service organizations in each country. In Asia, products are distributed through independent distributors. The Company utilizes distributors, agents, and direct sales to export products from Europe and North America to ROW. The Company’s primary Network Power customers in Europe and ROW include China Mobile, Deutsche Telecom, Alcatel, Emerson Electric, Ericsson and Siemens.

 

Quality

 

The Company recognizes that product performance and quality are critical to its success. The Company’s Customer-focused Excellence Lean Leadership (“EXCELL”) initiative and Quality Management System (“QMS”) are both important drivers of operational excellence and results in improved levels of quality, productivity, and delivery of goods and services to the global transportation and industrial energy markets.

 

EXCELL

 

The Company implemented EXCELL to systematically reduce and ultimately eliminate waste and to implement the concepts of continuous flow and customer pull throughout the Company’s supply chain. The EXCELL framework follows lean production techniques and process improvements, and is also designed to prioritize improvement initiatives that drive quality improvement and customer satisfaction while achieving all business objectives of the Company. The Company’s Take Charge! initiative, which is an integral component of the EXCELL framework, is designed to identify waste in the Company’s manufacturing and distribution processes, and to implement changes to enhance productivity and throughput while reducing investment in inventories.

 

QMS

 

The Company’s QMS was developed to streamline and standardize the global quality systems so that key measurements could be evaluated to drive best practices as it continues to pursue improved EXCELL certifications across all facilities. The QMS plays a major role in the Company’s efforts to achieve world-class product quality.

 

The Company’s quality process begins in the design phase with an in-depth understanding of customer and application requirements. The Company’s products are designed to the required performance, industry, and customer quality standards using design processes, tools, and materials to achieve reliability and durability. The Company’s commitment to quality continues through the manufacturing process. The Company has quality audit processes and standards in each of its production and distribution facilities. The Company’s quality process extends throughout the entire product lifecycle and operation in service.

 

All of the Company’s major production facilities are approved under ISO/TS 16949 and/or ISO 9001 quality standards. The Company has also obtained ISO 14001 Environmental Health & Safety (“EH&S”) certification at 22 of its manufacturing plants and also has received quality certifications and awards from a number of OEM and aftermarket customers.

 

Research and Development

 

The Company is committed to developing new and technologically advanced products, services, and systems that provide superior performance and value to customers. To support this commitment, the Company focuses on developing opportunities across its global markets.

 

In addition, the Company also operates a number of product and process-development centers of excellence around the world. These centers work cooperatively to define and improve the Company’s product

design and production processes. By leveraging this network, the Company is able to transfer technologies, product and process knowledge among its various operating facilities, thereby adapting best practices from around the world for use throughout the Company.

 

In addition to in-house efforts, the Company continues to pursue the formation of alliances and collaborative partnerships to develop energy-management systems for automotive electrical and electronic architectures for the global OEM market. In addition, the Company has various development activities targeted at the industrial and military markets.

 

Patents, Trademarks and Licenses

 

The Company owns or has a license to use various trademarks that are valuable to its business. The Company believes these trademarks and licenses enhance the brand recognition of the Company’s products. The Company currently owns approximately 300 trademarks, and maintains licenses from others to use approximately 20 trademarks worldwide. For example, the Company licenses the NASCAR mark from NASCAR, and the Exide mark in the United Kingdom and Ireland from Chloride Group Plc. The Company’s license with NASCAR will expire on December 31, 2011. The Company also acts as licensor under certain licenses. For example the National Automotive Parts Association is licensed to use the EXIDE SELECT ORBITAL mark on battery products.

 

The Company has generated a number of patents in the operation of its business and currently owns all or a partial interest in approximately 350-375 patents and applications for patents pending worldwide. Although the Company believes its patents and patent applications collectively are important to the Company’s business, and that technological innovation is important to the Company’s market competitiveness, currently no patent is individually material to the operation of the business or the Company’s financial condition.

 

In March 2003, the Company brought legal proceedings in the Bankruptcy Court to reject certain agreements relating to EnerSys, Inc.’s right to use the “Exide” trademark on certain industrial battery products in the United States and 80 foreign countries. In April 2006, the Court granted the Company’s request to reject those agreements. EnerSys, Inc. has appealed this decision. For further information regarding this matter, see Note 11 to the Consolidated Financial Statements.

 

Manufacturing, Raw Materials and Suppliers

 

Lead is the primary material used in the manufacture of the Company’s lead acid batteries, representing approximately 49% of the cost of goods produced. The Company obtains substantially all of its North American lead requirements through the operation of six secondary lead recycling plants, which reclaim lead by recycling spent lead acid batteries. In North America, spent-batteries are obtained for recycling primarily from the Company’s customers, through the Company-owned branch networks, and from outside spent-battery collectors. In Europe and ROW, the Company obtains a small portion of its lead requirements through the operation of four lead recycling plants. The majority of the Company’s lead requirements, however, are obtained from third-party suppliers.

 

The Company uses both polyethylene and AGM battery separators. There are a number of suppliers from whom the Company purchases AGM separators. Polyethylene separators are purchased solely from one supplier, with supply agreements expiring in December 2009. The agreements restrict the Company’s ability to source separators from other suppliers unless there is a technical benefit that the Company’s sole supplier cannot provide. In addition, the agreements provide for substantial minimum annual purchase commitments. There is no second source that could readily provide the volume of polyethylene separators used by the Company. As a result, any major disruption in supply from the Company’s sole supplier would have a material adverse impact on the Company.

 

Other key raw materials and components in the production of batteries include lead oxide, acid, steel, plastics and chemicals, which are generally available from multiple sources. The Company has not experienced any material stoppage or disruption in production as a result of unavailability, or delays in the availability of raw materials.

Competition

 

Transportation Segments

 

The Americas and European transportation markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service, and warranty. Well-recognized brand names are also important for aftermarket customers who do not purchase private label batteries. Most sales are made without long-term contracts.

 

In the Americas transportation aftermarket, the Company believes it has the second largest market position. Other principal competitors in this market are Johnson Controls, Inc. and East Penn Manufacturing. Price competition in this market has been severe in recent years. Competition is strongest in the auto parts retail and mass merchandiser channels where large customers use their buying power to negotiate lower prices.

 

The largest competitor in the Americas transportation OEM market is Johnson Controls, Inc. Due to technical and production qualification requirements, OEMs change battery suppliers less frequently than aftermarket customers, but because of their purchasing size, they can influence market participants to compete on price and other terms.

 

The Company also believes that it has the overall second largest market position in Europe in transportation batteries. The Company’s largest competitor in the transportation markets is Johnson Controls, Inc. The European battery markets, in both the transportation OEM and aftermarket channels, have experienced severe price competition. In addition, the strength of the Euro in the Company’s European markets has resulted in competitive pricing pressures from Asian imports, negatively impacting average selling prices.

 

Industrial Energy Segments

 

Motive Power

 

The Company believes that it is one of the major players in the global motive power battery market. Competitors in Europe include EnerSys, Inc., Hoppecke, BAE, and MIDAC. Competitors in the Americas include Crown Battery, Inc., EnerSys, Inc. and East Penn Manufacturing. In Asia, GS/Yuasa, Shinkobe, and EnerSys, Inc. are the major competitors, with GS/Yuasa being the market leader.

 

Quality, product performance, in-service reliability, delivery, and price are important differentiators in the motive power market. The Company’s well-known brands, such as Chloride Motive Power , DETA , GNB , Sonnenschein , and Tudor are among the leading brands in the world. In addition, the Company has developed a range of low maintenance batteries (the Liberator series) that are combined with a matched range of the Company-regulated or high frequency chargers that work together to reduce customers’ operating costs.

 

Network Power

 

The Company is one of the major players in the global network power battery market. The major competitor in Europe is EnerSys, Inc. Competitors in the Americas include C&D Technologies, EnerSys, Inc., and East Penn Manufacturing. In Asia, GS/Yuasa, Shinkobe, and EnerSys, Inc. are the major competitors.

 

Quality, reliability, delivery, and price are important differentiators in the network power market, along with technical innovation and responsive service. Brand recognition is also important, and the Company’s Absolyte , Classic, Marathon, Sonnenschein , and Sprinter are among the leading brands in the world.

 

Environmental, Health and Safety Matters

 

As a result of its manufacturing, distribution, and recycling operations, the Company is subject to numerous federal, state, and local environmental, occupational safety, and health laws and regulations, as well as similar laws and regulations in other countries in which the Company operates (collectively, “EH&S laws”). For a discussion of the legal proceedings relating to environmental, health, and safety matters, see Note 11 to the Consolidated Financial Statements.

