EnerSys 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 regions and serves more than 10,000 customers in over 100 countries. The filing covers the fiscal year ended March 31, 2019, including the fourth quarter ended March 31, 2019. The filing is not a 2018 calendar-year fourth-quarter report.
On December 7, 2018, EnerSys acquired Alpha Technologies for total consideration of approximately $742.5 million, including $650.0 million in cash and $93.3 million of EnerSys stock. Alpha contributed $162.5 million of fiscal 2019 sales and a $1.3 million net loss for the period owned.
Financial performance and liquidity
| Metric | Fiscal 2019 | Fiscal 2018 | Change |
|---|---|---|---|
| Net sales | $2.808 billion | $2.582 billion | +8.8% |
| Gross profit / margin | $693.0 million / 24.7% | $658.4 million / 25.5% | Margin down 80 bps |
| Operating earnings / margin | $212.5 million / 7.6% | $270.8 million / 10.5% | Down 21.5% |
| Net earnings attributable to EnerSys stockholders | $160.2 million | $119.6 million | +34.0% |
| Diluted EPS | $3.73 | $2.77 | +34.7% |
| Cash flow from operations | $197.9 million | $211.0 million | Down $13.2 million |
| Capital expenditures | $70.4 million | $69.8 million | Approximately flat |
Fiscal 2019 sales growth reflected approximately 6% from Alpha, 3% organic volume growth and 2% pricing, partly offset by a 2% foreign-currency translation headwind. Reserve power sales increased 13.5%, while motive power sales increased 4.3%. Americas sales rose 18.3%, EMEA sales rose 1.3% and Asia sales declined 15.2% due primarily to lower China telecom demand and weaker Australian demand.
Higher lead, freight and tariff costs of approximately $60 million, along with Alpha-related costs and ERP-related product delays, pressured margins. The effective tax rate declined to 11.9% from 49.7%, largely because fiscal 2018 included a $97.5 million provisional Tax Cuts and Jobs Act transition-tax charge, while fiscal 2019 included a $13.5 million tax benefit from finalizing that accounting.
At March 31, 2019, cash and cash equivalents were $299.2 million, compared with $522.1 million a year earlier. Total debt, including capital leases, was $1.037 billion, compared with $598.0 million. Available and undrawn credit lines were approximately $547.0 million, including $459.0 million under the amended credit facility. Net debt under the credit agreement was $835.8 million, or 2.0 times adjusted EBITDA, versus 0.7 times in fiscal 2018. The company reported compliance with all debt covenants.
Fourth-quarter results and changes versus the prior comparable quarter
| Metric | Q4 fiscal 2019 | Q4 fiscal 2018 |
|---|---|---|
| Net sales | $796.6 million | $683.0 million |
| Gross profit | $202.3 million | $167.4 million |
| Operating earnings | $35.0 million | $67.7 million |
| Net earnings attributable to stockholders | $18.5 million | $54.0 million |
| Diluted EPS | $0.42 | $1.27 |
Fourth-quarter sales increased approximately 16.6%, helped by Alpha and seasonal strength, but profitability declined sharply. Q4 operating results included approximately $26.5 million of restructuring and exit charges, $7.2 million of legal-proceeding expense, and $6.1 million of Alpha inventory fair-value step-up charges. Q4 fiscal 2019 also included a $5.2 million income-tax expense, compared with $4.1 million in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management expected declining commodity prices to provide year-over-year benefits in the following fiscal year, with corresponding reductions in some customer selling prices.
- Approximately 30% of revenue was subject to lead-indexed pricing agreements. The company hedged approximately 7% of fiscal 2019 lead requirements and estimated that a 10% increase in lead costs would raise annual cost of goods sold by approximately $70 million.
- The company acknowledged that ERP implementation difficulties caused production and shipping delays, increased costs and disruption to customer fulfillment. Management stated that the EnerSys Operating System program had slowed and that strong fiscal 2020 and 2021 execution was required to meet targeted fiscal 2021 improvements.
- Restructuring and exit charges were $34.7 million in fiscal 2019, including the planned closure of the Targovishte, Bulgaria facility, the disposition of a German subsidiary, Tunisia joint-venture dissolution, and efficiency programs in the Americas, EMEA and Asia. Additional fiscal 2020 restructuring charges were expected.
- The company recorded a $7.3 million reserve for a German competition matter, paid in April 2019, and retained a $1.1 million environmental reserve for the former Sumter, South Carolina facility.
- Material risks include lead and other raw-material volatility, pricing pressure, foreign-exchange exposure, global economic cyclicality, debt and variable interest rates, Alpha integration, ERP execution, environmental and product-liability exposure, regulatory investigations, cybersecurity and competition from alternative battery technologies.
- The company continued to pay a quarterly dividend of $0.175 per share and announced the same amount for the first quarter of fiscal 2020. Future dividends and repurchases remain subject to board discretion, liquidity and debt covenants.
Most important facts for an investor to verify
- Whether Alpha integration produces the anticipated cost and revenue synergies while reducing leverage.
- Whether gross-margin pressure from lead, freight and tariffs reverses as commodity prices decline and pricing actions normalize.
- Progress resolving ERP-related delays and achieving the EnerSys Operating System savings targets.
- Trends in Asia, particularly China telecom demand, and the sustainability of Americas growth after the Alpha contribution.
- Debt repayment capacity, covenant headroom, interest-rate sensitivity and the concentration of cash in foreign subsidiaries.
- Remaining exposure from competition investigations, environmental matters, warranties, restructuring commitments and uncertain tax positions.
- The scope of Alpha’s internal-control exclusion: Alpha represented 28.3% of consolidated assets at March 31, 2019, while management’s internal-control assessment did not include Alpha.