ENS

Business Context and Reporting Period

Company: EnerSys (NYSE: ENS)
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended March 31, 2010
Business Overview: EnerSys is the world's largest manufacturer, marketer, and distributor of industrial batteries, including reserve power products (telecom, UPS, aerospace) and motive power products (forklifts, mining, rail). The company operates in three geographic segments: Americas, Europe, and Asia. Approximately 60% of net sales are generated outside the United States.

Key Financial Metrics (Fiscal 2010)

Material Changes vs. Prior Period (Fiscal 2009)

• Revenue Decline: Net sales decreased 19.9% to $1.579 billion, driven by a 17% decline in organic volume and a 4% decrease in selling prices due to the global economic slowdown. Europe was the hardest hit segment, with sales down 24.8%.
• Profitability: Net earnings decreased 24.0% to $62.3 million. However, gross profit margin improved by 190 basis points to 22.9%, aided by lower commodity costs (specifically lead) and cost-saving initiatives.
• Segment Performance:
  • Europe: Operating earnings dropped 72.9% to $17.6 million due to severe volume declines and restructuring charges.
  • Americas: Operating earnings increased 10.1% to $87.2 million despite a 15.8% sales decline, thanks to improved plant utilization and cost savings.
  • Asia: Operating earnings increased 60.2% to $20.5 million.
• Unusual Items: Fiscal 2010 included a $2.9 million bargain purchase gain from the Oerlikon acquisition and $13.9 million in restructuring charges. Fiscal 2009 included an $11.3 million gain on the sale of facilities and a $3.4 million legal proceedings charge.

Guidance, Outlook, and Risks

Management Commentary: Management notes that global economic activity has improved since the first quarter of fiscal 2010, resulting in three consecutive quarters of sequential revenue increases. The company remains focused on cost reduction, optimizing global manufacturing capacity, and pursuing acquisitions.

Liquidity: The company maintains a strong financial position with $201 million in cash and short-term investments and approximately $247 million in available credit lines. The senior secured revolving credit facility is committed through June 2013.

Key Risks:

• Commodity Volatility: Lead costs account for over half of the cost of goods sold; price fluctuations significantly impact margins.
• Foreign Exchange: Approximately 60% of sales are in foreign currencies. A stronger U.S. dollar negatively impacts reported revenue and earnings.
• Competition: Intense pricing pressure, particularly from Chinese producers with lower labor costs.
• Environmental Liabilities: Significant exposure to environmental regulations regarding hazardous materials (lead and acid) and remediation costs at current and former sites.

Investor Verification Checklist

• Lead Price Hedging: Verify the extent of current lead hedging contracts and their impact on future cost of goods sold given recent price volatility.
• Restructuring Progress: Confirm the timeline and cash outflow for the remaining $2 million of restructuring charges expected in fiscal 2011 related to the Oerlikon integration and European operations.
• Convertible Notes: Review the terms of the $172.5 million senior unsecured 3.375% Convertible Notes due 2038, specifically the conversion price ($40.60) and potential dilution or cash settlement requirements.
• Environmental Reserves: Assess the adequacy of the $3.7 million reserve for the Sumter, SC facility and potential liabilities from other former sites.
• European Recovery: Monitor the recovery trajectory of the Europe segment, which saw the steepest decline in organic volume (over 20%) and remains a significant portion of total sales.