The following discussion and analysis of our results of operations and financial condition for the fiscal years ended
March 31, 2022and 2021, should be read in conjunction with our audited Consolidated Financial Statements and the notes to those statements included in Item 8. Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. Our discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, opinions, expectations, anticipations and intentions and beliefs. Actual results and the timing of events could differ materially from those anticipated in those forward-looking statements as a result of a number of factors. See "Cautionary Note Regarding Forward-Looking Statements," "Business" and "Risk Factors," sections elsewhere in this Annual Report on Form 10-K. In the following discussion and analysis of results of operations and financial condition, certain financial measures may be considered "non-GAAP financial measures" under the SECrules. These rules require supplemental explanation and reconciliation, which is provided in this Annual Report on Form 10-K. EnerSys'management uses the non-GAAP measures, EBITDA and adjusted EBITDA, in its computation of compliance with loan covenants and adjusted EBITDA in evaluating its financial performance. These measures, as used by EnerSys, adjust net earnings determined in accordance with GAAP for interest, taxes, depreciation and amortization, and certain charges or credits as permitted by our credit agreements, that were recorded during the periods presented. EnerSys'management uses the non-GAAP measures, "free cash flows", "primary working capital" and "primary working capital percentage" along with capital expenditures, in its evaluation of business segment cash flow and financial position performance. Primary working capital is trade accounts receivable, plus inventories, minus trade accounts payable and the resulting net amount is divided by the trailing three-month net sales (annualized) to derive a primary working capital percentage. Free cash flows are cash flows from operating activities less capital expenditures. These non-GAAP disclosures have limitations as analytical tools, should not be viewed as a substitute for cash flow or operating earnings determined in accordance with GAAP, and should not be considered in isolation or as a substitute for analysis of the Company's results as reported under GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. This supplemental presentation should not be construed as an inference that the Company's future results will be unaffected by similar adjustments to operating earnings determined in accordance with GAAP.
EnerSys(the "Company," "we," or "us") is a world leader in stored energy solutions for industrial applications. We also manufacture and distribute energy systems solutions and motive power batteries, specialty batteries, battery chargers, power equipment, battery accessories and outdoor equipment enclosure solutions to customers worldwide. Energy Systems which combine enclosures, power conversion, power distribution and energy storage are used in the telecommunication and broadband, utility industries, uninterruptible power supplies, and numerous applications requiring stored energy solutions. Motive Powerbatteries and chargers are utilized in electric forklift trucks and other industrial electric powered vehicles. Specialty batteries are used in aerospace and defense applications, large over the road trucks, premium automotive and medical. We also provide aftermarket and customer support services to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and our internal sales force around the world. During the first quarter of fiscal 2021, the Company's chief operating decision maker, or CODM (the Company's Chief Executive Officer), changed the manner in which he reviews financial information for purposes of assessing business performance and allocating resources, by focusing on the lines of business on a global basis, rather than on geographic basis. As a result of this change, the Company re-evaluated the identification of its operating segments and reportable segments. The operating segments were identified as Energy Systems, Motive Powerand Specialty. The Company's operating segments also represent its reportable segments under ASC 280, Segment Reporting. Therefore, the Company changed its segment presentation from three reportable segments based on geographic basis to three reportable segments based on line of business. All prior comparative periods presented have been recast to reflect these changes.
The three reportable segments of the Company, based on business segments, are as follows:
•Energy Systems - uninterruptible power systems, or "UPS" applications for computer and computer-controlled systems, as well as telecommunications systems, switchgear and electrical control systems used in industrial facilities and electric utilities, large-scale energy storage and energy pipelines. Energy Systems also includes highly integrated 29 -------------------------------------------------------------------------------- Table of Contents power solutions and services to broadband, telecom, renewable and industrial customers, as well as thermally managed cabinets and enclosures for electronic equipment and batteries. •Motive Power - power for electric industrial forklifts used in manufacturing, warehousing and other material handling applications, as well as mining equipment, diesel locomotive starting and other rail equipment; and •Specialty - premium starting, lighting and ignition applications in transportation, energy solutions for satellites, military aircraft, submarines, ships and other tactical vehicles, as well as medical and security systems. We evaluate business segment performance based primarily upon operating earnings exclusive of highlighted items. Highlighted items are those that the Company deems are not indicative of ongoing operating results, including those charges that the Company incurs as a result of restructuring activities, impairment of goodwill and indefinite-lived intangibles and other assets, acquisition activities and those charges and credits that are not directly related to operating unit performance, such as significant legal proceedings, ERP system implementation, amortization of recently acquired intangible assets and tax valuation allowance changes, including those related to the adoption of the Tax Cuts and Jobs Act. Because these charges are not incurred as a result of ongoing operations, or are incurred as a result of a potential or previous acquisition, they are not as helpful a measure of the performance of our underlying business, particularly in light of their unpredictable nature and are difficult to forecast. All corporate and centrally incurred costs are allocated to the business segments based principally on net sales. We evaluate business segment cash flow and financial position performance based primarily upon capital expenditures and primary working capital levels. Although we monitor the three elements of primary working capital (receivables, inventory and payables), our primary focus is on the total amount due to the significant impact it has on our cash flow. Our management structure, financial reporting systems, and associated internal controls and procedures, are all consistent with our three lines of business. We report on a
March 31fiscal year-end. Our financial results are largely driven by the following factors: •global economic conditions and general cyclical patterns of the industries in which our customers operate; •changes in our selling prices and, in periods when our product costs increase, our ability to raise our selling prices to pass such cost increases through to our customers; •the extent to which we are able to efficiently utilize our global manufacturing facilities and optimize our capacity; •the extent to which we can control our fixed and variable costs, including those for our raw materials, manufacturing, distribution and operating activities; •changes in our level of debt and changes in the variable interest rates under our credit facilities; and •the size and number of acquisitions and our ability to achieve their intended benefits. Current Market Conditions Economic Climate The economic climate in North Americaand Chinaexperienced strong growth during calendar 2021. In calendar 2022, both regional economies have slowed. The U.Seconomy slowed due to rising interest rates and inflation worries, while China'seconomy has been slowed by COVID-19 lockdowns. EMEA's economy grew moderately faster than normal in calendar 2021. In calendar 2022 the economic impact from the war in Ukrainewill likely cause the EMEA economies to achieve only slow growth. Inflation has increased in all regions during calendar 2021 and continues in calendar 2022. EnerSysis experiencing supply chain disruptions and cost spikes in certain materials such as plastic resins, acid, pasting paper and electronic components along with transportation and related logistics challenges and broad-based cost increases. In addition, some locations are experiencing difficulty meeting hiring goals. Generally, our mitigation efforts and the recent economic recovery, have tempered the impact of the pandemic-related challenges. The overall market demand for our products and services remains robust.
