EnerSys Form 10-K Summary
Reporting period: Fiscal year ended March 31, 2021. The request references “2020 Q4,” but the supplied filing is EnerSys’s fiscal 2021 annual Form 10-K, filed May 26, 2021. Fiscal 2021 fourth quarter ended March 31, 2021. EnerSys provides stored-energy solutions, industrial batteries, chargers, power equipment, enclosures, and related services through three reportable segments: Energy Systems, Motive Power, and Specialty.
Financial Performance and Liquidity
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Net sales | $2,977.9 million | $3,087.9 million | Down 3.6% |
| Gross profit | $739.2 million | $784.9 million | Down 5.8% |
| Gross margin | 24.8% | 25.4% | Down 60 basis points |
| Operating earnings | $216.4 million | $190.2 million | Up 13.8% |
| Operating margin | 7.2% | 6.1% | Up 110 basis points |
| Net earnings attributable to EnerSys | $143.4 million | $137.1 million | Up 4.6% |
| Diluted EPS | $3.32 | $3.20 | Up 3.8% |
| Cash flow from operations | $358.4 million | $253.4 million | Up $105.0 million |
| Capital expenditures | $70.0 million | $101.4 million | Down $31.4 million |
Free cash flow, calculated by management as operating cash flow less capital expenditures, was approximately $288.4 million. Cash and cash equivalents were $451.8 million at March 31, 2021, compared with $327.0 million a year earlier. Working capital was $1,014.3 million. Primary working capital declined to $797.9 million, or 24.5% of annualized quarterly revenue, from $833.5 million, or 26.7%.
Total debt, including finance leases, was $1,004.4 million, compared with $1,151.8 million at March 31, 2020. The company reported $615.0 million of total net debt under its credit agreement and a 1.7x net debt-to-adjusted EBITDA ratio, below the 3.5x maximum covenant. Available and undrawn committed credit lines were approximately $698 million. The company stated that it was in compliance with all debt covenants.
Segment Results
| Segment | Fiscal 2021 Sales | Year-over-Year Change | Operating Earnings | Operating Margin |
|---|---|---|---|---|
| Energy Systems | $1,380.2 million | Up 1.7% | $67.1 million | 4.9% |
| Motive Power | $1,163.7 million | Down 13.7% | $143.5 million | 12.3% |
| Specialty | $433.9 million | Up 13.5% | $46.1 million | 10.6% |
Energy Systems benefited from strong telecommunications and data-center demand, partly offset by weakness in broadband power systems. Motive Power was most affected by COVID-19-related restrictions and economic weakness, although results improved in the second half and benefited from operational recovery at the Richmond, Kentucky facility. Specialty benefited from transportation demand but experienced pandemic-related manufacturing inefficiencies and transition costs associated with new high-speed production lines.
Material Changes Versus the Prior Comparable Period
- Sales declined 3.6%, reflecting a 5% organic volume decline and a 1% pricing decline, partly offset by a 2% contribution from the NorthStar acquisition.
- Gross margin contracted because of pandemic-related manufacturing inefficiencies, lower volumes, and transition inefficiencies at NorthStar facilities. Lower commodity costs net of pricing and $7.5 million of Richmond fire business-interruption insurance proceeds partly offset the pressure.
- Operating earnings improved despite lower sales because operating expenses fell $47.4 million, or 8.9%, following headcount reductions, lower discretionary spending, restructuring, and automation efforts.
- Fiscal 2021 included $40.4 million of restructuring, exit, and other charges, compared with $20.8 million in fiscal 2020. Fiscal 2020 included $39.7 million of goodwill impairment and $4.5 million of indefinite-lived trademark impairment; no comparable impairment charges were recorded in fiscal 2021.
- The company completed the insurance settlement related to the Richmond plant fire, recording a $4.4 million net gain and receiving total property and business-interruption proceeds of approximately $46.1 million through March 31, 2021.
- Fiscal 2021 financing activities used $188.7 million of cash, primarily reflecting debt repayments, dividends, and other financing payments. No acquisitions or open-market share repurchases occurred during the year.
- The quarterly dividend remained $0.175 per share, or $0.70 for the fiscal year. A $0.175 per-share dividend for the first quarter of fiscal 2022 was approved on May 20, 2021.
Outlook, Commentary, Risks, and Unusual Items
Management did not provide a clear formal numerical revenue or earnings forecast in the supplied filing. Management expects year-over-year headwinds from higher commodity prices, with some related increases in selling prices. Approximately 30% of revenue was subject to agreements that adjust pricing based on a market-based lead index.
Management stated that the United States and Chinese economies were recovering more strongly than EMEA, which continued to face elevated COVID-19 impacts. Supply-chain disruptions involving plastic resins and electronic components, transportation challenges, and hiring difficulties remained present, although mitigation efforts and economic recovery limited the effects.
- EnerSys committed to substantially close its Hagen, Germany facility, which produces flooded motive-power batteries. Total charges are estimated at approximately $60 million, including roughly $40 million of cash charges and $20 million of non-cash charges. Approximately 200 employees are expected to be affected, with most charges expected by the end of calendar 2021.
- The company also committed to close its Vijayawada, India facility and recorded $1.5 million of exit charges in fiscal 2021.
- Key risks include COVID-19 and broader economic cyclicality, raw-material price and availability volatility, competitive pricing pressure, foreign-currency exposure, variable-rate debt, supply-chain disruptions, environmental and hazardous-material liabilities, product quality and warranty claims, cybersecurity, ERP implementation issues, litigation, tax matters, and the need to develop competitive lithium-ion and other technologies.
- A 100-basis-point increase in interest rates would increase annual interest expense by approximately $4.1 million on variable-rate debt. A 10% increase in lead costs was estimated to increase annual cost of goods sold by approximately $54 million.
- The company had approximately $58.96 million of product-warranty reserves at March 31, 2021 and a pension funded-status deficit of approximately $41.95 million.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Critical audit matters included valuation of indefinite-lived intangible assets and uncertain tax positions.
Important Facts for Investors to Verify
- Whether Motive Power demand and margins continue to recover after the pandemic-related fiscal 2021 decline.
- Whether higher lead, plastics, steel, copper, electronics, freight, and labor costs can be passed through to customers without reducing demand or margins.
- The timing and final cost of the Hagen closure, including the remaining estimated charges and cash requirements.
- Progress in commissioning NorthStar high-speed production lines and realizing acquisition-related synergies.
- Debt maturity and refinancing risk, particularly the Amended Credit Facility due in 2022 and the $300 million of senior notes due in 2023.
- The sustainability of operating cash flow, working-capital improvements, dividends, and future capital-allocation decisions.
- Sensitivity of goodwill and intangible-asset valuations to changes in projected growth, margins, discount rates, and market conditions.
- The potential financial effects of environmental, regulatory, tax, litigation, cybersecurity, ERP, and supply-chain contingencies.