Employees

 

Total worldwide employment was approximately 13,027 at March 31, 2008, compared to approximately 13,352 at March 31, 2007.

 

Americas

 

As of March 31, 2008, the Company employed approximately 1,235 salaried employees and approximately 3,908 hourly employees in the Americas, primarily in the U.S. Approximately 45% of these salaried employees are engaged in sales, service, marketing, and administration and approximately 55% in manufacturing and engineering. Approximately 22% of the Company’s hourly employees in the Americas are represented by unions. Relations with the unions are generally good. Union contracts covering approximately 148 of the Company’s domestic employees expire in fiscal 2009, and the remainder thereafter.

 

Europe and ROW

 

As of March 31, 2008, the Company employed approximately 2,817 salaried employees and approximately 5,067 hourly employees outside of the Americas, primarily in Europe. Approximately 50% of these salaried employees are engaged in sales, service, marketing, and administration and approximately 50% in manufacturing and engineering. The Company’s hourly employees in Europe and ROW are generally represented by unions. The Company meets regularly with the European Works Councils. Relations with the unions are generally good. Contracts covering most of the Company’s union employees generally expire on various dates through fiscal 2009.

 

Executive Officers of the Registrant

 

Gordon A. Ulsh (62) President, Chief Executive Officer and member of the Board of Directors. Mr. Ulsh was appointed in to his current position in April 2005. From 2001 until March 2005, Mr. Ulsh was Chairman, President and CEO of Texas-based FleetPride Inc., the nation’s largest independent aftermarket distributor of heavy-duty truck parts. Prior to joining FleetPride in 2001, Mr. Ulsh worked with Ripplewood Equity Partners, providing analysis of automotive industry segments for investment opportunities. Earlier, he served as President and Chief Operating Officer of Federal-Mogul Corporation in 1999 and as head of its Worldwide Aftermarket Division in 1998. Prior to Federal-Mogul, he held a number of leadership positions with Cooper Industries, including Executive Vice President of its automotive products segment. Mr. Ulsh joined Cooper’s Wagner Lighting business unit in 1984 as Vice President of Operations, following 16 years in manufacturing and engineering management at Ford Motor Company. Mr. Ulsh is a director of OM Group, Inc.

 

Mitchell S. Bregman (54) President, Industrial Energy Americas. Mr. Bregman joined Exide in September 2000 in connection with the Company’s acquisition of GNB. He has served in his current role since March 2003 and prior to that was President, Global Network Power. Mr. Bregman joined GNB in 1979. He served for 12 years as a Vice President with various responsibilities with GNB Industrial Power and nine years with GNB’s Transportation Division.

 

Joel Campbell (61) President, Industrial Energy Europe. Mr. Campbell joined the Company in February 2006 as Vice President & General Manager, North American Recycling. Between August 1999 and February 2006, Mr. Campbell was retired. From 1998 to 1999, Mr. Campbell served as Senior Vice President, North American Aftermarket at Tenneco. Mr. Campbell also previously served in several executive positions at Cooper Industries from 1988 to 1998, including President of Cooper Automotive. Mr. Campbell has more than 30 years of management experience with various manufacturing companies.

 

Bruce A. Cole (45) President, Transportation Americas. Mr. Cole joined the Company in September 2000 in connection with the Company’s acquisition of GNB. He has served in his current role since August 2007 and prior to that was Vice President and General Manager, North American Recycling. Mr. Cole joined GNB in 1989. He has served in a variety of roles including VP, Manufacturing & Engineering for Industrial Energy Americas and VP Global Marketing Industrial Energy.

Phillip A. Damaska (53) Executive Vice President and Chief Financial Officer. Mr. Damaska joined the Company in January 2005 as Vice President, Finance, was appointed Vice President and Corporate Controller in September, 2005, was named Senior Vice President and Corporate Controller in March 2006, and was named Executive Vice President and Chief Financial Officer effective April 1, 2008. Prior to joining the Company, Mr. Damaska served in numerous capacities with Freudenberg-NOK from 1996 through 2004, most recently as President of Corteco, an automotive and industrial seal supplier that is part of the partnership’s global group of companies.

 

Barbara A. Hatcher ( 53) has been Executive Vice President and General Counsel since May 2006 and had served as Deputy General Counsel from April 2004 through April 2006. Ms. Hatcher joined the Company in 2000 through its acquisition of GNB Technologies, Inc., where she served as Vice President & General Counsel.

 

George S. Jones, Jr. ( 55 ) Executive Vice President, Human Resources and Communications. Mr. Jones joined the Company in July 2005. From 1974 to 2004, Mr. Jones served in several executive positions at Cooper Industries, most recently as Vice President — Operations at the Lighting Division from 1997 to 2004.

 

Louis E. Martinez (42) Vice President, Corporate Controller, and Chief Accounting Officer. Mr. Martinez was appointed to this position in March 2008. Previously, Mr. Martinez served as the Company’s Assistant Corporate Controller since joining the Company in May 2005. Mr. Martinez served as Corporate Controller for Airgate PCS, Inc., from March 2003 through May 2005. Mr. Martinez has also served as Corporate Controller for Cotelligent, Inc., from March 2000 through February 2003 and as Director of Finance & Controller for Aegis Communications Group from 1996 through February 2000.

 

Edward J. O’Leary (52) Chief Operating Officer. Mr. O’Leary joined the Company in June 2005 as President, Transportation Americas, and was named Chief Operating Officer in August 2007. Prior to joining the Company, Mr. O’Leary served as President, the Americas at Oetiker Inc. From 2002 to 2004, Mr. O’Leary served in a consulting capacity with Jag Management Consultants. Mr. O’Leary served as Chief Executive Officer of iStarSystems from 2000 to 2002, and served as Vice President Sales and Distribution, the Americas at Federal-Mogul Corp. from 1998 to 1999. Prior to that, Mr. O’Leary served as Executive Vice President of Cooper Automotive, a division of Cooper Industries, from 1995 to 1998, as well as spending 17 years at Tenneco Automotive.

 

Rodolphe Reverchon (49) President, Transportation Europe. Mr. Reverchon joined the Company in 2003 as Vice President, Operations Europe. From 1996 to 2003, Mr. Reverchon served in a number of capacities at Bosch Chassis & Systems as European Manufacturing Director, Plant Manager and Manufacturing Quality Manager, Europe.

 

Backlog

 

The Company’s order backlog at March 31, 2008 was approximately $42.6 million for Industrial Energy Americas and $107.0 million for Industrial Energy Europe and ROW. The Company expects to fill all of the March 31, 2008 backlogs during fiscal 2009. The Transportation backlog at March 31, 2008 was not significant.

 

Available Information

 

The Company maintains a website on the internet at www.exide.com . The Company makes available free of charge through its website, by way of a hyperlink to a third-party Securities Exchange Commission (“SEC”) filing website ( www.sec.gov ), its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports electronically filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act of 1934. Such information is available as soon as reasonably practicable after it is filed with the SEC. The SEC website contains reports, proxy and other statements, and other information regarding issuers that file electronically with the SEC. Also, the public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington D.C., 20549. Information on the operation of the Public Reference Room may be obtained by

calling the SEC at 1-800-SEC-0330. Additionally, the Company’s Code of Ethics and Business Conduct may be accessed within the Investor Relations section of its website. Amendments and waivers of the Code of Ethics and Business Conduct will also be disclosed within four business days on the website. Information found in the Company’s website is neither part of this annual report on Form 10-K nor any other report filed with the SEC.

 

foreign currency depreciation against the U.S. Dollar would result in a decrease in the Company’s net investment in foreign subsidiaries.

 

In addition, foreign currency depreciation, particularly depreciation of the Euro, would make it more expensive for the Company’s non-U.S. subsidiaries to purchase certain raw material commodities that are priced globally in U.S. Dollars, such as lead, which is quoted on the LME in U.S. Dollars. The Company does not engage in significant hedging of its foreign currency exposure and cannot assure that it will be able to hedge its foreign currency exposures at a reasonable cost.

 

There are other risks inherent in the Company’s non-U.S. operations, including:

 

 

These and other factors may have a material adverse effect on the Company’s non-U.S. operations or on its business, financial position, results of operations, and cash flows.