Volatility of raw materials and foreign currencies
Our most significant commodity and foreign currency exposures are related to lead and the Euro, respectively. Historically, volatility of commodity costs and foreign currency exchange rates have caused large swings in our production costs. As a result of the COVID-19 pandemic, lead costs dropped into the low
70 centsper pound during our first fiscal quarter of 2021 and increased to just below $1.10per pound in March 2022, which is above the pre-COVID-19 levels. We are experiencing increasing costs in almost all of our other raw materials such as plastic resins, steel, copper and electronics and increased freight costs. 30 -------------------------------------------------------------------------------- Table of Contents Customer Pricing Our selling prices fluctuated during the last several years to offset the volatile cost of commodities. Approximately 30% of our revenue is now subject to agreements that adjust pricing to a market-based index for lead. Customer pricing changes generally lag movements in lead prices and other costs by approximately six to nine months. In fiscal 2022, customer pricing has increased due to higher raw material prices and shipping costs, labor and other costs having increased throughout the year. Based on the current volatility of the commodity markets, it is difficult to predict with certainty whether commodity prices will be higher or lower in fiscal 2023 versus fiscal 2022. However, given the lag related to increasing our selling prices for inflationary cost increases, our selling prices should be higher in fiscal 2023 versus fiscal 2022. As we concentrate more on energy systems and non-lead chemistries, the emphasis on lead will continue to decline.
Cash and capital resources
We believe that our financial position is strong. We have substantial liquidity with
$402 millionof available cash and cash equivalents and available and undrawn, under all its lines of credit of approximately $482 millionat March 31, 2022to cover short-term liquidity requirements and anticipated growth in the foreseeable future. The nominal amount of credit available is subject to a leverage ratio maximum of 3.5x EBITDA, as discussed in Liquidity and Capital Resources, which effectively limits additional debt or lowered cash balances by approximately $350 million. During the second quarter of fiscal 2022, we entered into a second amendment to the Amended Credit Facility (as amended, the "Second Amended Credit Facility"). As a result, the Second Amended Credit Facility, now scheduled to mature on September 30, 2026, consists of a $130.0 millionsenior secured term loan (the "Second Amended Term Loan"), a CAD 106.4 million( $84.2 million) term loan and an $850.0 millionsenior secured revolving credit facility (the "Second Amended Revolver"). This amendment resulted in a decrease of the Amended Term Loan by $150.0 millionand an increase of the Amended Revolver by $150.0 million. During fiscal 2022, our operating cash flow was a use of cash of $65.5 million, compared to a source of cash of $358.4 millionin the prior year. The use of cash in fiscal 2022 was primarily due to the large increase in primary working capital dollars, compared to the prior year, reflects the increase in all components of inventory due to supply chain delays, new products and higher inventory costs from higher raw material costs, manufacturing and freight costs, strategic inventory builds to buffer against potential supply chain exposures and to address the high backlog of customer orders.
In fiscal 2022, we repurchased 1,996,334 common shares for
A substantial majority of the Company's cash and investments are held by foreign subsidiaries. The majority of that cash and investments is expected to be utilized to fund local operating activities, capital expenditure requirements and acquisitions. The Company believes that it has sufficient sources of domestic and foreign liquidity.
The Federal Reserve Bank of the United Stateshas discontinued quantitative easing and, started raising short-term interest rates and has signaled they will continue to raise interest rates through the remainder of calendar 2022. The increase in short-term interest rates will increase EnerSys'variable cost of borrowing under the Second Amended Credit Facility.
We believe that our strong capital structure and liquidity provide us with access to capital for future capital expenditures, stock acquisition and buyback opportunities and the continued payment of dividends.
Significant Accounting Policies and Estimates
Our significant accounting policies are described in Note 1 - Summary of Significant Accounting Policies to the Consolidated Financial Statements in Item 8. In preparing our financial statements, management is required to make estimates and assumptions that, among other things, affect the reported amounts in the Consolidated Financial Statements and accompanying notes. These estimates and assumptions are most significant where they involve levels of subjectivity and judgment necessary to account for highly uncertain matters or matters susceptible to change, and where they can have a material impact on our financial condition and operating performance. We discuss below the more significant estimates and related assumptions used in the preparation of our Consolidated Financial Statements. If actual results were to differ materially from the estimates made, the reported results could be materially affected. 31
In accordance with ASC 606, we recognize revenue only when we have satisfied a performance obligation through transferring control of the promised good or service to a customer. The standard indicates that an entity must determine at contract inception whether it will transfer control of a promised good or service over time or satisfy the performance obligation at a point in time through analysis of the following criteria: (i) the entity has a present right to payment, (ii) the customer has legal title, (iii) the customer has physical possession, (iv) the customer has the significant risks and rewards of ownership and (v) the customer has accepted the asset. Our primary performance obligation to our customers is the delivery of finished goods and products, pursuant to purchase orders. Control of the products sold typically transfers to our customers at the point in time when the goods are shipped as this is also when title generally passes to our customers under the terms and conditions of our customer arrangements. Management believes that the accounting estimates related to revenue recognition are critical accounting estimates because they require reasonable assurance of collection of revenue proceeds and completion of all performance obligations. Also, revenues are recorded net of provisions for sales discounts and returns, which are established at the time of sale. These estimates are based on our past experience. For additional information see Note 1 of Notes to the Consolidated Financial Statements.
Asset impairment determinations
We test our goodwill and indefinite life trademarks for impairment at least annually and whenever events or circumstances occur indicating that possible impairment has been incurred.
