EnerSys Fiscal 2018 Form 10-K Summary
Business context and reporting period
EnerSys is a global manufacturer and distributor of industrial batteries, chargers, power equipment, accessories, enclosures and related services. It operates through the Americas, EMEA and Asia segments and sells reserve-power and motive-power products in more than 100 countries. The filing covers the fiscal year ended March 31, 2018; the fourth quarter ended March 31, 2018. The filing is not a standalone “2017 Q4” report, but includes fourth-quarter information and full-year comparisons with fiscal 2017.
Financial performance and key metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Net sales | $2,581.9 million | $2,367.1 million | +9.1% |
| Gross profit | $656.9 million | $650.6 million | +1.0% |
| Gross margin | 25.4% | 27.5% | -210 basis points |
| Operating earnings | $269.4 million | $235.9 million | +14.2% |
| Operating margin | 10.4% | 10.0% | +40 basis points |
| Net earnings attributable to EnerSys stockholders | $119.6 million | $160.2 million | -25.4% |
| Diluted EPS | $2.77 | $3.64 | -23.9% |
| Cash flow from operations | $211.0 million | $246.0 million | -14.2% |
| Capital expenditures | $69.8 million | $50.1 million | +39.5% |
Fiscal 2018 sales growth reflected approximately 4% pricing, 3% organic volume growth and 2% favorable foreign-currency translation. Reserve-power sales increased 9.2% to $1,247.9 million, while motive-power sales increased 8.9% to $1,334.0 million.
- Americas sales rose 7.3% to $1,429.8 million; operating earnings declined 1.3% to $189.0 million, with margin falling to 13.2%.
- EMEA sales rose 11.3% to $849.5 million, aided by currency translation and pricing; operating earnings were broadly flat at $76.6 million, with margin declining to 9.0%.
- Asia sales rose 11.3% to $302.5 million; operating earnings declined 15.7% to $12.6 million, with margin declining to 4.2%.
Fourth-quarter fiscal 2018 net sales were $683.0 million, operating earnings were $67.3 million, net earnings attributable to EnerSys stockholders were $54.0 million and diluted EPS was $1.27. Fourth-quarter results included $1.1 million of restructuring and other exit charges and $3.4 million of inventory write-offs related to the Cleveland facility closure.
Cash, debt and liquidity
- Cash and cash equivalents were $522.1 million at March 31, 2018, compared with $500.3 million a year earlier.
- Total debt, including capital leases, was $598.0 million, compared with $606.1 million at March 31, 2017. The balance comprised $300.0 million of 5.00% Senior Notes due 2023, $285.5 million outstanding under the 2017 Credit Facility and $18.3 million of short-term debt.
- The 2017 Credit Facility consists of a $600 million revolving facility and a $150 million term loan, maturing September 30, 2022. Available and undrawn credit lines were approximately $613 million, including $463 million under the 2017 Credit Facility.
- Management stated that operating cash flow, cash balances and borrowing capacity should fund foreseeable capital expenditures, acquisitions and other investments. The company was in compliance with its debt covenants.
- Net debt, as defined under the credit agreement, was $234.7 million, or 0.7 times adjusted EBITDA, versus 1.4 times in fiscal 2017. Consolidated interest coverage was 14.5 times, compared with a 3.0 times minimum requirement.
- Primary working capital increased to $701.6 million, or 25.7% of annualized quarterly sales, from $624.8 million, or 24.9%, primarily because of higher inventory levels.
Material changes versus the prior comparable period
- Revenue increased materially, but gross margin contracted because commodity costs, particularly lead, increased by approximately $125 million. Pricing, volume and cost savings only partially offset the impact.
- Operating earnings improved despite commodity pressure, partly because fiscal 2017 included $12.2 million of goodwill impairment, $1.8 million of indefinite-lived intangible impairment and a $23.7 million legal-proceedings charge that did not recur in fiscal 2018.
- Net earnings and EPS declined primarily because fiscal 2018 included a provisional $83.4 million net tax expense from the 2017 Tax Cuts and Jobs Act, including a $97.5 million transition-tax charge partially offset by a $14.1 million deferred-tax benefit.
- Operating cash flow declined as working capital increased and accrued legal expenses were paid, while capital expenditures increased by $19.8 million.
- EnerSys repurchased $121.2 million of common stock during fiscal 2018; there were no common-stock repurchases in fiscal 2017. The company also paid $29.7 million of dividends, or $0.70 per share.
- European competition matters resulted in $26.0 million of fines paid during fiscal 2018: $14.8 million related to Germany and $11.2 million related to the Netherlands. The remaining related reserve was $2.3 million at year-end. EnerSys is appealing a proposed $12.3 million German reserve-power fine and has not accrued it.
Outlook, management commentary, risks and unusual items
Management characterized economic conditions as moderately positive in North America and EMEA, with Asia growing faster than the other regions. The company expects continued volatility in lead costs and foreign exchange rates and reported that pricing actions were implemented to recover higher commodity costs. Approximately 30% of revenue was subject to lead-indexed pricing agreements, and lead hedges covered approximately 14% of estimated fiscal requirements at year-end.
EnerSys’s EnerSys Operating System program engaged more than 2,700 employees and generated nearly $25 million of fiscal 2018 savings, including approximately $7 million from restructuring. Management remained on pace for a targeted 200-basis-point improvement through the end of fiscal 2021; this is an operational target rather than formal earnings guidance.
- Key risks include lead, plastics, steel and copper price volatility; inability to pass cost increases through to customers; foreign-exchange movements; competitive pricing pressure; cyclical end markets; and interest-rate exposure.
- The company faces environmental, health and safety obligations associated with lead and acid, including a $1.1 million reserve for the former Sumter, South Carolina facility.
- Restructuring programs remained in progress, including approximately $5.1 million of expected additional charges for EMEA actions and approximately $2.9 million of restructuring liabilities at year-end.
- The 2017 Tax Act amounts were provisional and could change as the company finalized calculations and received additional regulatory guidance.
- Other notable exposures include warranty obligations of $50.6 million, underfunded pension obligations of approximately $46.1 million and a multi-year global ERP implementation.
- A 10% increase in lead costs was estimated to increase annual cost of goods sold by approximately $69 million; a 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $3.0 million.
Investor verification priorities
- Verify the final accounting for the provisional $83.4 million Tax Act charge and the $97.5 million transition-tax liability.
- Monitor whether pricing and lead-indexed contracts offset continuing commodity inflation without further gross-margin erosion.
- Review the appeal and potential cash impact of the proposed $12.3 million German competition fine and any related customer claims.
- Confirm progress, remaining costs and savings from the EOS, restructuring and ERP programs.
- Assess working-capital normalization, inventory levels and the conversion of reported earnings into operating cash flow.
- Evaluate liquidity, variable-rate debt exposure and covenant headroom under the 2017 Credit Facility.
- Track reserve-power telecom demand, Asian profitability and the company’s ability to remain competitive against lithium-based and other storage technologies.