 

The Company’s liquidity is affected by the seasonality of its business. Warm winters and cool summers adversely affect the Company.

 

The Company sells a disproportionate share of its automotive aftermarket batteries during the fall and early winter. Resellers 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. This seasonality increases the Company’s working capital requirements and makes it more sensitive to fluctuations in the availability of liquidity. Unusually cold winters or hot summers may accelerate battery failure and increase demand for automotive 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, it cannot make offsetting cost reductions to protect the Company’s liquidity and gross margins in the short-term because a large portion of the Company’s manufacturing and distribution costs are fixed.

 

Decreased demand in the industries in which the Company operates may adversely affect its business.

 

The Company’s financial performance depends, in part, on conditions in the automotive, material handling, and telecommunications industries which, in turn, are generally dependent on the U.S. and global economies. As a result, economic and other factors adversely affecting production by OEMs and their customers’ spending could adversely impact the Company’s business. Relatively modest declines in customer purchases from the Company could have a significant adverse impact on its profitability because the Company has substantial fixed production costs. If the Company’s OEM and large aftermarket customers reduce their inventory levels, and reduce their orders, the Company’s performance would be significantly adversely impacted. In this environment, the Company cannot predict future production rates or inventory levels or the underlying economic factors. Continued uncertainty and unexpected fluctuations may adversely affect the Company’s business.

 

The remaining portion of the Company’s battery sales are of aftermarket batteries. The factors influencing demand for automotive replacement batteries include: (1) the number of vehicles in use; (2) average battery life; (3) the average age of vehicles and their operating environment; (4) average miles driven, (5) weather conditions; and (6) population growth and overall economic conditions. Any significant adverse change in any one of these factors may adversely affect the Company’s business.

The loss of the Company’s sole supplier of polyethylene battery separators would have a material adverse effect on the Company’s business.

 

The Company relies exclusively on a single supplier to fulfill its needs for polyethylene battery separators — a critical component of many of the Company’s products. There is no second source that could readily provide the volume of polyethylene separators used by the Company. As a result, any major disruption in supply from this supplier would have a material adverse impact on the Company. If the Company is not able to maintain a good relationship with this supplier, or if for reasons beyond the Company’s control the supplier’s service was disrupted, it would have a material adverse affect on the Company’s business.

 

Many of the industries in which the Company operates are cyclical.

 

The Company’s operating results are affected by the general cyclical pattern of the industries in which its major customer groups operate. Any decline in the demand for new automobiles, light trucks, or sport utility vehicles could have a material adverse impact on the financial condition and results of operations of the Company’s Transportation segments. A weak capital expenditure environment in the telecommunications, uninterruptible power systems or electric industrial forklift truck markets could have a material adverse effect on the business, financial positions, and results of operations, and cash flow of the Company’s Industrial Energy segments.

 

The Company is subject to pricing pressure from its larger customers.

 

The Company faces significant pricing pressures in all of its business segments from its larger customers. Because of their purchasing volume, the Company’s larger customers can influence market participants to compete on price and other terms. Such customers also use their buying power to negotiate lower prices. If the Company is not able to offset pricing reductions resulting from these pressures by improved operating efficiencies and reduced expenditures, those price reductions may have an adverse impact on the Company’s business.

 

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.

 

The Company competes with a number of major domestic and international manufacturers and distributors of lead acid batteries, as well as a large number of smaller, regional competitors. Due to excess capacity in some sectors of its industry and consolidation among industrial purchasers, the Company has been subjected to continual and significant pricing pressures. The North American, European and Asian lead-acid battery markets are highly competitive. The manufacturers in these markets compete on price, quality, technical innovation, service, and warranty. In addition, the Company is experiencing heightened competitive pricing pressure as Asian producers, which are able to employ labor at significantly lower costs than producers in the U.S. and Western Europe, expand their export capacity and increase their marketing presence in the Company’s major markets.

 

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.

 

The Company believes that its future success depends, in part, on the ability to develop, on a timely basis, new technologically advanced products or improve on the Company’s existing products in innovative ways that meet or exceed its competitors’ product offerings. Maintaining the Company’s market position will require continued investment in research and development and sales and marketing. Industry standards, customer expectations, or other products may emerge that could render one or more of the Company’s products less desirable or obsolete. The Company may be unsuccessful in making the technological advances necessary to develop new products or improve its existing products to maintain its market position. If any of these events occur, it could cause decreases in sales and have an adverse effect on the Company’s business, financial position, results of operations, and cash flow.

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.

 

Instability in the world financial markets and the global economy, including (and as a result of) the turmoil in the Middle East, may create uncertainty in the industries in which the Company operates, and may adversely affect its business. In addition, terrorist activities may cause unpredictable or unfavorable economic conditions and could have a material adverse impact on the Company’s business, financial position, results of operations, and cash flow.

 

The Company may be unable to successfully implement its business strategy, which could adversely affect its results of operations and financial condition.

 

The Company’s ability to achieve its business and financial objectives is subject to a variety of factors, many of which are beyond the Company’s control. For example, the Company may not be successful in increasing its manufacturing and distribution efficiency through productivity, process improvements and cost reduction initiatives. Further, the Company may not be able to realize the benefits of these improvements and initiatives within the time frames the Company currently expects. In addition, the Company may not be successful in increasing the Company’s percentage of captive arrangements and spent-battery collections or in hedging its lead requirements, leaving it exposed to fluctuations in the price of lead. Any failure to successfully implement the Company’s business strategy could adversely affect results of operations and financial condition, and could further impair the Company’s ability to make certain strategic capital expenditures and meet its restructuring objectives.

 

The Company is subject to costly regulation in relation to environmental, health and safety matters, which could adversely affect its business, financial position, results of operations, and cash flow.

 

In the manufacture of its products throughout the world, the Company manufactures, distributes, recycles, and otherwise uses large amounts of potentially hazardous materials, especially lead and acid. As a result, the Company is subject to a substantial number of costly regulations. In particular, the Company is required to comply with increasingly stringent requirements of federal, state, and local environmental, occupational health and safety laws and regulations in the U.S. and other countries, including those governing emissions to air, discharges to water, noise and odor emissions; the generation, handling, storage, transportation, treatment, and disposal of waste materials; and the cleanup of contaminated properties and human health and safety. Compliance with these laws and regulations results in ongoing costs. The Company could also incur substantial costs, including cleanup costs, fines, and civil or criminal sanctions, third-party property damage or personal injury claims, or costs to upgrade or replace existing equipment, as a result of violations of or liabilities under environmental laws or non-compliance with environmental permits required at its facilities. In addition, many of the Company’s current and former facilities are located on properties with histories of industrial or commercial operations. Because some environmental laws can impose liability for the entire cost of cleanup upon any of the current or former owners or operators, regardless of fault, the Company could become liable for the cost of investigating or remediating contamination at these properties if contamination requiring such activities is discovered in the future. The Company may become obligated to pay material remediation-related costs at its closed Tampa, Florida facility in the amount of approximately $12.5 million to $20.5 million, at the Columbus, Georgia facility in the amount of approximately $6.0 million to $9.0 million and at the Sonalur, Portugal facility in the amount of approximately $2.0 million.

 

The Company cannot be certain that it has been, or will at all times be, in complete compliance with all environmental requirements, or that the Company will not incur additional material costs or liabilities in connection with these requirements in excess of amounts it has reserved. Private parties, including current or former employees, could bring personal injury or other claims against the Company due to the presence of, or exposure to, hazardous substances used, stored or disposed of by it, or contained in its products, especially lead. Environmental requirements are complex and have tended to become more stringent over time. These requirements or their enforcement may change in the future in a manner that could have a material adverse effect on the Company’s business, results of operations and financial condition. The Company has made and will continue to make expenditures to comply with environmental requirements. These requirements,

responsibilities and associated expenses and expenditures, if they continue to increase, could have a material adverse effect on the Company’s business and results of operations. While the Company’s costs to defend and settle claims arising under environmental laws in the past have not been material, the Company cannot provide assurance that this will remain so in the future.

 

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 business, financial position, results of operations, or cash flows.

 

The 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. The Company previously has been advised by the EPA or state agencies that it is a “Potentially Responsible Party” under the Comprehensive Environmental Response, Compensation and Liability Act or similar state laws at 100 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 $35.0 million. 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 may be adversely affected by legal proceedings to which the Company is, or may become, a party.