We assess whether goodwill impairment exists using both qualitative and quantitative assessments. The qualitative assessment involves determining whether events or circumstances exist that indicate it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill. If, based on this qualitative assessment, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, or if we elect not to perform a qualitative assessment, a quantitative assessment is performed to determine whether a goodwill impairment exists at the reporting unit. We perform our annual goodwill impairment test on the first day of our fourth quarter for each of our reporting units based on the income approach, also known as the discounted cash flow ("DCF") method, which utilizes the present value of future cash flows to estimate fair value. We also use the market approach, which utilizes market price data of companies engaged in the same or a similar line of business as that of our company, to estimate fair value. A reconciliation of the two methods is performed to assess the reasonableness of fair value of each of the reporting units. The future cash flows used under the DCF method are derived from estimates of future revenues, operating income, working capital requirements and capital expenditures, which in turn reflect our expectations of specific global, industry and market conditions. The discount rate developed for each of the reporting units is based on data and factors relevant to the economies in which the business operates and other risks associated with those cash flows, including the potential variability in the amount and timing of the cash flows. A terminal growth rate is applied to the final year of the projected period and reflects our estimate of stable growth to perpetuity. We then calculate the present value of the respective cash flows for each reporting unit to arrive at the fair value using the income approach and then determine the appropriate weighting between the fair value estimated using the income approach and the fair value estimated using the market approach. Finally, we compare the estimated fair value of each reporting unit to its respective carrying value in order to determine if the goodwill assigned to each reporting unit is potentially impaired. If the fair value of the reporting unit exceeds its carrying value, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than the carrying value, an impairment charge is recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. Significant assumptions used include management's estimates of future growth rates, the amount and timing of future operating cash flows, capital expenditures, discount rates, as well as market and industry conditions and relevant comparable company multiples for the market approach. Assumptions utilized are highly judgmental, especially given the role technology plays in driving the demand for products in the telecommunications and aerospace markets.
Based on the results of the annual impairment test at
The indefinite-lived trademarks are tested for impairment by comparing the carrying value to the fair value based on current revenue projections of the related operations, under the relief from royalty method. Any excess carrying value over the amount 32 -------------------------------------------------------------------------------- Table of Contents of fair value is recognized as impairment. Any impairment would be recognized in full in the reporting period in which it has been identified. With respect to our other long-lived assets other than goodwill and indefinite-lived trademarks, we test for impairment when indicators of impairment are present. An asset is considered impaired when the undiscounted estimated net cash flows expected to be generated by the asset are less than its carrying amount. The impairment recognized is the amount by which the carrying amount exceeds the fair value of the impaired asset.
We account for business combinations in accordance with ASC 805, Business Combinations. We recognize assets acquired and liabilities assumed in acquisitions at their fair values as of the acquisition date, with the acquisition-related transaction and restructuring costs expensed in the period incurred. Determining the fair value of assets acquired and liabilities assumed often involves estimates based on third-party valuations, such as appraisals, or internal valuations based on discounted cash flow analyses and may include estimates of attrition, inflation, asset growth rates, discount rates, multiples of earnings or other relevant factors. In addition, fair values are subject to refinement for up to a year after the closing date of an acquisition. Adjustments recorded to the acquired assets and liabilities are applied prospectively. Fair values are based on estimates using management's assumptions using future growth rates, future attrition of the customer base, discount rates, multiples of earnings or other relevant factors. Any change in the acquisition date fair value of assets acquired and liabilities assumed may materially affect our financial position, results of operations and liquidity. Litigation and Claims From time to time, the Company has been or may be a party to various legal actions and investigations including, among others, employment matters, compliance with government regulations, federal and state employment laws, including wage and hour laws, contractual disputes and other matters, including matters arising in the ordinary course of business. These claims may be brought by, among others, governments, customers, suppliers and employees. Management considers the measurement of litigation reserves as a critical accounting estimate because of the significant uncertainty in some cases relating to the outcome of potential claims or litigation and the difficulty of predicting the likelihood and range of potential liability involved, coupled with the material impact on our results of operations that could result from litigation or other claims.
To determine the legal reserves, management takes into account, among other elements:
•interpretation of contractual rights and obligations; •the status of government regulatory initiatives, interpretations and investigations; •the status of settlement negotiations; •prior experience with similar types of claims; •whether there is available insurance coverage; and •advice of outside counsel. For certain matters, management is able to estimate a range of losses. When a loss is probable, but no amount of loss within a range of outcomes is more likely than any other outcome, management will record a liability based on the low end of the estimated range. Additionally, management will evaluate whether losses in excess of amounts accrued are reasonably possible, and will make disclosure of those matters based on an assessment of the materiality of those addition possible losses.
Potential environmental losses
Accruals for environmental loss contingencies (i.e., environmental reserves) are recorded when it is probable that a liability has been incurred and the amount can reasonably be estimated. Management views the measurement of environmental reserves as a critical accounting estimate because of the considerable uncertainty surrounding estimation, including the need to forecast well into the future. From time to time, we may be involved in legal proceedings under federal, state and local, as well as international environmental laws in connection with our operations and companies that we have acquired. The estimation of environmental reserves is based on the evaluation of currently available information, prior experience in the remediation of contaminated sites and assumptions with respect to government regulations and enforcement activity, changes in remediation technology and practices, and financial obligations and creditworthiness of other responsible parties and insurers. 33
We record a warranty reserve for possible claims against our product warranties, which generally run for a period ranging from one to twenty years for our Energy Systems batteries, one to five years for our
Motive Powerbatteries and for a period ranging from one to four for Specialty transportation batteries. The assessment of the adequacy of the reserve includes a review of open claims and historical experience. Management believes that the accounting estimate related to the warranty reserve is a critical accounting estimate because the underlying assumptions used for the reserve can change from time to time and warranty claims could potentially have a material impact on our results of operations.
