EnerSys Form 10-K Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, enclosures and related aftermarket services. It operates through the Americas, EMEA and Asia segments and serves more than 10,000 customers in over 100 countries. The filing covers the fiscal year ended March 31, 2016, including the fourth quarter ended March 31, 2016. The supplied request references “2015 Q4,” but the filing is the fiscal 2016 Form 10-K.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Net sales | $2,316.2 million | $2,505.5 million | (7.6%) |
| Gross profit / margin | $611.8 million / 26.4% | $640.9 million / 25.6% | Margin up 80 bps |
| Operating earnings / margin | $210.0 million / 9.1% | $263.4 million / 10.5% | (20.3%) |
| Net earnings attributable to EnerSys stockholders | $136.2 million | $181.2 million | (24.9%) |
| Diluted EPS | $2.99 | $3.77 | (20.7%) |
| Cash flow from operations | $307.6 million | $194.5 million | +$113.1 million |
| Capital expenditures | $55.9 million | $63.6 million | ($7.7 million) |
| Cash and equivalents | $397.3 million | $268.9 million | +$128.4 million |
| Total debt, including capital leases | $628.6 million | $513.2 million | +$115.4 million |
Sales declined primarily because of a 7% foreign-currency translation impact and a 2% organic-volume decline, partly offset by a 1% acquisition contribution. Gross margin improved because of lower commodity costs, favorable mix and EMEA restructuring benefits, despite lower volume and higher warranty costs.
- Americas sales decreased 3.5% to $1,276.0 million; adjusted operating margin increased to 14.3% from 12.3%.
- EMEA sales decreased 17.0% to $787.4 million; adjusted operating margin declined to 9.6% from 11.6%.
- Asia sales increased 7.9% to $252.8 million, but adjusted operating margin declined to 0.2% from 4.2%.
- Reserve power sales declined 11.5% to $1,109.2 million; motive power sales declined 3.7% to $1,207.0 million.
At March 31, 2016, EnerSys reported approximately $397 million of cash and approximately $472 million of available committed and uncommitted credit lines, including $328 million under its 2011 Credit Facility. The company stated that it was in compliance with its debt covenants. Adjusted EBITDA under the credit agreement was $320.8 million, and total net debt was $491.9 million, producing a 1.5x net-debt-to-adjusted-EBITDA ratio versus a 3.25x maximum permitted ratio.
Material changes versus the prior comparable period
- Fiscal 2016 revenue and earnings declined substantially, primarily due to currency headwinds, lower organic volume and weaker EMEA and Asia performance.
- Gross margin improved to 26.4% from 25.6%, while reported operating margin declined because of higher impairment, restructuring and legal charges.
- Fourth-quarter operating earnings were $25.9 million and net earnings attributable to stockholders were $9.3 million, compared with $43.0 million and $26.5 million, respectively, in the prior-year fourth quarter.
- The company recorded $36.3 million of non-cash impairment charges, including $31.4 million of goodwill, $3.4 million of trademarks and $1.4 million of fixed assets.
- EnerSys issued $300 million of 5.00% Senior Notes due 2023 and extinguished its convertible notes through cash payments and issuance of 1.9 million treasury shares.
- The company repurchased $178.2 million of common stock and paid $30.9 million of dividends. The quarterly dividend remained $0.175 per share.
- EnerSys acquired Australian shelter designer and manufacturer ICS Industries for approximately $34.5 million.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a clear quantitative fiscal 2017 revenue or earnings forecast in the filing. Management described North American economic activity as good, EMEA growth as limited and Asia as the fastest-growing region. Cost-reduction programs continued, including actions expected to reduce approximately 240 employees and close the Cleveland, Ohio manufacturing facility; additional fiscal 2017 restructuring charges were expected.
- European competition investigations remained open in Germany and the Netherlands. The Belgian proceeding was settled for approximately $2.0 million; a $2.0 million reserve remained for related investigations and legal charges.
- Lead, plastics, steel and copper represent significant input costs. Management estimated that a 10% increase in lead costs would raise annual cost of goods sold by approximately $54 million.
- Approximately 50% of sales and expenses are transacted in foreign currencies, creating material translation and operating exposure.
- A 100-basis-point increase in interest rates would increase annual interest expense by approximately $3.3 million on variable-rate debt.
- Environmental, health and safety risks are significant because the company processes lead and acid. The reserve for the former Sumter, South Carolina facility was approximately $1.1 million.
- Goodwill and intangible asset impairment remains a risk, particularly for reporting units with limited excess fair value, including ABSL UK.
- Other key risks include intense competition and pricing pressure, cyclical customer industries, product quality and warranty claims, ERP implementation, cybersecurity, acquisition integration, regulatory compliance and access to credit facilities.
Important facts for investors to verify
- Reconcile reported earnings with adjusted operating results after excluding impairment, restructuring and legal items.
- Assess whether EMEA and Asia volume, pricing and operating margins stabilize after restructuring.
- Monitor leverage, refinancing requirements and compliance with the 2018 credit facility maturity and covenants.
- Review the potential financial impact and timing of the German and Dutch competition investigations.
- Evaluate sensitivity to lead prices, foreign exchange rates, warranty costs and variable interest rates.
- Track progress and costs associated with the Cleveland closure, other restructuring programs, ERP implementation and the ICS and subsequent Enser acquisitions.