 

The Company and its subsidiaries are currently, and may in the future become, subject to legal proceedings which could adversely affect its results of business, financial position, results of operations, or cash flows. See Note 11 to the Consolidated Financial Statements.

 

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 business, financial position, results of operations, or cash flows.

 

At March 31, 2008, there are approximately 200 pre-petition disputed unsecured claims on file in the bankruptcy case that remain to be resolved through the Plan’s claims reconciliation and allowance procedures. The Company established a reserve of common stock and warrants to purchase common stock for issuance to holders of these disputed unsecured claims as the claims are allowed by the Bankruptcy Court. Although these claims are generally resolved through the issuance of common stock and warrants from the reserve rather than cash payments, the process of resolving these claims through settlement or litigation requires considerable Company resources, including expenditures for legal and professional fees and the attention of Company personnel. These costs could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

 

Work stoppages or other labor issues at the Company’s facilities or its customers’ or suppliers’ facilities could adversely affect the Company’s business, financial position, results of operations, or cash flows.

 

At March 31, 2008, approximately 22% of the Company’s hourly employees in the Americas and many of its non-U.S. employees were unionized. It is likely that a significant portion of the Company’s workforce will remain unionized for the foreseeable future. It is also possible that the portion of the Company’s workforce that is unionized may increase in the future. Contracts covering approximately 148 of the Company’s domestic employees expire in fiscal 2009, and the remainder thereafter. In addition, contracts covering most of the Company’s union employees in Europe and ROW expire on various dates through fiscal 2009. Although the Company believes that its relations with employees are generally good, if conflicts develop between the Company and its employees’ unions in connection with the renegotiation of these contracts or otherwise, work stoppages or other labor disputes could result. A work stoppage at one or more of the Company’s plants, or a material increase in its costs due to unionization activities, may have a material adverse effect on the Company’s business. Work stoppages at the facilities of the Company’s customers or suppliers may also negatively affect the Company’s business. If any of the Company’s customers experience a material work stoppage, the customer may halt or limit the purchase of the Company’s products. This could require the Company to shut down or significantly reduce production at facilities relating to those products. Moreover, if any of the Company’s suppliers experience a work stoppage, the Company’s operations could be adversely affected if an alternative source of supply is not readily available.

 

The Company’s substantial indebtedness could adversely affect its financial condition.

 

The Company has a significant amount of indebtedness. As of March 31, 2008, the Company had total indebtedness, including capital leases, of approximately $716.2 million. The Company’s level of indebtedness could have significant consequences. For example, it could:

 

 

One or a combination of these factors could adversely affect the Company’s financial condition. Subject to restrictions in the indenture governing the Company’s senior secured notes and convertible notes and its senior secured credit facility, the Company may incur additional indebtedness, which could increase the risks associated with its already substantial indebtedness.

 

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.

 

The Company’s senior secured credit facility (the “Credit Agreement”) and the indenture governing its senior secured notes contain covenants that limit or restrict its ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to its growth strategy or otherwise important to the Company. The Credit Agreement and the indenture governing the Company’s senior secured notes limit or restrict, among other things, the Company’s ability and the ability of its subsidiaries to:

 

 

 

In addition, the Credit Agreement requires the Company to repay outstanding borrowings with portions of the proceeds the Company receives from certain sales of property or assets and specified future debt offerings. The Company’s ability to comply with these provisions may be affected by events beyond its control.

 

Any breach of the covenants in the Credit Agreement or the indenture governing its senior secured notes could cause a default under the Company’s Credit Agreement and other debt (including the notes), which would restrict the Company’s ability to borrow under its Credit Agreement, thereby significantly impacting the Company’s liquidity. If there were an event of default under any of the Company’s debt instruments that was not cured or waived, the holders of the defaulted debt could cause all amounts outstanding with respect to the debt instrument to be due and payable immediately. The Company’s assets and cash flow may not be sufficient to fully repay borrowings under its outstanding debt instruments if accelerated upon an event of default. If, as or when required, the Company is unable to repay, refinance or restructure its indebtedness under, or amend the covenants contained in, its senior secured credit facility, the lenders under its senior secured credit facility could institute foreclosure proceedings against the assets securing borrowings under the Credit Agreement.

 

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.

 

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.

 

Pursuant the Plan, the Company has established a reserve of common stock and warrants to purchase common stock for issuance to holders of unsecured pre-petition disputed claims. To the extent this reserve is insufficient to satisfy these disputed claims, the Company would be required to issue additional shares of common stock and warrants, which would result in dilution to holders of its common stock.

 

Under the claims reconciliation and allowance process set forth in the Plan, the Official Committee of Unsecured Creditors, in consultation with the Company, established a reserve to provide for a pro rata distribution of 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 these objections. Predictions regarding the allowance and classification of claims are inherently difficult to make. With respect to environmental claims in particular, there is inherent difficulty in assessing 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 in law to believe that the Company will ultimately be responsible for only its share of these remediation costs, there can be no assurance that the Company will prevail on these claims. In addition, the scope of remedial costs or other environmental injuries are 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 and either specify no 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 claims assessment and information that is unknown to the Company at the current time may significantly affect its 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 new 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 new 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.

 

The Company’s ability to recognize the benefits of deferred tax assets is dependent on future cash flows and taxable income

 

The Company recognizes the expected future tax benefit from deferred tax assets when the tax benefit is considered to be more likely than not of being realized. Otherwise, a valuation allowance is applied against deferred tax assets. Assessing the recoverability of deferred tax assets requires management to make significant estimates related to expectations of future taxable income. Estimates of future taxable income are based on forecasted cash flows from operations and the application of existing tax laws in each jurisdiction. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realize the deferred tax assets could be impacted. Additionally, future changes in tax laws could limit the Company’s ability to obtain the future tax benefits represented by its deferred tax assets. As of March 31, 2008, the Company’s current and long-term deferred tax assets were $36.8 million and $51.2 million, respectively.

 

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 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) 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, (ix) general economic conditions, (x) the ability to acquire goods and services and/or fulfill labor needs at budgeted costs, (xi) the Company’s reliance on a single supplier for its polyethylene battery separators, (xii) the Company’s ability to successfully pass along increased material costs to its customers, and (xiii) the loss of one or more of the Company’s major customers for its industrial or transportation products.

 

The Company cautions each reader 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.

 

 

The chart below lists the locations of the Company’s principal facilities. All of the facilities are owned by the Company unless otherwise indicated. Most of the Company’s significant U.S. properties and some of its European properties secure its financing arrangements. For a description of the financing arrangements, refer to Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations , Liquidity and Capital Resources. The leases for leased facilities generally expire at various dates through 2016.

 

 

In addition, the Company also leases sales and distribution outlets in North America, Europe and Asia.

The Company believes that its facilities are in good operating condition, adequately maintained, and suitable to meet the Company’s present needs.

 

 

PART II

 

The Company did not declare or pay dividends on its common stock during fiscal years 2008 and 2007. Covenants in the Credit Agreement restrict the Company’s ability to pay cash dividends on capital stock and the Company presently does not intend to pay dividends on its common stock.

 

As of June 3, 2008, the Company had 75,296,301 shares of its common stock and, 5,022,309 of its warrants outstanding, with 4,042 and 5,299 holders of record, respectively.

 

 

Of the total of 7.1 million shares of common stock available for issuance under stock option and incentive plans for employees and non-employee directors, no more than 1.9 million shares may be issued as restricted shares or restricted stock units.

 

The following table sets forth selected financial data for the Company. The reader should read this information in conjunction with the Company’s Consolidated Financial Statements and Notes thereto and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” that appear elsewhere in this report.

 

 

 

were generated in Europe and ROW. Further, approximately 64.3% of the Company’s aggregate accounts receivable and inventory as of March 31, 2008 were 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 a portion of its fourth fiscal quarters). Retailers and distributors buy automotive batteries during these periods so they will have sufficient inventory for cold weather periods. 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, portions of which were hedged during late fiscal 2008. See Notes 2 and 7 to the Consolidated Financial Statements.

 

Fiscal 2008 Highlights and Outlook

 

The Company’s reported results continued to improve throughout fiscal 2008, but were again impacted by increases in the price of lead and other commodities that are primary components in the manufacture of batteries, as well as increases in 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 that are obtained for recycling from the Company’s customers and outside spent-battery collectors. This process 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 fiscal 2008, the average cost of spent-batteries has increased approximately 87% versus 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 at lower cost rather than purchasing spent batteries in the secondary market to help mitigate these risks.