Allowance for doubtful accounts
Subsequent to the adoption of ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326)" effective
April 1, 2020the Company uses an expected loss model as mandated by the standard. The expected loss model: (i) estimates the risk of loss even when risk is remote, (ii) estimates losses over the contractual life, (iii) considers past events, current conditions and reasonable supported forecasts and (iv) has no recognition threshold. The Company estimates the allowance for credit losses in relation to accounts receivable based on relevant qualitative and quantitative information about historical events, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported accounts receivable. Subsequent to April 1, 2020, accounts receivable are recorded at amortized cost less an allowance for expected credit losses. The Company maintains an allowance for credit losses for the expected failure or inability of its customers to make required payments. The Company recognizes the allowance for expected credit losses at inception and reassesses quarterly, based on management's expectation of the asset's collectability. The allowance is based on multiple factors including historical experience with bad debts, the credit quality of the customer base, the aging of such receivables and current macroeconomic conditions, as well as management's expectations of conditions in the future. The Company's allowance for uncollectible accounts receivable is based on management's assessment of the collectability of assets pooled together with similar risk characteristics. The Company then adjusts the historical credit loss percentage by current and forecasted economic conditions. The Company then includes a baseline credit loss percentage into the historical credit loss percentage for each aging category to reflect the potential impact of the current and economic conditions. Such a baseline calculation will be adjusted further if changes in the economic environment impacts the Company's expectation for future credit losses. Management believes that the accounting estimate related to the allowance for doubtful accounts is a critical accounting estimate because the underlying assumptions used for the allowance can change from time to time and uncollectible accounts could potentially have a material impact on our results of operations. Retirement Plans We use certain economic and demographic assumptions in the calculation of the actuarial valuation of liabilities associated with our defined benefit plans. These assumptions include the discount rate, expected long-term rates of return on assets and rates of increase in compensation levels. Changes in these assumptions can result in changes to the pension expense and recorded liabilities. Management reviews these assumptions at least annually. We use independent actuaries to assist us in formulating assumptions and making estimates. These assumptions are updated periodically to reflect the actual experience and expectations on a plan-specific basis, as appropriate. For benefit plans which are funded, we establish strategic asset allocation percentage targets and appropriate benchmarks for significant asset classes with the aim of achieving a prudent balance between return and risk. We set the expected long-term rate of return based on the expected long-term average rates of return to be achieved by the underlying investment portfolios. In establishing this rate, we consider historical and expected returns for the asset classes in which the plans are invested, advice from pension consultants and investment advisors, and current economic and capital market conditions. The expected return on plan assets is incorporated into the computation of pension expense. The difference between this expected return and the actual return on plan assets is deferred and will affect future net periodic pension costs through subsequent amortization. We believe that the current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change materially, we may change our assumptions, and the resulting change could have a material impact on the Consolidated Statements of Income and on the Consolidated Balance Sheets. 34
We recognize compensation cost relating to equity-based payment transactions by using a fair-value measurement method whereby all equity-based payments to employees, including grants of restricted stock units, stock options, market and performance condition-based awards are recognized as compensation expense based on fair value at grant date over the requisite service period of the awards. We determine the fair value of restricted stock units based on the quoted market price of our common stock on the date of grant. The fair value of stock options is determined using the Black-Scholes option-pricing model, which uses both historical and current market data to estimate the fair value. The fair value of market condition-based awards is estimated at the date of grant using a Monte Carlo Simulation. The fair value of performance condition-based awards is based on the closing stock price on the date of grant, adjusted for a discount to reflect the illiquidity inherent in these awards. All models incorporate various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the awards. When estimating the requisite service period of the awards, we consider many related factors including types of awards, employee class, and historical experience. Actual results, and future changes in estimates of the requisite service period may differ substantially from our current estimates.
Our effective tax rate is based on pretax income and statutory tax rates available in the various jurisdictions in which we operate. We account for income taxes in accordance with applicable guidance on accounting for income taxes, which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between book and tax bases on recorded assets and liabilities. Accounting guidance also requires that deferred tax assets be reduced by a valuation allowance, when it is more likely than not that a tax benefit will not be realized. The recognition and measurement of a tax position is based on management's best judgment given the facts, circumstances and information available at the reporting date. We evaluate tax positions to determine whether the benefits of tax positions are more likely than not of being sustained upon audit based on the technical merits of the tax position. For tax positions that are more likely than not of being sustained upon audit, we recognize the largest amount of the benefit that is greater than 50% likely of being realized upon ultimate settlement in the financial statements. For tax positions that are not more likely than not of being sustained upon audit, we do not recognize any portion of the benefit in the financial statements. If the more likely than not threshold is not met in the period for which a tax position is taken, we may subsequently recognize the benefit of that tax position if the tax matter is effectively settled, the statute of limitations expires, or if the more likely than not threshold is met in a subsequent period. We evaluate, on a quarterly basis, our ability to realize deferred tax assets by assessing our valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. To the extent we prevail in matters for which reserves have been established, or are required to pay amounts in excess of our reserves, our effective tax rate in a given financial statement period could be materially affected. 35 -------------------------------------------------------------------------------- Table of Contents Results of Operations-Fiscal 2022 Compared to Fiscal 2021 The following table presents summary Consolidated Statements of Income data for fiscal year ended
March 31, 2022, compared to fiscal year ended March 31, 2021: Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Net sales $ 3,357.3100.0 % $ 2,977.9100.0 % $ 379.4 12.7 % Cost of goods sold 2,604.7 77.6 2,238.8 75.2 365.9 16.3 Inventory adjustment relating to exit activities 2.6 0.1 - - 2.6 NM Gross profit 750.0 22.3 739.1 24.8 10.9 1.5 Operating expenses 520.8 15.5 482.3 16.2 38.5 8.0 Restructuring and other exit charges 18.8 0.6 40.4 1.4 (21.6) (53.5) Impairment of indefinite-lived intangibles 1.2 - - - 1.2 NM Loss on assets held for sale 3.0 0.1 - - 3.0 NM Operating earnings 206.2 6.1 216.4 7.2 (10.2) (4.7) Interest expense 37.8 1.1 38.5 1.3 (0.7) (1.7) Other (income) expense, net (5.5) (0.2) 7.8 0.2 (13.3) NM Earnings before income taxes 173.9 5.2 170.1 5.7 3.8 2.2 Income tax expense 30.0 0.9 26.8 0.9 3.2 12.2 Net earnings 143.9 4.3 143.3 4.8 0.6 0.4 Net earnings attributable to noncontrolling interests - - - - - - Net earnings attributable to EnerSysstockholders $ 143.94.3 % $ 143.34.8 % $ 0.6 0.4 % NM = not meaningful Overview
Our sales in fiscal year 2022 were
A discussion of specific operating results for fiscal 2022 compared to fiscal 2021 follows, including an analysis and discussion of our reportable segment results.
