| EnerSys ITEM 1A RISK FACTORS The following risks and uncertainties, as well as others described in this Annual Report on Form 10-K, could materially adversely affect our business, results of operations and financial conditions |
| Security holders are cautioned that these and other factors may affect future performance and cause actual results to differ from those which may, from time to time, be anticipated |
| ” We operate in an extremely competitive industry and are subject to continual pricing pressure |
| We compete with a number of major international manufacturers and distributors, as well as a large number of smaller, regional competitors |
| Due to excess capacity in some sectors of our industry, consolidation among industrial battery purchasers and the financial difficulties being experienced by several of our competitors, we have been subjected to continual and significant pricing pressures |
| These pricing pressures have prevented us from fully passing through to customers increased costs |
| We anticipate heightened competitive pricing pressure as Chinese and other foreign producers, able to employ labor at significantly lower costs than producers in the US and Western Europe, expand their export capacity and increase their marketing presence in our major US and European markets |
| Several of our competitors have strong technical, marketing, sales, manufacturing, distribution and other resources, as well as significant name recognition, established positions in the market and A-11 ______________________________________________________________________ [29]Table of Contents long-standing relationships with original equipment manufacturers and other customers |
| In addition, certain of our competitors own lead smelting facilities which, during periods of lead cost increases or price volatility, may provide a competitive pricing advantage and reduce their exposure to volatile raw material costs |
| Our ability to maintain and improve our operating margins has depended, and continues to depend, on our ability to control and reduce our costs |
| We cannot assure you that we will be able to continue to reduce our operating expenses, to raise or maintain our prices or increase our unit volume, in order to maintain or improve our operating results |
| Cyclical industry conditions of our customers have adversely affected and may continue to adversely affect our results of operations |
| Our operating results are affected by the general cyclical pattern of the industries in which our major customer groups operate and the overall economic conditions in which we and our customers operate |
| For example, the significant capital expenditures made by the telecommunications industry during the period from fiscal 1999 through fiscal 2001, as numerous companies expanded their systems and installed standby backup battery power systems, drove demand for our reserve power products |
| As the telecommunications industry dramatically reduced the building of new systems in response to massive overcapacity, the demand for our reserve power products for this important application declined significantly |
| Both our reserve power and motive power segments are heavily dependent on the end-user markets they serve, such as telecommunications, UPS and electric industrial forklift trucks |
| A weak capital expenditure environment in these markets has had, and can be expected to have, a material adverse effect on our results of operations |
| Our raw materials costs are volatile and expose us to significant movements in our product costs |
| We employ significant amounts of lead, plastics, steel, copper and other materials in our manufacturing processes |
| We estimate that raw material costs account for approximately half of our cost of goods sold |
| Lead is our most significant raw material |
| The costs of these raw materials, particularly lead, are volatile and beyond our control |
| Volatile raw material costs can significantly affect our operating results and make period-to-period comparisons extremely difficult |
| We cannot assure you that we will be able to hedge the costs of our raw material requirements at a reasonable level or pass on to our customers the increased costs of our raw materials |
| Our operations expose us to the risk of material environmental, health and safety liabilities, costs, and litigation |
| In the manufacture of our products throughout the world, we process, store, dispose of and otherwise use large amounts of hazardous materials, especially lead and acid |
| As a result, we are subject to extensive and changing environmental, health and safety laws and regulations governing, among other things: the generation, handling, storage, use, transportation and disposal of hazardous materials; remediation of polluted ground or water; emissions or discharges of hazardous materials into the ground, air or water; and the health and safety of our employees |
| Compliance with these laws and regulations results in ongoing costs |
| Failure to comply with these laws or regulations, or to obtain or comply with required environmental permits, could result in fines, criminal charges or other sanctions by regulators |
| From time to time we have had instances of alleged or actual noncompliance that have resulted in the imposition of fines, penalties and required corrective actions |
| Our ongoing compliance with environmental, health and safety laws, regulations and permits could require us to incur significant expenses, limit our ability to modify or expand our facilities or continue production and require us to install additional pollution control equipment and make other capital improvements |