 

In Europe, the Company’s lead requirements are mainly fulfilled by third-party suppliers. Because of the Company’s exposure to lead market prices in Europe, and based on historical price increases and volatility in lead prices, the Company has implemented several measures to offset higher lead prices including selective pricing actions, price escalators, and long-term lead supply contracts. 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, the selective pricing actions, lead price escalators in some 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:

 

(i) Successful execution and completion of the Company’s ongoing restructuring plans and organizational realignment of divisional and corporate functions intended to result 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 the established Take Charge! initiative, which is now installed in 23 of the Company’s 28 manufacturing locations.

 

(iv) Continued review and rationalization of the various brand offerings of products in its markets to gain efficiencies in manufacturing and distribution, and better leverage its marketing spending.

 

(v) 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 Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and the related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates based on its historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

The Company believes the following critical accounting policies and estimates affect the preparation of its Consolidated Financial Statements.

 

Inventory Reserves.   The Company adjusts its inventory carrying value to estimated market value (when below historical cost basis) based upon assumptions of future demand and market conditions. If actual market conditions are less favorable than those projected by the Company, additional inventory write-downs may be required.

 

Valuation of Long-lived Assets.   The Company’s long-lived assets include property, plant and equipment, and identified intangible assets. Long-lived assets (other than indefinite lived intangible assets) are depreciated and amortized over their estimated useful lives, and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable. Indefinite-lived intangible assets are reviewed for impairment on both an annual basis and whenever changes in circumstances indicate that the carrying value may not be recoverable. The fair value of indefinite-lived intangible assets are based upon the Company’s estimates of future cash flows and other factors including discount rates to determine the fair value of the respective assets. An erosion of future business results in any of the Company’s business units could create impairment in the Company’s long-lived assets and require a significant write-down in future periods.

 

Employee Benefit Plans.   The Company’s pension plans and postretirement benefit plans are accounted for under SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans — An Amendment of FASB Statements No. 87, 88, 106, and 132(R) (“SFAS 158”)” using actuarial

valuations required by SFAS No. 87, “Employers’ Accounting for Pensions (“SFAS 87”)” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions (“SFAS 106”)”. The Company considers accounting for employee benefit plans critical because management is required to make significant subjective judgments about a number of actuarial assumptions, including discount rates, compensation growth, long-term return on plan assets, retirement, turnover, health care cost trend rates and mortality rates. Depending on the assumptions and estimates used, the pension and postretirement benefit expense could vary within a range of outcomes and have a material effect on reported results. In addition, the assumptions can materially affect accumulated benefit obligations and future cash funding. For a detailed discussion of the Company’s retirement benefits, see Employee Benefit Plans herein and Note 8 to the Consolidated Financial Statements.

 

Deferred Taxes.   The Company records valuation allowances to reduce its deferred tax assets to amounts that are more likely than not to be realized. While the Company has considered future taxable income and used ongoing prudent and feasible tax planning strategies in assessing the need for valuation allowances, if the Company were to determine that it would be able to realize deferred tax assets in the future in excess of the Company’s net recorded amount, an adjustment to the net deferred tax asset would increase income in the period that such determination was made. Likewise, should the Company determine that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the net deferred tax asset would decrease income in the period such determination was made. The Company regularly evaluates the need for valuation allowances against its deferred tax assets, and currently has full valuation allowances recorded for deferred tax assets in the United Kingdom, France, Italy, and Spain as well as in several other countries in Europe and ROW.

 

Revenue Recognition.   The Company records sales when revenue is earned. Shipping terms are generally FOB shipping point and revenue is recognized when product is shipped to the customer. In limited cases, terms are FOB destination and in these cases, revenue is recognized when the product is delivered to the customer’s delivery site. The Company records sales net of discounts and estimated customer allowances and returns.

 

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.

 

Environmental Reserves.   The Company is subject to numerous environmental laws and regulations in all the countries in which it operates. In addition, the Company can be held liable for investigation and remediation of sites impacted by its past operating activities. The Company maintains reserves for the cost of addressing these liabilities once they are determined to be both probable and reasonably estimable. These estimates are determined through a combination of methods, including outside estimates of likely expense and the Company’s historical experience in the management of these matters.

 

Because environmental liabilities are not accrued until a liability is determined to be probable and reasonably estimable and there is a constructive obligation to remediate, 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 result in either an increase or decrease in the reserves and have a significant impact on the Company’s liquidity and its results of operations.

 

Litigation.   The Company has legal contingencies that have a high degree of uncertainty. When a contingency becomes probable and reasonably estimable, a reserve is established. Numerous lawsuits have been filed against the Company for which the liabilities are not considered probable and/or reasonably estimable. Consequently, no reserves have been established for these matters. If future litigation or the resolution of existing matters results in liability to the Company, such liability could have a significant impact on the Company’s future results and liquidity.

Recently Issued Accounting Standards.   See Note 1 to the Consolidated Financial Statements for a description of new accounting pronouncements and their impact to the Company.

 

Industrial Energy Europe and ROW net sales were $1.11 billion for fiscal 2008 versus $906.8 million for fiscal 2007. Net sales in fiscal 2008, excluding favorable foreign currency translation of $111.0 million, increased $94.9 million, or 10.5%, compared to fiscal 2007 due to favorable pricing actions implemented in both the network power and motive power markets, partially offset by reduced volumes in the motive power market.

 

Gross Profit

 

Gross profit was $593.2 million in fiscal 2008 versus $472.8 million in fiscal 2007. Gross margin decreased slightly to 16.0% of net sales in fiscal 2008 from 16.1% of net sales in fiscal 2007. Foreign currency translation favorably impacted gross profit in fiscal 2008 by approximately $31.8 million. Gross profit was positively impacted by higher average selling prices and cost reductions driven to a significant degree by the Company’s continued execution of the Take Charge! initiative and targeted capital spending. These improvements were partially offset by higher lead costs (average LME prices were up 100.3% to $2,856 per metric ton in fiscal 2008 as compared to $1,426 per metric ton in fiscal 2007), and increases in other commodity costs.

 

 

Transportation Americas gross profit was $209.4 million, or 18.6% of net sales, in fiscal 2008 versus $165.7 million, or 17.8% of net sales, in fiscal 2007. The increase in gross margin was primarily due to the impact of favorable pricing actions and higher aftermarket volumes, partially offset by higher raw material costs including lead, and an additional $2.1 million for environmental remediation costs in the second quarter of fiscal 2008.

 

Transportation Europe and ROW gross profit was $146.6 million, or 12.7% of net sales, in fiscal 2008 versus $93.4 million, or 11.2% of net sales, in fiscal 2007. Foreign currency translation favorably impacted gross profit during fiscal 2008 by approximately $15.2 million. The remaining increase in gross profit was primarily due to the favorable impact of pricing actions and higher OE volumes, partially offset by lower volumes in the aftermarket channels.

 

Industrial Energy Americas gross profit was $77.6 million, or 25.7% of net sales, in fiscal 2008 versus $60.2 million, or 22.2% of net sales, in fiscal 2007. The increase in gross profit was primarily due to favorable pricing actions in both the network power and motive power markets, as well as increased unit volumes in the network power market and ongoing cost reduction initiatives, partially offset by higher commodity costs.

 

Industrial Energy Europe and ROW gross profit was $162.1 million, or 14.6% of net sales, in fiscal 2008 versus $153.5 million, or 16.9% of net sales, in fiscal 2007. Foreign currency translation favorably impacted gross profit in fiscal 2008 by approximately $16.6 million. Gross profit was negatively impacted by higher lead and other commodity costs not fully recovered by higher average selling prices, partially offset by manufacturing cost reductions resulting from the installation of the Take Charge! Initiative at the division’s manufacturing facilities.

Unallocated other gross profit consisted of an expense of $2.4 million in fiscal 2008 for environmental remediation costs for a previously closed facility. As this site was closed many years ago, the costs have not been allocated to the current business segments.

