EnerSys Form 10-K Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, accessories, enclosures and related services. It serves more than 10,000 customers in over 100 countries through the Americas, EMEA and Asia segments. Its principal product lines are reserve power and motive power.
The filing is the fiscal 2017 Form 10-K for the year ended March 31, 2017, filed May 30, 2017. The supplied request references “2016 Q4,” but the filing identifies the fourth quarter as the period ended March 31, 2017, and compares it primarily with fiscal 2016.
Financial performance and liquidity
| Metric | Fiscal 2017 | Fiscal 2016 | Change |
|---|---|---|---|
| Net sales | $2,367.1 million | $2,316.2 million | +2.2% |
| Gross profit | $650.6 million | $611.8 million | +6.4% |
| Gross margin | 27.5% | 26.4% | +110 bps |
| Operating earnings | $235.9 million | $210.0 million | +12.3% |
| Operating margin | 10.0% | 9.1% | +90 bps |
| Net earnings attributable to EnerSys stockholders | $160.2 million | $136.2 million | +17.7% |
| Diluted EPS | $3.64 | $2.99 | +21.7% |
| Cash flow from operations | $246.0 million | $307.6 million | -20.0% |
| Capital expenditures | $50.1 million | $55.9 million | -10.4% |
Fiscal 2017 sales growth reflected approximately 2% organic volume growth, 1% pricing, 1% acquisitions and a 2% adverse foreign-currency translation effect. Reserve power sales increased 3.0% to $1,142.3 million, while motive power sales increased 1.5% to $1,224.8 million.
- Americas: Sales increased 4.4% to $1,332.4 million; segment operating margin was 14.4%.
- EMEA: Sales decreased 3.1% to $763.0 million, primarily due to currency translation; segment operating margin was 10.0%.
- Asia: Sales increased 7.5% to $271.8 million; segment operating margin improved to 5.5% from 0.2%.
Cash and cash equivalents were $500.3 million at March 31, 2017, compared with $397.3 million at March 31, 2016. Available and undrawn credit lines were approximately $476 million, including approximately $333 million under the 2011 Credit Facility. Total debt, including capital leases, was $606.1 million, consisting principally of $300 million of 5.00% senior notes due 2023 and borrowings under the 2011 Credit Facility due 2018. Net debt under the credit agreement was $463.7 million, or 1.4 times adjusted EBITDA. The company reported compliance with its debt covenants.
Primary working capital increased to $624.8 million, or 24.9% of annualized quarterly sales, from $593.4 million, or 24.3%, primarily due to higher inventory. The company paid $30.4 million in dividends during fiscal 2017, equal to $0.70 per share, and did not repurchase treasury stock.
Fourth-quarter results
For the quarter ended March 31, 2017, net sales were $626.8 million, gross profit was $167.1 million and operating earnings were $51.9 million. Net earnings attributable to EnerSys stockholders were $33.8 million, and diluted EPS was $0.76. Fourth-quarter results included $14.0 million of goodwill and indefinite-lived intangible impairment charges and $6.7 million of legal proceedings charges.
Material changes versus the prior comparable period
- Revenue increased modestly despite adverse currency translation, with growth in the Americas and Asia partially offsetting lower EMEA sales.
- Gross margin improved 110 basis points due to product mix, EMEA restructuring benefits, higher organic volume and lower warranty costs.
- Operating expenses increased 4.8%, partly due to payroll, acquisitions, professional fees and a $9.4 million ERP-related charge, including a $6.3 million write-off of previously capitalized costs.
- Restructuring and exit charges declined to $7.2 million from $13.0 million; impairment charges declined to $14.0 million from $36.3 million.
- Legal proceedings charges increased substantially to $23.7 million from $3.2 million, primarily relating to European competition investigations.
- Operating cash flow declined by $61.5 million, largely because fiscal 2017 used $55.5 million of primary working capital compared with a $55.0 million source in fiscal 2016.
- Fiscal 2017 included the liquidation and deconsolidation of the South Africa joint venture and completion of restructuring actions that reduced approximately 240 employees and closed the Cleveland, Ohio manufacturing facility.
Guidance, outlook, risks and unusual items
Management did not provide specific fiscal 2018 revenue or earnings guidance in the supplied filing. Management expects positive operating cash flow, cash balances and borrowing capacity to fund normal capital expenditures, acquisitions and other investments for the foreseeable future, subject to market and operating conditions.
The company initiated the EnerSys Operating System, or EOS, in January 2017 to expand lean and operational-excellence initiatives. Management’s stated objective is to improve operating margins by at least 200 basis points by the end of fiscal 2021. Management also expects inventory turns to improve during fiscal 2018 through lean initiatives.
- European competition investigations remained unresolved. Reserves at March 31, 2017 included approximately $1.8 million for Belgium, $10.3 million for the Netherlands and $13.5 million for a portion of the German proceeding. The company stated that the potential loss for the remaining German matter could not yet be estimated.
- Raw materials, particularly lead, represent a major cost exposure. Management estimates that a 10% increase in lead costs would increase annual cost of goods sold by approximately $57 million.
- Foreign currency exposure is significant because approximately 50% of sales and expenses are transacted in foreign currencies. A 100-basis-point increase in variable interest rates would increase annual interest expense by approximately $3.1 million.
- Telecommunications weakness contributed to Purcell impairments of $14.0 million in fiscal 2017. A hypothetical 10% decline in fair value would have resulted in additional estimated impairment charges of $2.4 million for Purcell US and $3.1 million for Purcell EMEA.
- Other key risks include competitive pricing pressure, cyclical customer markets, environmental and hazardous-material liabilities, product quality and warranty claims, ERP implementation risk, acquisition integration, cybersecurity, labor relations, Brexit-related uncertainty and access to credit.
Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting as of March 31, 2017.
Important facts for investors to verify
- Confirm that the relevant comparison is fiscal 2017 and the quarter ended March 31, 2017, rather than calendar 2016 Q4.
- Review the composition, maturity profile and covenant terms of the $606.1 million total debt and the September 2018 maturity of the 2011 Credit Facility.
- Track the final outcomes and potential additional payments from the German and Dutch competition investigations.
- Assess whether EOS, restructuring actions and planned automation can deliver the targeted 200-basis-point operating-margin improvement by fiscal 2021.
- Monitor lead prices, pricing pass-through, foreign exchange movements and inventory levels, which materially affect margins and cash conversion.
- Evaluate the sustainability of reported earnings after excluding impairment, legal, restructuring, ERP and other highlighted items.
- Assess Purcell’s telecom demand and margins, including the risk of further goodwill or intangible impairment.
- Verify the company’s ability to maintain its $0.175 quarterly dividend while funding debt repayments, capital expenditures and acquisitions.