Net SalesSegment sales Fiscal 2022 Fiscal 2021 Increase (Decrease) In % Net In % Net In Millions Sales Millions Sales Millions %
$ 156.4 11.3 % Motive Power 1,361.2 40.5 1,163.8 39.1 197.4 17.0 Specialty 459.5 13.7 433.9 14.6 25.6 5.9
Total net sales
$ 379.4 12.7 % 36
-------------------------------------------------------------------------------- Table of Contents Net sales of our Energy Systems segment in fiscal 2022 increased
$156.4 million, or 11.3%, compared to fiscal 2021. This increase was due to a 10% increase in organic volume and a 1% increase in pricing / mix. Continued strong demand in telecommunications and broadband was offset by supply chain driven constraints for our power systems products. Net sales of our Motive Powersegment in fiscal 2022 increased by $197.4 million, or 17.0%, compared to fiscal 2021. This increase was primarily due to a 14% increase in organic volume and a 3% increase in pricing. The prior year's COVID-19 restrictions and related economic slowdown impacted this segment more than our other lines of business. Net sales of our Specialty segment in fiscal 2022 increased by $25.6 million, or 5.9%, compared to fiscal 2021. The increase was primarily due to a 4% increase in pricing and a 2% increase in organic volume. Strong demand from transportation was joined with a resurgence in aerospace and defense sales but logistical challenges were impediments to our sales performance. Gross Profit Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Gross profit $ 750.022.3 % $ 739.124.8 % $ 10.9 1.5 % Gross profit increased $10.9 millionor 1.5% in fiscal 2022 compared to fiscal 2021. Gross profit, as a percentage of net sales, decreased 250 basis points in fiscal 2022 compared to fiscal 2021. The decrease in the gross profit margin in fiscal 2022 compared to the prior year reflects the negative impact of higher freight costs and component shortages from our supply chain along with other inflationary pressures in raw materials, labor, supplies and utilities, in excess of pricing recoveries and organic volume growth. Energy Systems was most acutely impacted by these pressures. Motive Powerand Specialty have also been impacted by higher costs but have a quicker pace of cost recovery relative to Energy Systems. Operating Items Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Operating expenses $ 520.815.5 % $ 482.316.2 % $ 38.5 8.0 % Restructuring, exit and other charges 18.8 0.6 40.4 1.4 (21.6) (53.5) Impairment of indefinite-lived intangibles 1.2 - - - 1.2 NM Loss on assets held for sale 3.0 0.1 - - 3.0 NM NM = not meaningful Operating Expenses Operating expenses increased $38.5 millionor 8.0% in fiscal 2022 from fiscal 2021 and decreased as a percentage of net sales by 70 basis points. Selling expenses, our main component of operating expenses, increased $14.3 millionor 7.0% in fiscal 2022 compared to fiscal 2021. 37 -------------------------------------------------------------------------------- Table of Contents Restructuring, exit and other charges Exit Charges Fiscal 2022 Programs Russia In February 2022, as a result of the Russia- Ukraineconflict, economic sanctions were imposed on Russian individuals and entities, including financial institutions, by countries around the world, including the U.S.and the European Union. On March 3, 2022, the Company announced that it was indefinitely suspending its operations in Russiain order to comply with the sanctions. As a result of this decision, the Company wrote off net assets of $4.0 millionrelating to its Russian subsidiary. The Company also incurred cash charges of $1.3 millionrelating to severance and exiting lease obligations.
In fiscal 2022, the Company closed a small assembly plant in Zamudio,
Fiscal 2021 Programs Hagen,
GermanyIn fiscal 2021, we committed to a plan to close substantially all of our facility in Hagen, Germany, which produces flooded motive power batteries for forklifts. Management determined that future demand for the motive power batteries produced at this facility was not sufficient, given the conversion from flooded to maintenance free batteries by customers, the existing number of competitors in the market, as well as the near term decline in demand and increased uncertainty from the pandemic. We plan to retain the facility with limited sales, service and administrative functions along with related personnel for the foreseeable future. We currently estimate that the total charges for these actions will amount to approximately $60.0 million, the majority of which were recorded by the end of calendar 2021. Cash charges of approximately $40.0 millionare primarily for employee severance related payments, but also include payments for cleanup related to the facility, contractual releases and legal expenses. Non-cash charges from inventory and equipment write-offs are estimated to be $20.0 million. These actions resulted in the reduction of approximately 200 employees. During fiscal 2022, the Company recorded cash charges, primarily relating to severance of $8.1 millionand non-cash charges of $3.5 millionprimarily relating to fixed asset write-offs. The Company also recorded a non-cash write off relating to inventories of $1.0 million, which was reported in cost of goods sold.
During fiscal 2021, the Company recorded charges related to the breach of
During fiscal 2019, the Company committed to a plan to close its facility in Targovishte,
Bulgaria, which produced diesel-electric submarine batteries. Management determined that the future demand for batteries of diesel-electric submarines was not sufficient given the number of competitors in the market. During fiscal 2022, the Company sold this facility for $1.5 million. A net gain of $1.2 millionwas recorded as a credit to exit charges in the Consolidated Statements of Income. Fiscal 2020 Programs
In line with our strategy to exit the manufacture of batteries for diesel-electric submarines, we sold in fiscal 2020 certain licenses and assets for
During fiscal 2020, we also wrote off
$5.5 millionof assets at our Kentuckyand Tennessee Motive Powerplants, as a result of our strategic product mix shift from traditional flooded batteries to maintenance free lead acid and lithium batteries. 38 -------------------------------------------------------------------------------- Table of Contents Richmond, Kentucky Plant FireDuring fiscal 2021, the Company settled its claims with its insurance carrier relating to the fire that broke out in the battery formation area of the Company's Richmond, Kentuckymotive power production facility in fiscal 2020. The total claims for both property and business interruption of $46.1 millionwere received through March 31, 2021. The final settlement of insurance recoveries and finalization of costs related to the replacement of property, plant and equipment, resulted in a net gain of $4.4 million, which was recorded as a reduction to operating expenses in the Consolidated Statements of Income.
The details of charges and recoveries for the 2021 and 2020 financial years are as follows:
In fiscal 2020, the Company recorded
$17.0 millionas receivable, consisting of write-offs for damages caused to its fixed assets and inventories, as well as for cleanup, asset replacement and other ancillary activities directly associated with the fire and received $12.0 millionrelated to its initial claims.
During fiscal year 2021, the Company recorded a
In addition to the property damage claim, the Company received
$12.5 millionin business interruption claims, of which $5.0 millionwas recorded in fiscal 2020 and $7.5 millionin fiscal 2021, and was credited to cost of goods sold, in the respective periods.
Impairment of indefinite life intangible assets
During the fourth quarter of fiscal 2022, the Company recorded a non-cash charge of
$1.2 millionrelated to impairment of indefinite-lived trademarks. Management completed its evaluation of key inputs used to estimate the fair value of its indefinite-lived trademarks and determined that an impairment charge relating to two of its trademarks that were acquired through legacy acquisitions was appropriate, as it plans to phase out these trademarks.