 

Expenses

 

Expenses were $544.9 million in fiscal 2008 versus $567.7 million in fiscal 2007. Restructuring charges of $10.5 million in fiscal 2008 and $24.5 million in fiscal 2007 are included in these expenses. Excluding these items, expenses were $534.4 million and $543.2 million in fiscal 2008 and fiscal 2007, respectively. Foreign currencies unfavorably impacted expenses by approximately $32.1 million in fiscal 2008. The decrease in expenses was impacted by the following:

 

i. interest, net, decreased $4.5 million principally due to the favorable impact of lower interest rates under the Credit Agreement, offset by higher borrowing required to fund incremental working capital caused by significantly higher lead costs;

 

ii. fiscal 2008 and fiscal 2007 expenses included currency remeasurement gains of $40.8 million and $11.6 million, respectively, included in Other (income) expense, net;

 

iii. restructuring expenses decreased by $14.0 million, to $10.5 million in fiscal 2008 from $24.5 million in fiscal 2007. This change is due to an overall decrease in the level of restructuring activities throughout the Company in fiscal 2008;

 

iv. fiscal 2008 and fiscal 2007 expenses included a loss on revaluation of warrants of $3.0 million and $3.2 million, respectively, included in Other (income) expense, net; and

 

v. fiscal 2008 and fiscal 2007 expenses included a (gain) loss on sale/impairment of fixed assets of ($0.2) million and $18.6 million, respectively, included in Other (income) expense, net. The change partially resulted from an impairment charge on assets (land and building) held for sale in Nanterre, France and Shreveport, LA. in the U.S., recognized in fiscal 2007.

 

 

Transportation Americas expenses were $130.5 million in fiscal 2008 versus $132.6 million in fiscal 2007. The decrease in expenses was due to unusual prior year expenses, which included $8.6 million in restructuring costs and a $7.2 million of fixed asset impairment charges, both related to the fiscal 2007 closure of the Shreveport, Louisiana battery plant, partially offset by higher selling, general and administrative expenses in fiscal 2008.

 

Transportation Europe and ROW expenses were $116.3 million in fiscal 2008 versus $113.8 million in fiscal 2007. Foreign currency translation unfavorably impacted expenses in fiscal 2008 by approximately $11.8 million. Excluding the impact of currency translation, expenses decreased by $9.3 million due primarily to a $9.7 million fixed asset impairment charge related to land and building held for sale in France in fiscal 2007.

Industrial Energy Americas expenses were $39.5 million in fiscal 2008 versus $38.2 million in fiscal 2007. The increase in expenses was primarily due to costs related to the closed Kankakee, Illinois manufacturing facility

 

Industrial Energy Europe and ROW expenses were $144.2 million in fiscal 2008 versus $145.2 million in fiscal 2007. Foreign currency translation unfavorably impacted expenses in fiscal 2008 by approximately $14.0 million. Excluding the impact of currency translation, expenses decreased by $15.1 million primarily due to a reduction in discretionary spending versus fiscal 2007, a $1.4 million gain on asset sales, and $5.3 million lower restructuring costs.

 

Unallocated expenses were $114.4 million in fiscal 2008 versus $137.9 million in fiscal 2007:

 

 

The $41.4 million and $12.4 million of currency remeasurement gains in fiscal 2008 and 2007 relate primarily to the remeasurement of U.S. dollar-denominated borrowings under the European tranche of its Credit Agreement and Euro-denominated intercompany loans (receivable) in the U.S.A. The $21.3 million loss on early extinguishment of debt relates to the Company’s May 2007 payoff of its prior credit facility. Foreign currency translation unfavorably impacted unallocated expenses by $6.3 million in fiscal 2008.

 

Reorganization Items

 

Reorganization items represent amounts the Company continues to incur as a result of the Company’s prior Chapter 11 filing, from which the Company emerged successfully in May 2004. Reorganization items for fiscal 2008 and 2007 were $3.8 million and $4.3 million, respectively. These expenses include professional fees, consisting primarily of legal services.

 

Income Taxes

 

The effective tax rate for fiscal 2008 and 2007 was impacted by the generation of income in tax-paying jurisdictions, principally in the U.S., New Zealand, Canada and certain countries in Europe, 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 United Kingdom, Italy, Spain, and France. The effective tax rate for fiscal 2008 was impacted by the recognition of $26.6 million of valuation allowances on current year tax benefits generated primarily in the UK, France and Spain. In addition, the income tax provision for fiscal 2008 increased $16.7 million due to a reduction in the deferred tax assets for Germany due to legislation enacted during the period which reduced the Company’s German subsidiaries’ marginal tax rate from approximately 37% to approximately 28%. Finally, the income tax provision for fiscal 2008 decreased as a result of the removal of a $25.0 million valuation allowance against net deferred tax assets generated from the Company’s U.S. operations. The effective tax rate for fiscal 2007 was impacted by the recognition of $46.5 million of valuation allowances on current year tax benefits generated primarily in the U.S., United Kingdom, France, Spain, and Italy. In

addition, the effective tax rate for fiscal 2007 was impacted by a settlement between the Company’s Dutch subsidiary and Dutch tax authorities, reducing by $3.8 million previously paid taxes to the Netherlands.

 

 

Fiscal Year Ended March 31, 2007 compared with Fiscal Year Ended March 31, 2006

 

Net Sales

 

Net sales were $2.94 billion for fiscal 2007 versus $2.82 billion in fiscal 2006. Foreign currency translation (primarily the strengthening of the Euro against the U.S. Dollar) favorably impacted net sales in fiscal 2007 by approximately $87.7 million. Excluding the foreign currency translation impact, net sales increased by approximately $32.2 million, or 1.1%, as a result of stronger Industrial Energy demand in Europe and ROW, and was partially offset by weaker Transportation demand in both the Americas and Europe and ROW, and weaker Industrial Energy demand in the Americas in the network power product. Lower demand was more than offset by the impact of favorable pricing actions in all of the Company’s segments. Much of the lower unit volume in both Transportation segments was attributed to the Company’s pricing strategy of driving customer profitability to more appropriate levels or severing relationships where reasonable profitability could not be achieved.

 

 

Transportation Americas net sales were $930.3 million for fiscal 2007 versus $913.3 million for fiscal 2006. Net sales for fiscal 2007 were $17.0 million, or 1.9% higher, than fiscal 2006 due to higher pricing, which, in part, reflected the pass-through of cost increases from lead, other materials, and energy. Transportation Americas experienced lower volumes in original equipment and aftermarket sales, in part, as a result of the Company’s efforts to eliminate or wind down unprofitable contracts and customers. Third-party lead sales revenues for fiscal 2007 were approximately $22.4 million higher than fiscal 2006 due to rising lead prices.

 

Transportation Europe and ROW net sales were $832.2 million for fiscal 2007 versus $810.9 million for fiscal 2006. Net sales in fiscal 2007 excluding the favorable impact of $42.3 million in foreign currency translation reduced by $21.0 million, or 2.6%, compared to fiscal 2006. The decrease was primarily due to lower aftermarket sales volumes only partially offset by higher average selling prices.

 

Industrial Energy Americas net sales were $270.5 million for fiscal 2007 versus $275.0 million for fiscal 2006. Net sales in fiscal 2007 were $4.5 million, or 1.6% lower than fiscal 2006, due primarily to the softness in the network power markets, particularly in wireless telecommunications and lower sales to the U.S. Navy, which spiked in fiscal 2006 in advance of a change in technology, offset partially by higher average selling prices related to lead cost recovery and strong volume in the motive power markets.

 

Industrial Energy Europe and ROW net sales were $906.8 million for fiscal 2007 versus $820.7 million for fiscal 2006. Net sales in fiscal 2007, excluding favorable foreign currency translation of $45.4 million,

increased $40.7 million, or 5.0%, compared to fiscal 2006 due to higher average selling prices related to lead and other pricing actions, and higher volumes in the network power markets, in particular the telecommunications channel.

 

Gross Profit

 

Gross profit was $472.8 million in fiscal 2007 versus $406.8 million in fiscal 2006. Gross margin increased to 16.1% of net sales in fiscal 2007 from 14.4% of net sales in fiscal 2006. Foreign currency translation positively impacted gross profit in fiscal 2007 by approximately $11.9 million. Gross profit was positively impacted by higher average selling prices and cost reductions driven to a significant degree by the Company’s continued execution of the Take Charge! initiative and targeted capital spending. These improvements were partially offset by higher lead costs (average LME prices were up 36.9% to $1,426 per metric ton in fiscal 2007 as compared to $1,041 per metric ton in fiscal 2006), and increases in other commodity costs.

 

 

Transportation Americas gross profit was $165.7 million, or 17.8% of net sales, in fiscal 2007 versus $97.1 million, or 10.6% of net sales, in fiscal 2006. The increase in gross margin was primarily due to higher pricing with a better mix of higher margin products and ongoing productivity initiatives, partially offset by lower volumes in original equipment and aftermarket channels, in part, as a result of efforts to rationalize unprofitable customers.

