Enersys annual report, FY2012

EnerSys Fiscal 2012 Form 10-K Summary

Business context and reporting period

EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, accessories and related services. It operates through three geographic segments: Americas, Europe and Asia, and sells to more than 10,000 customers in over 100 countries. Approximately 60% of sales are generated outside the United States. Products are divided between reserve power and motive power applications.

The filing covers the fiscal year ended March 31, 2012. Fiscal fourth quarter 2012 ended March 31, 2012 and consisted of a 13-week reporting period. The filing was signed May 25, 2012.

Financial performance and key metrics

Metric	Fiscal 2012	Fiscal 2011	Change
Net sales	$2,283.4 million	$1,964.5 million	+16.2%
Gross profit	$512.7 million	$449.8 million	+14.0%
Gross margin	22.4%	22.9%	Down 50 bps
Operating earnings	$210.8 million	$183.8 million	+14.7%
Operating margin	9.3%	9.4%	Down 10 bps
Net earnings attributable to EnerSys stockholders	$144.0 million	$113.4 million	+27.0%
Diluted EPS	$2.93	$2.27	+29.1%
Operating cash flow	$204.2 million	$76.5 million	+167.1%
Capital expenditures	$48.9 million	$59.9 million	Down $11.0 million

Fiscal fourth-quarter net sales were $592.8 million, gross profit was $145.5 million, operating earnings were $65.9 million, net earnings attributable to stockholders were $45.4 million, and diluted EPS was $0.94.

• Americas sales increased 20.8% to $1,082.8 million, Europe sales increased 11.8% to $995.4 million, and Asia sales increased 15.6% to $205.2 million.
• Motive power sales increased 19.8% to $1,190.7 million; reserve power sales increased 12.6% to $1,092.7 million.
• Operating earnings were $138.9 million in the Americas, $63.9 million in Europe and $12.1 million in Asia.
• Adjusted EBITDA under the credit agreement was $269.8 million, compared with $229.2 million in fiscal 2011. Total net debt to adjusted EBITDA was 0.8x versus 1.0x.

Liquidity, debt and balance sheet

• Cash and cash equivalents were $160.5 million at March 31, 2012, compared with $108.9 million a year earlier.
• Total debt, including capital leases, was $256.1 million, compared with $253.4 million in fiscal 2011. Total assets were $1.919 billion and EnerSys stockholders’ equity was $1.032 billion.
• Available committed and uncommitted credit lines totaled approximately $377 million, including a $350 million senior secured revolving facility committed through March 2016, subject to covenants and conditions.
• The company had $172.5 million of 3.375% convertible notes outstanding, with a $40.60 conversion price and a June 2038 maturity. The company expects to settle principal upon conversion in cash, subject to the terms of the notes.
• The company reported compliance with all debt covenants. Fiscal 2012 consolidated interest coverage was 22.6x versus a required minimum of 4.5x.
• Fiscal 2012 investing cash outflows were $73.4 million, including $48.9 million of capital expenditures and $24.6 million for acquisitions. Financing cash outflows were $78.4 million, including $58.4 million of share repurchases.

Material changes versus the prior comparable period

• Sales growth reflected approximately 8% organic volume growth, 4% contribution from acquisitions, 2% pricing, and 2% favorable currency translation.
• Lead costs increased approximately $59 million year over year. Price increases offset approximately $49 million of the $72 million increase in commodity costs.
• Gross margin declined despite higher volume because of commodity inflation and unforeseen interruptions at two facilities.
• Operating expenses increased 14.9% in dollars but declined to 13.0% of sales from 13.2%, reflecting operating leverage.
• Interest expense declined 25.2% to $16.5 million, primarily because of lower average borrowings and reduced impact from interest-rate hedges.
• Restructuring charges declined to $5.0 million from $6.8 million. Previously announced European and American restructuring programs were substantially completed, although approximately $1.1 million of additional fiscal 2013 charges were expected for fiscal 2012 programs.
• EnerSys completed four fiscal 2012 acquisitions or controlling investments involving businesses in South America, South Africa, India and Germany. The combined net purchase price was $24.6 million, with purchase accounting still being finalized at year end.
• The company repurchased 2.65 million shares for $58.4 million during fiscal 2012, reducing shares outstanding to approximately 47.8 million at March 31, 2012.

Guidance, outlook, commentary and risks

Management described the outlook as generally favorable, citing positive consolidated revenue and order trends, recovery in the Americas and continued expansion in Asia. Europe was affected by the sovereign debt crisis and slower Western European growth. Management expected strong cash generation and available borrowing capacity to support capital expenditures, acquisitions and other growth investments, but the filing did not provide specific revenue or EPS guidance.

• Cost savings initiatives remain focused on manufacturing labor and overhead, raw materials, automation, facility utilization and selling, general and administrative expenses. Management estimated favorable annualized pretax earnings impacts from completed and ongoing programs.
• Fiscal 2012 included approximately $2.0 million of impact from a three-week strike at the Poland facility, approximately $1.3 million of start-up costs for the German business, approximately $3.8 million of start-up costs for the Chongqing, China facility, and approximately $0.9 million related to the temporary Jiangsu, China closure.
• The Jiangsu facility was closed by Chinese authorities for an environmental review in September 2011 and reopened conditionally in November 2011. Relocation to a more suitable location was contemplated.
• Key risks include lead and other raw-material price volatility, competitive pricing pressure, the ability to pass cost increases to customers, foreign-exchange fluctuations, cyclical end markets, operational disruptions, environmental and safety liabilities, product quality and warranty claims, acquisition integration, technology transitions including lithium-ion batteries, labor relations, information-system security and access to credit facilities.
• A 10% increase in lead costs was estimated to increase annual cost of goods sold by approximately $59 million. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $0.8 million.
• The company maintains lead, foreign-currency and interest-rate hedges, but hedge effectiveness, counterparty performance and market movements may affect future earnings and cash flow.
• An environmental reserve of approximately $3.0 million covered obligations at the former Sumter, South Carolina battery facility. Management stated that routine litigation was not expected to have a material effect, but environmental liabilities remain potentially uncertain.

Most important facts for investors to verify

• Whether volume growth and acquisition contributions continue after the strong fiscal 2012 increase.
• Whether pricing and cost-reduction actions can offset lead, energy, labor and freight inflation without further margin erosion.
• The integration, profitability and capital requirements of the South American, South African, Indian and German investments.
• The status and cost of relocating or remediating the Jiangsu facility and the adequacy of environmental reserves.
• Liquidity requirements associated with the $172.5 million convertible notes, including potential repurchase or conversion events beginning in 2015.
• Compliance with credit-facility covenants and continued access to the approximately $377 million of available credit lines.
• Exposure to European demand, foreign-currency movements and cyclical motive-power markets.
• The filing text reports effective disclosure controls and internal control over financial reporting, with unqualified audit opinions from Ernst & Young; investors should nevertheless review subsequent filings for changes in controls, contingencies and acquisition accounting.