EnerSys Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2020, including the fourth quarter ended March 31, 2020. The requested “2019 Q4” label does not match the filing’s reporting period. EnerSys manufactures and distributes industrial batteries, chargers, power equipment, enclosures, and related services through the Americas, EMEA, and Asia segments.
Financial performance and key metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Net sales | $3,087.9 million | $2,808.0 million | +10.0% |
| Gross profit / margin | $784.9 million / 25.4% | $693.0 million / 24.7% | Margin +70 bps |
| Operating earnings / margin | $190.2 million / 6.1% | $212.5 million / 7.6% | −10.5%; margin −150 bps |
| Net earnings attributable to EnerSys | $137.1 million | $160.2 million | −14.4% |
| Diluted EPS | $3.20 | $3.73 | −14.2% |
| Cash flow from operations | $253.4 million | $197.9 million | +$55.5 million |
| Capital expenditures | $101.4 million | $70.4 million | +$31.1 million |
| Cash and equivalents | $327.0 million | $299.2 million | +$27.8 million |
| Total debt, including finance leases | $1,151.8 million | $1,036.5 million | +$115.3 million |
Reserve power sales rose 22.8% to $1,739.7 million, while motive power sales declined 3.1% to $1,348.2 million. Segment sales were $2,082.3 million in the Americas, $787.3 million in EMEA, and $218.3 million in Asia. The company reported adjusted EBITDA of $401.6 million and total net debt of $905.6 million, or 2.3 times adjusted EBITDA, under its credit agreement.
Liquidity, debt, and capital allocation
- Available cash and undrawn credit lines totaled approximately $1.021 billion, consisting of $327 million of cash and approximately $694 million of available credit.
- EnerSys issued $300 million of 4.375% senior notes due 2027 and used the net proceeds of approximately $296.3 million to repay revolver borrowings.
- The Amended Credit Facility had $108.0 million outstanding on the revolver and $405.2 million outstanding under the term loan at March 31, 2020; it matures in 2022.
- The company was in compliance with its debt covenants. Its total net debt-to-adjusted-EBITDA ratio was 2.3x versus a maximum permitted ratio of 3.5x.
- EnerSys paid $29.7 million in dividends, or $0.70 per share, and repurchased $34.6 million of common stock. Management stated that it did not plan to use the remaining repurchase authorization in the current environment.
Material changes versus the prior period
- Fiscal 2020 sales growth was driven primarily by the Alpha and NorthStar acquisitions, contributing approximately 17% to sales growth. Organic volume declined 4%, foreign-currency translation reduced sales by 2%, and pricing reduced sales by 1%.
- NorthStar was acquired on September 30, 2019 for $77.8 million in cash plus assumed debt of $107.0 million. Its results were included from the acquisition date.
- Operating performance weakened despite higher sales. The Richmond, Kentucky plant fire, ERP execution issues, weaker EMEA and Asia demand, and higher manufacturing costs pressured profitability.
- Fiscal 2020 included $39.7 million of non-cash goodwill impairment in Asia and $4.5 million of trademark impairment in EMEA. Asia ended the year with no remaining goodwill.
- Gross margin improved because commodity costs, particularly lead, declined relative to pricing. Operating expenses increased 20%, partly due to acquisitions and $25 million of additional new-product development spending.
- Interest expense increased 41.5% to $43.7 million because of higher average debt used to fund acquisitions, partially offset by a lower average cash interest rate.
- The effective tax rate declined to 6.7% from 11.9%, primarily due to the mix of earnings by jurisdiction and Swiss tax reform. The company recorded a $22.5 million deferred tax asset related to Swiss tax reform.
Fourth-quarter developments and unusual items
Fourth-quarter sales were $781.8 million, but the company reported a net loss attributable to EnerSys stockholders of $1.5 million, or $0.04 per diluted share. Fourth-quarter results included the Asia goodwill impairment, EMEA trademark impairment, restructuring charges, COVID-19 effects, and the Richmond insurance recovery.
- COVID-19 disrupted two Chinese plants for several weeks, reduced demand in China, delayed certain 5G deployments, and weakened OEM and motive-power demand. Management expected greater effects on the Americas and EMEA economies in the first quarter of fiscal 2021.
- A September 2019 fire at the Richmond, Kentucky motive-power facility disrupted production and caused missed sales opportunities and higher manufacturing costs. The company estimated the insurance claim could exceed $50 million and had received $12 million in advances by March 31, 2020, plus a $5 million business-interruption receivable recorded as a reduction to cost of goods sold.
- Fiscal 2020 restructuring, exit, and other charges totaled $20.8 million. The company continued closures and efficiency programs in EMEA and the Americas and completed its Asia restructuring program.
- Management described liquidity as strong but identified risks from COVID-19, global economic weakness, raw-material volatility, foreign exchange, competition, debt service, acquisitions, environmental obligations, litigation, cybersecurity, and ERP implementation.
Investor verification priorities
- Verify the extent and duration of COVID-19-related demand, supply-chain, and production impacts after March 31, 2020.
- Assess whether the Richmond facility has returned to normal capacity and whether insurance recoveries ultimately cover the estimated property, inventory, cleanup, and business-interruption claim.
- Evaluate Asia’s recovery prospects following the $39.7 million goodwill impairment and the segment’s near-zero operating margin.
- Reconcile reported GAAP earnings with adjusted EBITDA and review the credit-agreement adjustments, including acquisition-related pro forma earnings and insurance reimbursements.
- Monitor leverage, the 2022 maturity of the Amended Credit Facility, the 2023 senior notes, variable-rate exposure, and covenant headroom.
- Review integration results and expected synergies from Alpha and NorthStar, including NorthStar’s reported net losses in the third and fourth fiscal quarters.
- Review sensitivity to lead prices, foreign exchange, environmental liabilities, warranty claims, restructuring costs, and uncertain tax positions.
- Note that management’s internal-control assessment and the auditor’s attestation excluded NorthStar, which represented 6.7% of total assets and 1.8% of fiscal 2020 sales.