| In addition, private parties, including current or former employees, could bring personal injury or other claims against us due to the presence of, or exposure to, hazardous substances used, stored or disposed of by us or contained in our products |
| Certain environmental laws assess liability on owners or operators of real property for the cost of investigation, removal or remediation of hazardous substances at their current or former properties or at properties at which they have disposed of hazardous substances |
| These laws may also assess costs to repair A-12 ______________________________________________________________________ [30]Table of Contents damage to natural resources |
| We may be responsible for remediating damage to our properties that was caused by former owners |
| Soil and groundwater contamination has occurred at some of our current and former properties and may occur or be discovered at other properties in the future |
| We are currently investigating and monitoring soil and groundwater contamination at certain of our properties, and we may be required to conduct these operations at other properties in the future |
| In addition, we have been and in the future may be liable to contribute to the cleanup of locations owned or operated by other persons to which we or our predecessor companies have sent wastes for disposal, pursuant to federal and other environmental laws |
| Under these laws, the owner or operator of contaminated properties and companies that generated, disposed of or arranged for the disposal of wastes sent to a contaminated disposal facility can be held jointly and severally liable for the investigation and cleanup of such properties, regardless of fault |
| We cannot assure you that we have been or at all times will be in compliance with environmental laws and regulations or that we will not be required to expend significant funds to comply with, or discharge liabilities arising under, environmental laws, regulations and permits, or that we will not be exposed to material environmental, health or safety litigation |
| Recent legislation in the European Union could adversely affect our results of operations |
| The European Union has directed that new electrical and electronic equipment not contain certain hazardous substances, including lead and cadmium, beginning July 1, 2006 |
| Because battery accessories and chargers are subject to this directive (commonly known as RoHS), our compliance with the directive will directly impact our manufacturing of these products and could cause certain of our existing inventory to be obsolete |
| In addition, certain other jurisdictions outside the European Union have implemented, or plan to implement, similar restrictions with various compliance dates |
| We cannot assure you that we will meet all restrictions by the required dates |
| Inventory obsolescence and our failure to comply could each have an adverse effect on our financial results |
| We are exposed to exchange rate risks, and our net income and financial condition may suffer due to currency translations |
| We invoice foreign sales and service transactions in local currencies and translate net sales using actual exchange rates during the period |
| We translate our non-US assets and liabilities into US dollars using current rates as of the balance sheet date |
| Because a significant portion of our revenues and expenses are denominated in foreign currencies, changes in exchange rates between the US dollar and foreign currencies, primarily the euro and British pound, may adversely affect our revenue, cost of revenue and operating margins |
| For example, foreign currency depreciation against the US dollar will reduce the value of our foreign revenues and operating earnings as well as reduce our net investment in foreign subsidiaries |
| Most of the risk of fluctuating foreign currencies is in our European operations, which comprised over half of our net sales during the last two fiscal years |
| The euro is the dominant currency in our European operations |
| The translation impact from currency fluctuations on net sales and operating earnings in the Americas and Asia is minimal, as a substantial majority of these net sales and operating earnings are in dollars or are closely correlated to the dollar |
| Foreign currency depreciation will make it more expensive for our non-US subsidiaries to purchase certain of our raw material commodities that are priced globally in US dollars, while the related revenue will decrease when translated to US dollars |
| Significant movements in foreign exchange rates can have a material impact on our results of operations and financial condition |
| We periodically engage in hedging of our foreign currency exposure, but cannot assure you that we can successfully hedge all of our foreign currency exposure or do so at a reasonable cost |
| A-13 ______________________________________________________________________ [31]Table of Contents Our international operations may be adversely affected by actions taken by foreign governments or other forces or events over which we may have no control |
| We currently have significant manufacturing and distribution facilities outside of the US, including in the United Kingdom, France, Germany, China, Mexico, Poland, Czech Republic, Spain, Italy and Canada |
| We may face political instability and economic uncertainty, cultural and religious differences and difficult labor relations in our foreign operations |
| We also may face barriers in the form of long-standing relationships between potential customers and their existing suppliers, national policies favoring domestic manufacturers and protective regulations including exchange controls, restrictions on foreign investment or the repatriation of profits or invested capital, changes in export or import restrictions and changes in the tax system or rate of taxation in countries where we do business |
