ENS

Business Context and Reporting Period

Company: EnerSys (NYSE: ENS)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended March 31, 2009
Business Overview: EnerSys is the world's largest manufacturer, marketer, and distributor of industrial batteries, categorized into Reserve Power (backup power for telecom, UPS, utilities) and Motive Power (electric forklifts, mining, rail). The company operates globally with manufacturing facilities in the Americas, Europe, and Asia.

Key Financial Metrics (Fiscal 2009)

Material Changes vs. Prior Period (Fiscal 2008)

• Revenue: Net sales decreased 2.7% to $1,972.9 million. The decline was driven by a 7% decrease in organic volume due to the global economic slowdown, partially offset by a 5% increase in selling prices. Currency fluctuations had a negative impact of approximately 1%.
• Profitability: Despite lower sales, Net Earnings increased 41.7% to $84.6 million. Operating Earnings rose 19.4% to $142.4 million. Gross margin improved by 220 basis points to 21.0%, aided by price increases and cost savings initiatives, which offset higher commodity costs (lead) of approximately $15 million.
• Segment Performance:
  • Reserve Power: Sales increased 5.7% to $933.8 million; Operating Earnings increased 97.3% to $86.4 million.
  • Motive Power: Sales decreased 9.1% to $1,039.1 million; Operating Earnings decreased 20.5% to $70.5 million, reflecting the impact of the economic downturn on industrial forklift demand.
• Geographic Performance: Europe sales declined 11.5% due to volume and currency headwinds. Americas sales grew 6.9%, and Asia sales grew 15.8%.
• One-Time Items: Results included a $11.3 million gain on the sale of facilities (primarily Manchester, England), a $3.4 million legal charge regarding a French hotel fire, and $22.4 million in restructuring charges.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Economic Environment: Management notes a deterioration in the global economic climate, resulting in reduced industrial production and capital spending. Sales in the third and fourth quarters of fiscal 2009 were progressively lower.
• Restructuring: The company announced plans to restructure European and American operations, eliminating approximately 420 employees. Total estimated charges are $32.0 million ($23.0 million cash, $9.0 million non-cash). Management expects these actions to yield a favorable pre-tax earnings impact of $32 million ($0.46 per share) on an annualized basis by the end of fiscal 2010.
• Liquidity: The company strengthened its balance sheet with $163 million in cash and $150 million in undrawn committed credit lines. Management believes it has sufficient resources to weather the downturn and pursue acquisitions.

Key Risks and Contingencies:

• Commodity Volatility: Lead costs account for over half of the cost of goods sold. While lead prices dropped significantly in late 2008, volatility remains a risk. Approximately 35% of revenue is tied to lead price indices.
• Foreign Currency: Approximately 60% of sales are generated outside the U.S. Fiscal 2009 saw a $11.6 million foreign currency transaction gain due to high volatility, but future fluctuations could adversely affect results.
• Debt: Total consolidated debt is $417.7 million. The company has a $350 million senior secured credit facility and $172.5 million in convertible notes. Compliance with financial covenants (leverage ratio) is critical.
• Legal/Environmental: Ongoing environmental remediation obligations exist at former facilities (e.g., Sumter, SC). A $3.4 million charge was recorded for a French court ruling regarding a 1999 fire, which the company has appealed.

Investor Verification Checklist

• Restructuring Execution: Verify the timeline and cost realization of the $32 million restructuring plan, specifically the closure of the Italian facility and employee reductions.
• Lead Price Exposure: Monitor the correlation between lead commodity prices and the company's ability to pass costs to customers, given the 35% index-linked revenue.
• Debt Covenants: Confirm continued compliance with the Total Net Debt/Adjusted EBITDA leverage ratio (currently 1.6x, well below the 3.5x limit) amidst potential future earnings volatility.
• Customer Credit Risk: Assess the quality of accounts receivable, as the company noted a deterioration in aging and quality due to customer financial difficulties in the current economic environment.
• Accounting Changes: Note the upcoming adoption of FSP APB 14-1 in fiscal 2010, which will retroactively increase interest expense by approximately $4 million for fiscal 2009 and impact future earnings.