 

Transportation Europe and ROW gross profit was $93.4 million, or 11.2% of net sales, in fiscal 2007 versus $102.7 million, or 12.7% of net sales, in fiscal 2006. Foreign currency translation favorably impacted gross profit during fiscal 2007 by approximately $4.7 million. The decrease in gross profit before the favorable impact of currency translation was primarily due to lower sales volumes in the aftermarket channel, a shift to non-branded lower, margin product and higher lead and other costs, only partially recovered through pricing actions.

 

Industrial Energy Americas gross profit was $60.2 million, or 22.2% of net sales, in fiscal 2007 versus $53.2 million, or 19.3% of net sales, in fiscal 2006. The increase in gross profit was primarily due to higher average selling prices, improved customer mix, and cost reductions, partially offset by lower sales volumes to the U.S. Navy for submarine batteries and network power markets, particularly for wireless telecommunications, and higher lead and other commodity costs.

 

Industrial Energy Europe and ROW gross profit was $153.5 million, or 16.9% of net sales, in fiscal 2007 versus $153.9 million, or 18.8% of net sales, in fiscal 2006. Foreign currency translation positively impacted gross profit in fiscal 2007 by approximately $7.3 million. Gross profit was negatively impacted by higher lead and other commodity costs, not fully recovered by higher average selling prices.

 

Expenses

 

Expenses were $567.7 million in fiscal 2007 versus $556.9 million in fiscal 2006. Included in expenses are restructuring charges of $24.5 million in fiscal 2007 and $21.7 million in fiscal 2006. Excluding these items, expenses were $543.2 million and $535.2 million in fiscal 2007 and fiscal 2006, respectively. Foreign

currency translation unfavorably impacted expenses by approximately $15.2 million in fiscal 2007. The change in expenses was impacted by the following:

 

i. fiscal 2006 included a gain on revaluation of a foreign currency forward contract of $1.1 million;

 

ii. interest, net, increased $20.6 million principally due to higher interest rates and higher debt levels;

 

iii. fiscal 2007 and fiscal 2006 expenses included currency remeasurement gain of $11.6 million and a loss of $11.3 million, respectively, included in Other (income) expense, net;

 

iv. fiscal 2007 and fiscal 2006 expenses included a (gain) loss on revaluation of warrants of $3.2 million and ($9.1) million, respectively, included in Other (income) expense, net;

 

v. fiscal 2007 and fiscal 2006 expenses included a loss on sale/impairment of fixed assets of $18.6 million and $8.0 million, respectively, included in Other (income) expense, net. The primary driver of the increase resulted from an impairment charge on assets (land and building) held for sale in Nanterre, France and Shreveport, LA. in the U.S.; and

 

vi. fiscal 2006 general and administrative expenses included $23.8 million for settlement of fines associated with the previously disclosed U.S. Attorney matter, which was recorded on a discounted basis as payments will occur over a five-year period. This fine, which was part of a 2001 plea agreement and subsequent sentencing in 2002, related to an investigation of former officers of the Company prior to the effective date.

 

Commencing in fiscal 2007, the Company determined it to be more appropriate to allocate certain costs to its segments, which were previously reflected in unallocated expenses. These costs include the Company’s global Information Technology organization, its Shared Services expenses including country related finance organizations in Europe and ROW, its country Human Resource organizations, and certain of its legal costs which could be directly attributed to a business segment. This change in reporting was made to better align the Company’s cost structure with the business segment responsible for driving the cost. Fiscal 2006 costs were not restated to conform to this change. Therefore, the results between the fiscal years may not be comparable. The impact of this change in allocation is included in the discussion of each segment’s expenses below. Certain other corporate costs, including interest expense, are not allocated or charged to the business segments.

 

 

Transportation Americas expenses were $132.6 million in fiscal 2007 versus $103.2 million in fiscal 2006. The increase in expenses was due to the allocation of $14.8 million of previously unallocated corporate costs in fiscal 2007 that were not allocated in fiscal 2006, together with $8.6 million of restructuring costs and a $7.2 million impairment of fixed assets, both of which related to the fiscal 2007 closure of the Shreveport, Louisiana battery plant.

 

Transportation Europe and ROW expenses were $113.8 million in fiscal 2007 versus $78.3 million in fiscal 2006. Foreign currency translation unfavorably impacted expenses in fiscal 2007 by approximately

$5.6 million. The increase in expenses was primarily due to the allocation of $22.7 million of previously unallocated corporate costs in fiscal 2007 that were not allocated in fiscal 2006 and a $9.7 million fixed asset impairment charge related to land and building held for sale in France.

 

Industrial Energy Americas expenses were $38.2 million in fiscal 2007 versus $44.3 million in fiscal 2006. The decrease in expenses was primarily due to restructuring costs of $10.1 million in fiscal 2006 associated with the closure of the Kankakee, Illinois facility and reduced selling, marketing, and advertising expenses in fiscal 2007 and was offset by the allocation of $4.7 million of previously unallocated corporate costs in fiscal 2007 that were not allocated in fiscal 2006.

 

Industrial Energy Europe and ROW expenses were $145.2 million in fiscal 2007 versus $114.2 million in fiscal 2006. Foreign currency translation unfavorably impacted expenses in fiscal 2007 by approximately $7.0 million. The increase in expenses was primarily due to the allocation of $20.4 million of previously unallocated corporate costs in fiscal 2007 that were not allocated in fiscal 2006, offset by restructuring costs that were reduced by $1.1 million in fiscal 2007.

 

Unallocated expenses, included shared service and corporate expenses, interest expense, currency remeasurement losses (gains), and gain on revaluation of warrants:

 

 

Unallocated expenses were $137.9 million in fiscal 2007 versus $216.9 million in fiscal 2006. This decrease was primarily due to the allocation of approximately $62.6 million of costs to the business segments for fiscal 2007 that were not allocated for fiscal 2006, the fiscal 2006 U.S. Attorney settlement for $23.8 million, and the favorable impact of the Company’s fiscal 2007 cost reduction programs, consisting primarily of headcount reductions.

 

Interest expense, net was $90.0 million in fiscal 2007 versus $69.5 million in fiscal 2006. The increase is principally due to higher outstanding debt and higher interest rates under the Company’s senior secured credit facility. Currency unfavorably impacted unallocated expenses in fiscal 2007 by approximately $2.7 million.

 

Reorganization Items

 

Reorganization items for fiscal 2007 and 2006 were $4.3 million and $6.2 million, respectively. These items primarily include professional fees, consisting primarily of legal services.

 

Income Taxes

 

The effective tax rate for fiscal 2007 and 2006 was impacted by the generation of income in tax-paying jurisdictions, principally in New Zealand, Canada and certain countries in Europe, 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., United Kingdom, Italy, Spain, and France. The effective tax rate for fiscal 2007 was impacted by the recognition of $46.5 million of valuation allowances on current year tax benefits generated primarily in the U.S., United Kingdom, France, Spain, and Italy. In addition, the effective tax rate for fiscal 2007 was impacted by a settlement between the Company’s Dutch subsidiary and Dutch tax authorities,

reducing by $3.8 million previously paid taxes to the Netherlands. The effective tax rate for fiscal 2006 was impacted by the recognition of $78.3 million of valuation allowances on tax benefits generated primarily in the U.S., United Kingdom, France, Spain, and Italy. The effective tax rate for fiscal 2006 was also impacted by the recognition of $5.9 million in valuation allowances on tax benefits generated from prior year losses and certain deductible temporary differences in Spain based on the Company’s assessment that it is more likely than not that the related tax benefits will now not be realized.

 

 

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 101.0% 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, 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.

 

Borrowings of the Company and other domestic borrowers are guaranteed by substantially all domestic subsidiaries of the Company, and borrowings of Exide C.V. are guaranteed by the Company, 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.

 

In March 2005, the Company issued $290.0 million in aggregate principal amount of 10.5% senior secured notes due 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 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 for 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 $5.0 million threshold) must be applied to offer to repurchase notes to the extent such proceeds exceed $20.0 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 September 18, 2013, with an aggregate principal amount of $60.0 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 March 31, 2008 and 2007 was 1.3% and 3.9%, respectively. Interest is payable quarterly. The notes are convertible into the Company’s common stock at a conversion rate of 61.6143 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 March 31, 2008, 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 March 31, 2008, the Company had outstanding letters of credit with a face value of $46.3 million and surety bonds with a face value of $5.6 million. The majority of the letters of credit and surety bonds have been issued as collateral or financial assurance with respect to certain liabilities that 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 March 31, 2008, pursuant to the terms of the agreement, was $4.1 million.