Loss on assets held for sale
During fiscal 2021, we also committed to a plan to close our facility in Vijayawada,
Indiato align with the strategic vision for our new line of business structure and footprint and recorded exit charges of $1.5 millionprimarily relating to asset write-offs. In fiscal 2022, the Company reclassified property, plant and equipment with a carrying value of $4.6 millionto assets held for sale on the Consolidated Balance Sheet and recognized an impairment loss of $3.0 millionunder the caption Loss on assets held for sale on its consolidated statement of income, by writing down the carrying value of these assets to their estimated fair value of $1.6 million, based on their expected proceeds, less costs to sell. We also recorded a non-cash write off relating to inventories of $0.8 million, which was reported in cost of goods sold. 39
Operating profit by segment was as follows:
Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales(1) Millions Net Sales(1) Millions % Energy Systems
$ 18.61.2 % $ 66.94.9 % $ (48.3) (72.4) % Motive Power 169.7 12.5 143.6 12.3 26.1 18.3 Specialty 43.5 9.5 46.3 10.6 (2.8) (5.8) Subtotal 231.8 6.9 256.8 8.6 (25.0) (9.7) Inventory adjustment relating to exit activities - Energy Systems (0.2) - - - (0.2) NM Inventory adjustment relating to exit activities - Motive (2.4) (0.2) - - (2.4) NM Restructuring and other exit charges - Energy Systems (2.8) (0.2) (3.1) (0.2) 0.3 (14.9) Restructuring and other exit charges - Motive Power (17.1) (1.3) (36.9) (3.2) 19.8 (53.6) Restructuring and other exit charges - Specialty 1.1 0.2 (0.4) (0.1) 1.5 NM Impairment of indefinite-lived intangibles - Energy Systems (0.5) - - - (0.5) NM Impairment of indefinite-lived intangibles - Motive Power (0.7) - - - (0.7) NM Loss on assets held for sale - Motive Power (3.0) (0.2) - - (3.0) NM Total operating earnings $ 206.2
$ 216.47.2 % $ (10.2) (4.7) % NM = not meaningful (1)The percentages shown for the segments are computed as a percentage of the applicable segment's net sales. Operating earnings decreased $10.2 millionor 4.7% in fiscal 2022, compared to fiscal 2021. Operating earnings, as a percentage of net sales, decreased 110 basis points in fiscal 2022, compared to fiscal 2021. The Energy Systems operating earnings decreased 370 basis points in fiscal 2022 compared to fiscal 2021. Higher lead and freight costs along with lack of component availability negatively impacted the performance and sales mix of this line of business. The Motive Poweroperating earnings increased 20 basis points in fiscal 2022 compared to fiscal 2021. The strong recovery in organic growth along with price increases improved the performance of this line of business. However, the prior year period benefited from $11.9 millionof insurance recoveries. Specialty operating earnings decreased 110 basis points in fiscal 2022 compared to fiscal 2021. Pricing and customer demand in the transportation and aerospace and defense markets were stronger in the current year compared to prior year, but capacity constraints and higher inflation costs, combined with increased operating expenses negatively impacted the performance of this line of business. Interest Expense Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Interest expense $ 37.81.1 % $ 38.51.3 % $ (0.7) (1.7) % Interest expense of $37.8 millionin fiscal 2022 (net of interest income of $2.1 million) was $0.7 millionlower than the $38.5 millionin fiscal 2021 (net of interest income of $2.3 million). 40 -------------------------------------------------------------------------------- Table of Contents Our average debt outstanding was $1,150.7 millionin fiscal 2022, compared to our average debt outstanding of $1,105.5 millionin fiscal 2021. Our average cash interest rate incurred in fiscal 2022 and fiscal 2021 was 3.3%. The decrease in interest expense in fiscal 2022 compared to fiscal 2021 is primarily due to the benefit from the $300 millioncross currency fixed interest rate swaps, partially offset by higher borrowings. In fiscal 2022, in connection with the Second Amended Credit Facility, we capitalized $3.0 millionin debt issuance costs and wrote off $0.1 millionof unamortized debt issuance costs. In fiscal 2020, in connection with the issuance of the 2027 Notes, we capitalized $4.6 millionof debt issuance costs. Included in interest expense were non-cash charges related to amortization of deferred financing fees of $2.1 millionin both fiscal 2022 and fiscal 2021. Other (Income) Expense, Net Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Other (income) expense, net $ (5.5)(0.2) % $ 7.80.2 % $ (13.3) NM NM = not meaningful Other (income) expense, net was income of $5.5 millionin fiscal 2022 compared to expense of $7.8 millionin fiscal 2021. Foreign currency impact resulted in a gain of $7.2 millionin fiscal 2022 compared to a foreign currency loss of $6.7 millionin fiscal 2021.
Profit before income taxes
Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Earnings before income taxes
$ 173.95.2 % $ 170.15.7 % $ 3.8 2.2 % As a result of the factors discussed above, fiscal 2022 earnings before income taxes were $173.9 million, an increase of $3.8 millionor 2.2% compared to fiscal 2021. Income Tax Expense Fiscal 2022 Fiscal 2021 Increase (Decrease) In As % In As % In Millions Net Sales Millions Net Sales Millions % Income tax expense $ 30.00.9 % $ 26.80.9 % $ 3.2 12.2 % Effective tax rate 17.3 % 15.7 % 1.6 % Our effective income tax rate with respect to any period may be volatile based on the mix of income in the tax jurisdictions in which we operate and the amount of our consolidated income before taxes. The Company's income tax provision consists of federal, state and foreign income taxes. The effective income tax rate was 17.3% in fiscal 2022 compared to the fiscal 2021 effective income tax rate of 15.7%. The rate increase in fiscal 2022 compared to fiscal 2021 is primarily due to Swiss tax reform and changes in the mix of earnings among tax jurisdictions. On May 19, 2019, a public referendum held in Switzerlandapproved the Federal Act on Tax Reform and AHV ( Old-Age and Survivors Insurance) Financing (TRAF) as adopted by the Swiss Federal Parliament on September 28, 2018. The Swiss tax reform measures were effective January 1, 2020. We recorded a net deferred tax asset of $22.5 millionduring fiscal 2020, related to the amortizable goodwill and based on further evaluation with the Swiss tax authority, recorded an additional income tax benefit of $1.9 millionduring fiscal 2021. The fiscal 2022 foreign effective income tax rate was 11.0% on foreign pre-tax income of $152.1 millioncompared to an effective income tax rate of 6.8% on foreign pre-tax income of $114.1 millionin fiscal 2021. For both fiscal 2022 and fiscal 2021, the difference in the foreign effective tax rate versus the U.S.statutory rate of 21% is primarily attributable to lower tax rates in the foreign countries in which we operate. The rate increase in fiscal 2022 compared to fiscal 2021 is primarily due to 41 -------------------------------------------------------------------------------- Table of Contents Swiss tax reform and changes in the mix of earnings among tax jurisdictions. Income from our Swiss subsidiary comprised a substantial portion of our overall foreign mix of income for both fiscal 2022 and fiscal 2021 and was taxed, excluding the impact from Swiss tax reform, at approximately 4% and 8%, respectively.