| We cannot assure you that we will be able to successfully develop and expand our international operations and sales or that we will be able to overcome the significant obstacles and risks of our international operations |
| Our failure to introduce new products and product enhancements and broad market acceptance of new technologies introduced by our competitors could adversely affect our business |
| Many new energy storage technologies have been introduced over the past several years |
| In addition, recent advances in fuel cell and flywheel technology have been introduced for use in selected applications that compete with the end uses for industrial batteries |
| For certain important and growing markets, such as aerospace and defense, lithium-based battery technologies have large and growing market share |
| Our ability to achieve significant and sustained penetration of key developing markets, including aerospace and defense, will depend upon our success in developing or acquiring these and other technologies, either independently, through joint ventures or through acquisitions |
| If we fail to develop or acquire, and manufacture and sell, products that satisfy our customers’ demands, or we fail to respond effectively to new product announcements by our competitors by quickly introducing competitive products, then market acceptance of our products could be reduced and our business could be adversely affected |
| We cannot assure you that our lead-acid products will remain competitive with products based on new technologies |
| We may not be able adequately to protect our proprietary intellectual property and technology |
| We rely on a combination of copyright, trademark, patent and trade secret laws, non-disclosure agreements and other confidentiality procedures and contractual provisions to establish, protect and maintain our proprietary intellectual property and technology and other confidential information |
| Certain of these technologies, especially in thin-plate pure-lead—TPPL—technology, are important to our business and are not protected by patents |
| Despite our efforts to protect our proprietary intellectual property and technology and other confidential information, unauthorized parties may attempt to copy or otherwise obtain and use our intellectual property and proprietary technologies |
| On April 15, 2002, Exide Technologies filed for protection under Chapter 11 of the US Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware |
| During the course of its Chapter 11 proceedings, Exide Technologies sought to reject certain agreements related to the 1991 sale of Exide Technologies’ industrial battery business to Yuasa, including the trademark licensing agreement, which grants us the right, among other things, to use the “Exide” trade name |
| We opposed Exide Technologies’ attempt to reject these agreements |
| On April 3, 2006, the Court found in favor of Exide Technologies and ruled that after a transition period of up to two (2) years, the specifics of which are to be determined at a future hearing, the trademark will revert back to Exide Technologies |
| We respectfully disagree with the Court’s decision and have appealed this ruling |
| As with any litigation, we cannot assure you that we will be successful and will retain the right to this trademark |
| Further, we cannot give you any assurances as to the transition period that will ultimately be imposed on us by the Court if our appeal is unsuccessful |
| A-14 ______________________________________________________________________ [32]Table of Contents Relocation of our customers’ operations could adversely affect our business |
| The trend by a number of our North American and Western European customers to move manufacturing operations and expand their businesses into Asia and other low labor-cost markets may have an adverse impact on our business |
| As our customers in traditional manufacturing-based industries seek to move their manufacturing operations to lower-cost territories, there is a risk that these customers will source their energy storage products from competitors located in those territories and will cease or reduce the purchase of products from our manufacturing plants |
| We cannot assure you that we will be able to compete effectively with manufacturing operations of energy storage products in those territories, whether by establishing or expanding our manufacturing operations in those lower-cost territories or acquiring existing manufacturers |
| We may fail to implement our cost reduction initiatives successfully and improve our profitability |
| We must continue to implement cost reduction initiatives to achieve additional cost savings in future periods |
| We cannot assure you that we will be able to achieve all of the cost savings that we expect to realize from current or future initiatives |
| In particular, we may be unable to implement one or more of our initiatives successfully or we may experience unexpected cost increases that offset the savings that we achieve |
| Given the continued competitive pricing pressures experienced in our industry, our failure to realize cost savings would adversely affect our results of operations |
| Quality problems with our products could harm our reputation and erode our competitive position |
| The success of our business will depend upon the quality of our products and our relationships with customers |
| In the event that our products fail to meet our customers’ standards, our reputation could be harmed, which would adversely affect our marketing and sales efforts |