 

Risks and uncertainties could cause the Company’s performance to differ from management’s estimates. As discussed above 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 through cash provided by operations, borrowed funds and the proceeds of sales of accounts receivable. Additional cash has been generated in recent years through rights offerings, common stock issuance, and the sale of non-core businesses and assets.

 

Cash flows provided by operating activities were $1.1 million and $1.2 million in fiscal 2008 and fiscal 2007 respectively. The operating cash flows in fiscal 2008 were primarily attributable to the generation of $32.1 million of net income versus fiscal 2007’s net loss of $105.9 million, higher accounts payable resulting from improved supplier terms, offset by increased accounts receivable and inventories resulting from higher lead costs and sales growth.

 

The Company generated $7.1 million and $4.5 million in cash from the sale of non-core assets in 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 $57.4 million and $87.6 million in fiscal 2008 and fiscal 2007, respectively. Cash flows provided by financing activities in both fiscal 2008 and 2007 relate primarily to net proceeds from the Company’s rights offerings in those periods, partially offset in fiscal 2008 by financing costs associated with the Company’s senior secured credit facility.

 

Total debt at March 31, 2008 was $716.2 million, as compared to $684.5 million at March 31, 2007. See Note 7 to the Consolidated Financial Statements for the composition of such debt.

 

Going forward, the Company’s principal sources of liquidity will be cash on hand, cash from operations, and borrowings under the revolving loan facility.

 

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 Company anticipates that it will have ongoing liquidity needs to support its operational restructuring programs during fiscal 2009, including payment of remaining accrued restructuring costs of approximately

$5.1 million as of March 31, 2008. For further discussion see Note 12 to the Consolidated Financial Statements.

 

Capital expenditures were $56.9 million and $51.9 million in fiscal 2008 and fiscal 2007, respectively. The Company plans to increase capital expenditures to approximately $100.0 million in fiscal 2009.

 

Total pension and other post-retirement employer contributions were approximately $58.9 million and $66.8 millions in fiscal 2008 and fiscal 2007 respectively.

 

Employee Benefit Plans

 

Accounting and Significant Assumptions

 

The Company accounts for pension benefits using the accrual method set forth in SFAS 87. The accrual method of accounting for pensions involves the use of actuarial assumptions concerning future events that impact estimates of the amount and timing of benefit obligations and future benefit payments.

 

Significant assumptions used in calculating the Company’s pension benefit obligations and related expense are the discount rate, rate of compensation increase, and the expected long-term rate of return on plan assets. The Company establishes these underlying assumptions in consultation with its actuaries. Depending on the assumptions used, pension obligations and related expense could vary within a range of outcomes and have a material effect on the Company’s results, benefit obligations, and cash funding requirements.

 

The discount rates used by the Company for determining benefit obligations are generally based on high quality corporate bonds and reflect the cash flows of the respective plans. The assumed rates of compensation increases reflect estimates of the projected change in compensation levels based on future expectations, general price levels, productivity, and historical experience, among other factors. In evaluating the expected long-term rate of return on plan assets, the Company considers the allocation of assets and the expected return on various asset classes in the context of the long-term nature of pension obligations.

 

At March 31, 2008, the Company had increased the discount rates used to value its pension benefit obligations to reflect the increase in yields on high quality corporate bonds, and increased the rate of compensation increases to reflect current inflationary expectations. The aggregate effect of these changes decreased the present value of projected benefit obligations as of March 31, 2008 and had the effect of decreasing pension expense in fiscal 2009. Pension expense for the Company’s defined benefit pension and other post-retirement benefit plans was $12.3 million in fiscal 2008 compared to $18.7 million in fiscal 2007.

 

A one-percentage point change in the weighted average expected return on plan assets for defined benefit plans would change net periodic benefit cost by approximately $4.3 million in fiscal 2008. A one-percentage point increase in the weighted average discount rate would decrease net periodic benefit cost for defined benefit plans by approximately $1.9 million in fiscal 2008. A one-percentage point decrease in the weighted average discount rate would increase net periodic benefit cost for defined benefit plans by approximately $2.8 million in fiscal 2008.

 

As of March 31, 2008, actuarial gain for the Company’s defined benefit pension and other post-retirement benefit plans were $58.3 million, compared to gains of $12.8 million at March 31, 2007. The actuarial gains during the fiscal year ended March 31, 2008 principally reflect increase in discount rates in the UK, Germany, and the U.S. in 2008. SFAS 87 provides for delayed recognition of such actuarial gains/losses, whereby these gains/losses, to the extent they exceed 10% of the greater of the projected benefit obligation or the market related value of plan assets are amortized as a component of pension expense over a period that approximates the average remaining service period of active employees.

 

Plan Funding Requirements

 

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 under-funded. Based on current assumptions and regulatory requirements including the Pension Protection Act of 2006, which requires full funding of underfunded defined benefit plans in the U.S. over a specific period, 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 granting a temporary waiver of its minimum funding requirements for its U.S. plans for calendar years 2003 and 2004, amounting to approximately $50.0 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 March 31, 2008, such temporarily waived amounts aggregated approximately $18.9 million.

 

The Company expects its cumulative minimum future cash contributions to its U.S. pension plans will total approximately $60.0 million to $137.0 million from fiscal 2009 to fiscal 2013, including $21.4 million in fiscal 2009.

 

The Company expects that cumulative contributions to its non-US pension plans will total approximately $104.4 million from fiscal 2009 to fiscal 2013, including $20.4 million in fiscal 2009. In addition, the Company expects that cumulative contributions to its other post retirement benefit plans will total approximately $10.7 million from fiscal 2009 to fiscal 2013, including $2.2 million in fiscal 2009.

 

 

 

 

 

Trading Activities

 

The Company does not have any trading activity that involves non-exchange traded contracts accounted for at fair value.

 

Effects of Inflation

 

Inflation has not had a material impact on the Company’s operations during the past three years. The Company generally has been able to partially offset the effects of inflation with cost-reduction programs, operating efficiencies, and pricing actions.

 

Future Environmental Developments

 

As a result of its multinational manufacturing, distribution and recycling operations, the Company is subject to numerous federal, state, and local environmental, occupational safety, and health laws and regulations, and similar laws and regulations in other countries in which the Company operates. For a discussion of the legal proceedings relating to environmental matters, see Note 11 to the Consolidated Financial Statements.

 

 

The Company is exposed to market risks from changes in foreign currency exchange rates, certain commodity prices and interest rates. The Company does not enter into contracts without the intent to mitigate a particular risk, nor is it a party to any leveraged instruments. A discussion of the Company’s accounting policies for derivative instruments is provided in Notes 1 and 2 to the Consolidated Financial Statements.

 

Foreign Currency Exchange Rate Risk

 

The Company is exposed to foreign currency risk related to uncertainties to which future earnings or assets and liability values are exposed due to operating cash flows and various financial instruments that are denominated in foreign currencies. More specifically, the Company is exposed to foreign currency risk in most European countries, principally Germany, France, the United Kingdom, Spain, and Italy. It is also exposed, although 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. In some instances, gains in one currency may be offset by losses in another.

 

Commodity Price Risk

 

Lead is the primary material used in the manufacture of batteries, representing approximately 49% 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.

 

Interest Rate Risk

 

The Company is exposed to interest rate risk on its variable rate, long-term debt. In February 2008, the Company entered into an interest rate swap agreement to fix the variable component of interest on $200.0 million of its floating rate long-term obligations at a rate of 3.45% per annum through February 27, 2011. See Note 2 to the Consolidated Financial Statements.

The following table presents the expected outstanding debt balances and related interest rates, excluding capital lease obligations and lines of credit, under the terms of the Company’s borrowing arrangements in effect at March 31, 2008.

 

 

 

 

 

 

Management has completed its evaluation of the effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment and on those criteria, we determined that, as of March 31, 2008, the Company’s internal control over financial reporting was effective.

 

The effectiveness of the Company’s internal control over financial reporting as of March 31, 2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which is included herein.

 

Changes in Internal Control Over Financial Reporting

 

There have not been any changes in the Company’s internal control over financial reporting during the fiscal year ended March 31, 2008 that have materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.

 

PART III