Cash and capital resources
Cash flow and financing activities
Cash and cash equivalents at
Cash flows used by operating activities for fiscal year 2022 were
During fiscal 2022, primary working capital, net of currency translation changes, resulted in an outflow of funds of
$276.5 million. In fiscal 2022, net earnings were $143.9 million, depreciation and amortization $95.9 million, stock-based compensation $24.3 million, non-cash charges relating to exit charges of $6.5 million, primarily relating to the Hagen, Germanyplant closure and exiting our operations in Russiafollowing the conflict in Ukraine, loss on valuation of the assets held for sale in Indiaof $3.0 million, allowance for doubtful debts of $2.6 million, non-cash interest of $2.1 millionand non-cash charges for impairment of indefinite-lived intangibles of $1.2 million. Prepaid and other current assets were a use of funds of $32.0 million, primarily from an increase of $13.6 millionof contract assets, as well as an increase of $12.3 millionin other prepaid expenses, such as taxes, insurance and other advances. Accrued expenses were a use of funds of $38.6 millionprimarily from Hagen severance payments of $19.6 million, income tax payments of $17.3 millionnet of tax provisions, payroll related payments of $10.1 million, partially offset by customer advances of $8.9 million. During fiscal 2021, net earnings were $143.3 million, depreciation and amortization $94.1 million, stock-based compensation $19.8 million, non-cash charges relating to exit charges $10.2 million, primarily relating to the Hagen, Germanyplant closure, net gain from the disposal of assets of $3.9 million( $4.4 millionfrom the insurance settlement relating to the Richmondfire claim), deferred tax benefit of $9.0 millionand non-cash interest of $2.1 million. Decrease in primary working capital of $53.7 million, net of currency translation changes provided a source of funds and are explained below. Prepaid and other current assets provided a source of funds of $27.3 million, primarily from the receipt of $29.1 milliontowards the insurance receivable relating to the Richmondplant claim in fiscal 2020 and the receipt of a working capital adjustment claim of $2.0 million, relating to an acquisition made several years ago, partially offset by an increase of $3.8 millionin other prepaid expenses. Accrued expenses provided a source of funds of $32.4 millionprimarily from payroll related accruals of $27.8 million, taxes payable of $4.5 millionand selling and other expenses of $3.3 million, partially offset by payments relating to warranty of $5.8 million. Other liabilities decreased by $12.7 millionprimarily relating to income taxes. During fiscal 2020, cash provided by operating activities was primarily from net earnings of $137.1 million, depreciation and amortization of $87.3 million, non-cash charges relating to impairment of goodwill and other intangible assets of $44.2 million, restructuring, exit and other charges of $11.0 million, stock-based compensation of $20.8 million, provision for bad debts of $4.8 millionand non-cash interest of $1.7 million, partially offset by deferred taxes of $16.5 millionprimarily from the Swiss Tax Reform. Cash provided by earnings adjusted for non-cash items were partially offset by the increase in primary working capital of $16.4 million, net of currency translation changes. Accrued expenses increased by $7.1 million, primarily due to payroll accruals of $8.6 million, sales incentives of $8.0 million, interest of $3.9 million, partially offset by payments of $7.3 millionrelated to the German competition authority matter and $6.1 millionpaid to the seller in connection with the Alpha acquisition, for certain reimbursable pre-acquisition items. Prepaid and other current assets increased by $17.5 million, primarily due to contract assets of $11.1 million, insurance receivable of $22.0 millionrelating to the Richmondplant claim, partially offset by insurance proceeds of $12.0 millionand the receipt of $4.1 millionin connection with the Alpha transaction. Other liabilities decreased by $12.7 milliondue to income taxes. As explained in the discussion of our use of "non-GAAP financial measures," we monitor the level and percentage of primary working capital to sales. Primary working capital was $1,042.0 million(yielding a primary working capital percentage of 28.7%) at March 31, 2022and $797.9 million(yielding a primary working capital percentage of 24.5%) at March 31, 2021. The primary working capital percentage of 28.7% at March 31, 2022is 420 basis points higher than that for March 31, 2021, and 200 basis points higher than that for March 31, 2020. The large increase in primary working capital dollars, compared to the prior years, reflects the increase in all components of inventory due to supply chain delays, new products and higher inventory costs from higher raw material costs, manufacturing and freight costs, strategic inventory builds to buffer against potential supply chain exposures and to address the high backlog of customer orders. In addition, trade receivables increased due to higher revenue during fiscal 2022, as compared to a COVID-19 restricted revenue in fiscal 2021. 42
Primary Primary Quarter Working Trade Accounts Working Revenue Capital Balance at March 31, Receivables Inventory Payable Capital Annualized (%) (in millions) 2022
$ 719.4 $ 715.7 $ (393.1) $ 1,042.0 $ 3,628.128.7 % 2021 603.6 518.2 (323.9) 797.9 3,254.2 24.5 2020 595.9 519.5 (281.9) 833.5 3,127.2 26.7
The cash flows allocated to investing activities for the financial years 2022, 2021 and 2020 have been
In fiscal 2022 and 2021, we did not make any acquisitions. In fiscal 2020, we acquired
Capital expenditures were
