EnerSys Fiscal 2014 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. Its two primary product lines are reserve power and motive power. Operations are reported through the Americas, EMEA and Asia segments, serving more than 10,000 customers in over 100 countries.
The filing covers the fiscal year ended March 31, 2014. The fourth quarter ended March 31, 2014; therefore, the requested “2013 Q4” reference appears to correspond to the fiscal 2014 fourth quarter rather than calendar-year 2013.
Financial performance and position
| Metric | Fiscal 2014 | Fiscal 2013 | Change |
|---|---|---|---|
| Net sales | $2,474.4 million | $2,277.6 million | +8.6% |
| Gross profit | $629.6 million | $569.4 million | +10.6% |
| Gross margin | 25.4% | 25.0% | +40 basis points |
| Operating earnings | $194.5 million | $249.9 million | -22.2% |
| Operating margin | 7.9% | 11.0% | -310 basis points |
| Net earnings attributable to EnerSys stockholders | $150.3 million | $166.5 million | -9.7% |
| Diluted EPS | $3.02 | $3.42 | -11.7% |
| Cash flow from operations | $193.6 million | $244.4 million | -20.8% |
- Americas revenue rose 12.5% to $1,267.6 million; EMEA revenue rose 4.3% to $966.2 million; Asia revenue rose 7.2% to $240.7 million.
- Reserve power sales increased 10.3% to $1,234.5 million, while motive power sales increased 7.0% to $1,239.9 million.
- Fiscal 2014 included $27.3 million of restructuring and exit charges, a $58.2 million legal proceedings charge and a $5.2 million goodwill impairment charge.
- Excluding the unusual legal charge and other highlighted items, segment operating performance improved: Americas operating earnings increased 4.2%, EMEA increased 32.6%, and Asia was approximately flat.
- Cash and cash equivalents were $240.1 million at March 31, 2014, compared with $249.3 million a year earlier. Working capital was $719.3 million.
- Capital expenditures were $62.0 million, and cash used in investing activities was $232.0 million, including $171.5 million for acquisitions.
- Total debt, including capital leases and excluding the Convertible Notes discount, was $322.3 million, compared with $178.5 million at March 31, 2013.
- Available committed and uncommitted credit lines were approximately $360 million, including $224 million under the $350 million revolving credit facility. Management stated that the Company was in compliance with its covenants.
- Adjusted EBITDA under the credit agreement was $278.7 million, and total net debt to adjusted EBITDA was 0.8 times, versus 0.3 times in fiscal 2013.
- EnerSys initiated quarterly dividends during fiscal 2014, paying $0.50 per share for the year, and repurchased $69.9 million of common stock.
Fourth-quarter results
| Metric | Fiscal 2014 fourth quarter | Fiscal 2013 fourth quarter |
|---|---|---|
| Net sales | $665.3 million | $572.1 million |
| Gross profit | $178.0 million | $139.0 million |
| Operating earnings | $12.0 million | $57.0 million |
| Net earnings attributable to stockholders | $12.8 million | $37.7 million |
| Diluted EPS | $0.26 | $0.77 |
Fourth-quarter operating earnings were substantially reduced by the $58.2 million Altergy arbitration charge and $12.9 million of restructuring charges. The fourth quarter nevertheless produced the highest gross profit and gross margin of fiscal 2014, although the filing text does not provide a separate fourth-quarter gross margin percentage.
Material changes versus the prior comparable period
- Revenue growth was driven by approximately 5% organic volume growth and 3% contribution from acquisitions, with modest pricing improvement offsetting higher commodity costs.
- Gross margin improved because of higher volume, improved pricing, manufacturing efficiencies and benefits from prior restructuring programs.
- Reported operating earnings and net income declined because of the Altergy arbitration charge, higher restructuring costs, the India goodwill impairment and higher other expense.
- Fiscal 2014 acquisitions included Purcell Systems, Quallion and UTS Holdings for an aggregate purchase price of approximately $170.7 million net of cash acquired. These acquisitions contributed $68.2 million of revenue and $2.1 million of stockholder-attributable earnings during the year.
- Primary working capital increased to $666.9 million from $552.7 million, and its percentage of annualized quarterly sales increased to 25.1% from 24.2%, consuming operating cash.
- Debt increased primarily to fund acquisitions, dividends and share repurchases. The Convertible Notes became convertible during the first quarter of fiscal 2015 because the stock-price conversion condition was met.
Outlook, commentary, risks and unusual items
Management described the Americas economy as strengthening, Asia as slowing but supported by telecommunications capital spending, and EMEA as stabilized with flat to moderate growth. The filing does not provide a clear formal revenue or earnings guidance range.
- Restructuring programs announced in fiscal 2014 were expected to generate approximately $20.0 million of annualized pretax savings when completed, with approximately $7.5 million of additional charges expected in fiscal 2015 and an estimated reduction of approximately 510 employees.
- Earlier EMEA restructuring programs were expected to require approximately $0.7 million of additional fiscal 2015 charges. Total additional restructuring charges related to fiscal 2013 and fiscal 2014 programs were estimated at approximately $8.2 million.
- The $58.2 million Altergy arbitration award was recorded in fiscal 2014 with an after-tax expense of approximately $35.7 million. EnerSys was evaluating a challenge, but stated that success was not assured. The award also carried potential prejudgment and post-judgment interest.
- The $172.5 million principal amount of Convertible Notes was convertible through June 30, 2014 at a conversion price of $40.26 per share. Management intended to settle principal in cash and the remaining conversion value in cash, shares or a combination.
- Key operating risks include lead and other raw-material volatility, pricing pressure, foreign-exchange exposure, global economic cyclicality, environmental and safety liabilities, product quality, litigation, acquisition integration, cybersecurity, labor relations and access to credit facilities.
- A 10% increase in lead costs was estimated to increase annual cost of goods sold by approximately $58 million. Approximately 60% of sales and expenses were transacted in foreign currencies.
- Environmental reserves for the former Sumter, South Carolina facility totaled $2.9 million at March 31, 2014. The Company also reported a broader exposure to environmental, health and safety claims involving lead and acid.
Important facts for investors to verify
- Resolution, payment timing and any further interest or adjustment related to the Altergy arbitration award.
- Whether Convertible Note holders exercised conversion rights and the resulting cash requirement, share issuance and dilution.
- Actual fiscal 2015 restructuring costs, employee reductions and realization of projected savings.
- Post-acquisition performance and integration of Purcell Systems, Quallion and UTS Holdings.
- Lead prices, pass-through effectiveness, hedging results and gross-margin sustainability.
- Working-capital trends, operating cash conversion and the effect of acquisitions and dividends on leverage.
- Availability and covenant compliance under the revolving credit facility, including the February 2015 liquidity test.
- Potential environmental, tax, warranty and other litigation exposures beyond recorded reserves.