EnerSys Form 10-K Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, enclosures, accessories and related services. It serves more than 10,000 customers in over 100 countries through three geographic segments: Americas, EMEA and Asia. Its two principal product lines are reserve power and motive power.
The filing is the Form 10-K for the fiscal year ended March 31, 2015. The requested “2014 Q4” corresponds to the fourth quarter of fiscal 2014, ended March 31, 2014; this filing also provides comparative quarterly information for that period and fiscal 2015 fourth-quarter results.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $2,505.5 million | $2,474.4 million | +1.3% |
| Gross profit / margin | $640.9 million / 25.6% | $629.6 million / 25.4% | Margin +20 bps |
| Operating earnings / margin | $263.4 million / 10.5% | $194.5 million / 7.9% | +35.4% |
| Net earnings attributable to EnerSys stockholders | $181.2 million | $150.3 million | +20.5% |
| Diluted EPS | $3.77 | $3.02 | +$0.75 |
| Operating cash flow | $194.5 million | $193.6 million | +$0.9 million |
| Capital expenditures | $63.6 million | $62.0 million | +$1.6 million |
| Cash and equivalents | $268.9 million | $240.1 million | +$28.8 million |
| Total debt, including capital leases | $515.9 million | $322.3 million | +$193.6 million |
Fiscal 2015 sales reflected approximately 2% organic volume growth and 3% contribution from acquisitions, offset by a 4% adverse foreign-currency translation effect. Reserve power sales increased 1.5% to $1,252.6 million and motive power sales increased 1.1% to $1,252.9 million.
- Americas: sales increased 4.3% to $1,322.3 million; operating earnings declined 9.1% to $162.7 million, excluding highlighted items.
- EMEA: sales declined 1.8% to $948.8 million due primarily to currency translation; operating earnings increased 29.4% to $109.9 million, excluding highlighted items.
- Asia: sales declined 2.6% to $234.3 million; operating earnings declined 53.2% to $9.9 million, excluding highlighted items.
Fiscal 2015 fourth-quarter results were net sales of $629.9 million, gross profit of $158.5 million, operating earnings of $43.0 million, net earnings attributable to stockholders of $26.5 million and diluted EPS of $0.57. Fiscal 2014 fourth-quarter results were net sales of $665.3 million, operating earnings of $12.0 million, net earnings attributable to stockholders of $12.8 million and diluted EPS of $0.26.
Material changes versus the prior comparable period
- Reported operating earnings improved substantially because fiscal 2014 included a $58.2 million Altergy arbitration charge, while fiscal 2015 included a $16.2 million reversal of the related accrual, net of fees.
- Fiscal 2015 included $23.9 million of goodwill and indefinite-lived intangible impairment charges, compared with $5.2 million of goodwill impairment in fiscal 2014.
- Adjusted operating earnings excluding highlighted items were relatively stable at $282.5 million in fiscal 2015 versus $285.2 million in fiscal 2014; adjusted margin declined to 11.3% from 11.5%.
- Debt increased primarily to fund a $205.4 million share-repurchase program and related financing activity. Shares outstanding declined to 44.1 million at March 31, 2015 from 46.9 million a year earlier.
- EMEA benefited from restructuring, favorable mix and pricing, while Americas margins were pressured by lower pricing for a major customer, weaker-than-expected Purcell performance, stock compensation and ERP implementation costs.
- Asia results were adversely affected by a temporary plant shutdown in China, transition to a new Chinese facility, lower Chinese telecommunications sales and currency effects.
- There were no acquisitions in fiscal 2015. The Yangzhou, China manufacturing facility began operations during the second half of the year.
Liquidity, debt and cash flow
Management reported $268.9 million of cash and approximately $465 million of available committed and uncommitted credit lines at March 31, 2015, including $323 million available under the 2011 Credit Facility. The facility was committed through September 2018 subject to covenant compliance. The company stated that operating cash flow, cash balances and available borrowing capacity should fund normal capital expenditures, acquisitions and other investments for the foreseeable future.
The company’s fiscal 2015 leverage ratio was 1.0 times total net debt to adjusted EBITDA, compared with a maximum permitted ratio of 3.25 times. Consolidated interest coverage was 37.5 times versus a 4.5-times minimum requirement. A 100-basis-point increase in interest rates would have increased annual interest expense by approximately $3.4 million.
Subsequent to year-end, EnerSys issued $300 million of 5.00% senior secured notes due 2023. It called its $172.3 million principal amount of 3.375% convertible notes for redemption on June 8, 2015 and intended to use the new-note proceeds and credit-facility borrowings to settle or retire them. The conversion premium could be settled in cash, shares or a combination.
Outlook, commentary, risks and unusual items
- Management described North American activity as strengthening, EMEA growth as limited and Asia as the fastest-growing region.
- Approximately 35% of revenue was subject to lead-indexed pricing agreements. A 10% increase in lead costs was estimated to raise annual cost of goods sold by approximately $61 million, before mitigation.
- Approximately 60% of sales and expenses were transacted in foreign currencies, creating material exposure to the euro and other currencies. Fiscal 2015 sales were reduced by currency translation.
- Restructuring programs were expected to continue into fiscal 2016, including approximately $1.2 million of additional EMEA charges and $1.8 million related to the Jiangdu, China restructuring.
- Goodwill and intangible impairment reflected underperformance at Purcell and Quallion/ABSL US, including weaker telecommunications enclosure demand and cancellation of aerospace and defense programs.
- Environmental, health and safety exposure is significant because manufacturing uses lead and acid. The reserve for obligations at the former Sumter, South Carolina facility was $2.9 million.
- Principal risks include competitive pricing pressure, commodity volatility, foreign exchange movements, customer credit risk, environmental and product-liability claims, regulatory compliance, cybersecurity, labor disruptions, acquisition integration and potential future impairment charges.
- The company paid quarterly dividends of $0.175 per share during fiscal 2015 and announced the same rate for the first quarter of fiscal 2016, but stated that future dividends are not guaranteed.
Most important facts for investors to verify
- Whether the convertible notes were fully redeemed, repurchased or converted, and the resulting cash usage, share dilution and debt balance.
- Whether the new $300 million notes and any related refinancing materially changed interest expense, leverage and borrowing capacity.
- Whether Purcell and Quallion/ABSL US recovered sufficiently to avoid additional goodwill or intangible impairment.
- Whether EMEA restructuring savings were achieved and whether remaining fiscal 2016 restructuring costs stayed within estimates.
- The impact of lead prices, foreign exchange rates and the company’s ability to pass cost increases through to customers.
- Trends in Asia telecommunications demand, Chinese plant utilization and the planned Jiangdu facility closure.
- Future cash flow after working-capital investment, capital expenditures, dividends and share repurchases.
- The filing reports unqualified audit opinions and effective internal control over financial reporting as of March 31, 2015.