| We cannot assure you that our customers will not experience quality problems with our products |
| We offer our products under a variety of brand names, the protection of which is important to our reputation for quality in the consumer marketplace |
| We rely upon a combination of trademark, licensing and contractual covenants to establish and protect the brand names of our products |
| We have registered many of our trademarks in the US Patent and Trademark Office and in other countries |
| In many market segments, our reputation is closely related to our brand names |
| Monitoring unauthorized use of our brand names is difficult, and we cannot be certain that the steps we have taken will prevent their unauthorized use, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the US We cannot assure you that our brand names will not be misappropriated or utilized without our consent or that such actions will not have a material adverse effect on our reputation and on our results of operations |
| We may fail to implement our plans to make acquisitions |
| As part of our business strategy, we have grown, and plan to continue growing, by acquiring other product lines, technologies or facilities that complement or expand our existing business |
| We may be unable to implement this part of our business strategy and may not be able to make acquisitions to continue our growth |
| There is significant competition for acquisition targets in the industrial battery industry |
| We may not be able to identify suitable acquisition candidates or negotiate attractive terms |
| In addition, we may have difficulty obtaining the financing necessary to complete transactions we pursue |
| In that regard, our credit facilities restrict the amount of additional indebtedness that we may incur to finance acquisitions and place other restrictions on our ability to make acquisitions |
| Our failure to execute our acquisition strategy could have a material adverse effect on our business |
| The amounts we may pay for acquisitions are subject to limits on individual transactions and aggregate limits over the term of the credit facilities—until 2011 under the senior secured credit facility |
| Our individual transaction limits are dlra25dtta0 million cash and dlra75dtta0 million total (cash and company stock), and our aggregate limits are dlra100dtta0 million cash and dlra200dtta0 million total |
| Our ability to incur additional indebtedness A-15 ______________________________________________________________________ [33]Table of Contents also is restricted such that any significant acquisitions that could not be financed through cash generated from operations would need to be financed through issuance of additional company common stock |
| Exceeding any of these limitations would require the consent of our lenders |
| We cannot assure you that our acquisition strategy will be successful |
| Any acquisitions that we complete may dilute your ownership interest in EnerSys, may have adverse effects on our financial condition and results of operations and may cause unanticipated liabilities |
| Future acquisitions may involve the issuance of our equity securities as payment, in part or in full, for the businesses or assets acquired |
| Any future issuances of equity securities would dilute your ownership interests |
| In addition, future acquisitions might not increase, and may even decrease, our earnings or earnings per share and the benefits derived by us from an acquisition might not outweigh or might not exceed the dilutive effect of the acquisition |
| We also may incur additional debt or suffer adverse tax and accounting consequences in connection with any future acquisitions |
| The failure of critical computer systems could seriously affect our sales and operations |
| We operate a number of critical computer systems throughout our business that can fail for a variety of reasons |
| If such a failure were to occur, then we may not be able to sufficiently recover from the failure in time to avoid the loss of data or adversely impact certain of our operations that are dependent on such system |
| This could result in lost sales and the inefficient operation of our facilities for the duration of such a failure |
| Our significant indebtedness could adversely affect our financial condition |
| As of March 31, 2006, we had dlra402dtta5 million of total consolidated debt |
| This level of debt could: • increase our vulnerability to adverse general economic and industry conditions, including interest rate fluctuations, because a significant portion of our borrowings bear, and will continue to bear, interest at floating rates; • require us to dedicate a substantial portion of our cash flow from operations to debt service payments, which would reduce the availability of our cash to fund working capital, capital expenditures or other general corporate purposes, including acquisitions; • limit our flexibility in planning for, or reacting to, changes in our business and industry; • restrict our ability to introduce new products or new technologies or exploit business opportunities; • place us at a disadvantage compared with competitors that have proportionately less debt; • limit our ability to borrow additional funds in the future, if we need them, due to financial and restrictive covenants in our debt agreements; and • have a material adverse effect on us if we fail to comply with the financial and restrictive covenants in our debt agreements |
| This list of factors that may affect future performance is illustrative, but by no means exhaustive |
| Accordingly, all forward-looking statements should be evaluated with the understanding of their inherent uncertainty |