EnerSys Fiscal 2011 Form 10-K Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, accessories and related services. Its primary product lines are reserve power and motive power. Operations are reported through the Americas, Europe and Asia segments, with sales to more than 10,000 customers in over 100 countries.
The filing covers the fiscal year ended March 31, 2011. The fourth quarter ended March 31, 2011; the comparable fiscal 2010 fourth quarter ended March 31, 2010. Approximately 60% of sales were generated outside the United States.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Net sales | $1,964.5 million | $1,579.4 million | Up 24.4% |
| Gross profit | $449.8 million | $360.9 million | Up 24.6% |
| Gross margin | 22.9% | 22.9% | Flat |
| Operating earnings | $183.8 million | $114.3 million | Up 60.8% |
| Operating margin | 9.4% | 7.2% | Up 220 basis points |
| Net earnings | $113.4 million | $62.3 million | Up 82.1% |
| Diluted EPS | $2.27 | $1.28 | Up 77.3% |
| Cash flow from operations | $76.5 million | $136.6 million | Down 44.0% |
| Capital expenditures | $59.9 million | $45.1 million | Up 32.9% |
| Cash and cash equivalents | $108.9 million | $201.0 million | Down $92.2 million |
| Total debt, including capital leases | $253.4 million | $350.5 million | Down $97.1 million |
Fiscal 2011 revenue growth consisted primarily of approximately 18% organic volume growth, 4% pricing increases and 4% acquisition contribution, partially offset by a 2% adverse foreign-currency effect. Motive power sales rose 31.0% to $994.0 million, while reserve power sales rose 18.3% to $970.4 million.
Operating cash flow was reduced by an $86.7 million increase in primary working capital, reflecting higher receivables and inventory associated with increased sales. Adjusted EBITDA under the credit agreement was $229.2 million, versus $159.0 million in fiscal 2010, and total net debt to adjusted EBITDA improved to 1.0x from 1.7x.
Fourth-quarter fiscal 2011 results
| Metric | Q4 Fiscal 2011 | Q4 Fiscal 2010 |
|---|---|---|
| Net sales | $548.1 million | $450.5 million |
| Gross profit | $124.6 million | $96.5 million |
| Operating earnings | $53.5 million | $31.0 million |
| Net earnings | $30.1 million | $17.8 million |
| Diluted EPS | $0.59 | $0.36 |
Fourth-quarter fiscal 2011 results included $1.6 million of restructuring charges and $8.2 million of refinancing-related charges. The filing text does not provide a clear standalone fourth-quarter gross margin or operating margin percentage.
Material changes versus the prior comparable period
- Sales and profitability recovered materially as global industrial production, capital spending and order rates improved after the fiscal 2010 downturn.
- Lead costs increased by approximately $112 million year over year. Pricing actions offset approximately $66 million of that increase, while gross margin remained at 22.9%.
- Operating expenses increased 10.0% in dollars but declined from 15.0% to 13.2% of sales, reflecting operating leverage.
- Restructuring charges declined to $6.8 million from $13.9 million. Fiscal 2010 also included a $2.9 million bargain purchase gain that did not recur.
- Europe revenue increased 20.0% and operating earnings increased substantially to $55.6 million from $17.6 million. Americas revenue increased 28.0% and operating earnings increased 42.9% to $124.5 million.
- Asia revenue increased 29.5%, but operating earnings declined 48.9% to $10.5 million because of higher manufacturing and freight costs, lower pricing and business-development expenses.
- EnerSys completed three acquisitions, including lithium-ion battery business ABSL Power Solutions Ltd., for aggregate cash consideration of $32.2 million. Purchase accounting remained subject to finalization at year-end.
Debt, liquidity and capital allocation
- In March 2011, EnerSys refinanced its prior credit facility with a $350 million senior secured revolving facility maturing in March 2016. It borrowed $100 million at closing and had approximately $356 million of committed and uncommitted credit availability at March 31, 2011.
- The company had $108.9 million of cash and was in compliance with its debt covenants. The filing states that management expects operating cash flow, cash balances and borrowing capacity to fund foreseeable liquidity needs, capital expenditures, acquisitions and other investments.
- The company had $172.5 million principal amount of 3.375% convertible notes, with a $40.60 conversion price and a 2015 put/conversion risk. The notes mature in 2038 unless earlier converted, redeemed or repurchased.
- Fiscal 2011 financing activities used $82.7 million of cash, primarily reflecting repayment of legacy debt, refinancing activity and new borrowings under the replacement facility and China term loan.
- EnerSys has never paid cash dividends and stated that it expects to retain earnings for growth. A share repurchase authorization was approved after year-end on May 26, 2011.
Outlook, management commentary, risks and unusual items
Management reported that the global economic recovery appeared to be continuing and believed the company was positioned to benefit from future market growth. It expected restructuring actions to produce approximately $29 million of favorable annualized pretax earnings impact when fully implemented by the end of fiscal 2012, with approximately $3 million of additional fiscal 2012 restructuring expense expected. The filing does not provide formal revenue or EPS guidance.
- Commodity exposure is significant: raw materials represented more than half of cost of goods sold, and a 10% increase in lead costs was estimated to increase annual cost of goods sold by approximately $50 million.
- Foreign currency risk is material because approximately 60% of sales and expenses are transacted in foreign currencies, particularly the euro, British pound and Polish zloty.
- A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $1.0 million on variable-rate debt.
- Environmental, health and safety exposure arises from the use of lead, acid and other hazardous materials. The reserve for environmental obligations at the former Sumter, South Carolina facility was $3.3 million at March 31, 2011.
- Other risks include competitive pricing pressure, cyclical customer demand, acquisition integration, product quality, labor relations, customer credit, regulatory compliance, technology substitution and the ability to maintain credit facilities and comply with covenants.
- Fiscal 2011 included $8.2 million of refinancing charges, primarily deferred financing fee write-offs and losses from discontinuing hedge accounting for interest-rate swaps, as well as $6.8 million of restructuring charges and a $3.1 million favorable settlement of foreign tax audits.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Most important facts for investors to verify
- Whether volume growth and pricing can continue to offset lead, energy, freight and other commodity-cost inflation.
- The sustainability of the 9.4% operating margin after restructuring benefits are fully realized and unusual tax and refinancing items are excluded.
- Working-capital requirements, inventory levels and the resulting conversion of earnings into operating cash flow.
- Compliance with the 2011 Credit Facility covenants and liquidity requirements, including the February 2015 test related to the convertible notes.
- The company’s ability to fund or refinance the $172.5 million convertible notes when holders may put or convert them beginning in 2015.
- Integration and purchase-accounting outcomes for ABSL and the other fiscal 2011 acquisitions.
- Exposure to environmental liabilities, warranty claims, foreign exchange movements, interest-rate changes and lead-price volatility.