$74.0 million, $70.0 millionand $101.4 millionin fiscal 2022, 2021 and 2020, respectively. We also received $3.3 millionfrom the sale of two of our facilities in Europeduring fiscal 2022. During the second quarter of fiscal 2022, we entered into the Second Amended Credit Facility. As a result, financing activities provided cash of $98.4 millionin fiscal 2022. During fiscal 2022, we borrowed $523.4 millionunder the Second Amended Revolver and repaid $88.4 millionof the Second Amended Revolver. Repayment on the Second Amended Term Loan was $161.4 millionand net borrowings on short-term debt were $20.6 million. Treasurystock open market purchases were $156.4 million, payment of cash dividends to our stockholders were $29.4 millionand payment of taxes related to net share settlement of equity awards were $9.1 million. Debt issuance costs relating to the refinancing of the Credit Facility was $3.0 million. Proceeds from stock options were $1.3 million. During fiscal 2021, financing activities provided cash of $188.7 million. We borrowed $102.0 millionunder the Amended 2017 Revolver and repaid $210.0 millionof the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was $39.6 millionand net payments on short-term debt were $15.9 million. Proceeds from stock options during fiscal 2021 were $9.1 million. Payment of cash dividends to our stockholders were $29.8 million, payment of taxes related to net share settlement of equity awards were $5.2 million. During fiscal 2020, financing activities provided cash of $62.7 million. We issued our 2027 Notes for $300 million, the proceeds of which were utilized to pay down the existing revolver borrowings. We borrowed $386.7 millionunder the Amended 2017 Revolver and repaid $517.7 millionof the Amended 2017 Revolver. Repayment on the Amended 2017 Term Loan was $28.1 millionand net payments on short-term debt were $5.3 million. Treasurystock open market purchases were $34.6 million, payment of cash dividends to our stockholders were $29.7 millionand payment of taxes related to net share settlement of equity awards were $6.4 million. Currency translation had a negative impact of $12.9 millionon our cash balance in the twelve months of fiscal 2022 compared to the positive impact of $20.2 millionin the twelve months of fiscal 2021. In the twelve months of fiscal 2022, principal currencies in which we do business such as the Euro, Polish zloty, British pound and Swiss franc generally weakened versus the U.S.dollar. As a result of the above, total cash and cash equivalents decreased by $49.3 millionfrom $451.8 millionat March 31, 2021to $402.5 millionat March 31, 2022. In addition to cash flows from operating activities, we had available committed and uncommitted credit lines of approximately $482 millionat March 31, 2022to cover short-term liquidity requirements. Our Second Amended Credit Facility is committed through September 30, 2026, as long as we continue to comply with the covenants and conditions of the credit facility agreement. 43 -------------------------------------------------------------------------------- Table of Contents Compliance with Debt Covenants All obligations under our Second Amended Credit Facility are secured by, among other things, substantially all of our U.S.assets. The Second Amended Credit Facility contains various covenants which, absent prepayment in full of the indebtedness and other obligations, or the receipt of waivers, limit our ability to conduct certain specified business transactions, buy or sell assets out of the ordinary course of business, engage in sale and leaseback transactions, pay dividends and take certain other actions. There are no prepayment penalties on loans under this credit facility. We are in compliance with all covenants and conditions under our Second Amended Credit Facility and Senior Notes. We believe that we will continue to comply with these covenants and conditions, and that we have the financial resources and the capital available to fund the foreseeable organic growth in our business and to remain active in pursuing further acquisition opportunities. See Note 10 to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
Off-balance sheet arrangements
The Company has not entered into any off-balance sheet arrangements during the periods covered by this report.
Contractual obligations and commercial commitments
March 31, 2022, we had certain cash obligations, which are due as follows: Less than 2 to 3 4 to 5 After Total 1 year years years 5 years (in millions) Debt obligations $ 1,250.3 $ 5.4 $ 324.2 $ 920.7$ - Short-term debt 55.1 55.1 - - - Interest on debt 157.0 41.4 58.5 44.0 13.1 Operating leases 84.6 23.0 29.5 15.5 16.6 Tax Act - Transition Tax 52.5 6.2 27.0 19.3 - Pension benefit payments and profit sharing 39.4 3.0 6.4 7.8 22.2 Restructuring and Hagen exit related accruals 2.9 2.9 - - - Purchase commitments 22.2 22.2 - - - Lead and foreign currency forward contracts 0.7 0.7 - - - Finance lease obligations, including interest 0.4 0.2 0.2 - - Total $ 1,665.1 $ 160.1 $ 445.8 $ 1,007.3 $ 51.9
Due to the uncertainty of future cash outflows, uncertain tax positions have been excluded from the table above.
Under our second amended credit facility and other credit agreements, we had outstanding standby letters of credit
Credit facilities and leverage
Our focus on working capital management and operating cash flow is measured by our ability to reduce debt and lower our leverage ratios.
During the second quarter of fiscal 2022, we entered into a second amendment to the Amended Credit Facility (as amended, the "Second Amended Credit Facility"). As a result, the Second Amended Credit Facility, now scheduled to mature on
September 30, 2026, consists of a $130.0 millionsenior secured term loan (the "Second Amended Term Loan"), a CAD 106.4 million( $84.2 million) term loan and an $850.0 millionsenior secured revolving credit facility (the "Second Amended Revolver"). This amendment resulted in a decrease of the Amended Term Loan by $150.0 millionand an increase of the Amended Revolver by $150.0 million.
Below are the leverage ratios at
Table of Contents Total Net Debt, as defined in the Second Amended Credit Facility, is
The following table provides a reconciliation of net income to EBITDA (non-GAAP) and Adjusted EBITDA (non-GAAP) for
Fiscal 2022 Fiscal 2021 (in millions, except ratios) Net earnings as reported $ 143.9
$ 143.3Add back: Depreciation and amortization 95.9 94.1 Interest expense 37.8 38.5 Income tax expense 30.0 26.8 EBITDA (non GAAP)(1) $ 307.6 $ 302.7Adjustments per credit agreement definitions(2) 51.5 56.3 Adjusted EBITDA (non-GAAP) per credit agreement(1) $ 359.1 $ 359.0Total net debt(3) $ 905.9 $ 615.0
Total net debt/adjusted EBITDA ratio 2.5 X 1.7 X Maximum ratio permitted 3.5 X 3.5 X Consolidated interest coverage ratio(5)
10.0 X 9.8 X Minimum ratio required 3.0 X 3.0 X (1)We have included EBITDA (non-GAAP) and adjusted EBITDA (non-GAAP) because our lenders use them as key measures of our performance. EBITDA is defined as earnings before interest expense, income tax expense, depreciation and amortization. EBITDA is not a measure of financial performance under GAAP and should not be considered an alternative to net earnings or any other measure of performance under GAAP or to cash flows from operating, investing or financing activities as an indicator of cash flows or as a measure of liquidity. Our calculation of EBITDA may be different from the calculations used by other companies, and therefore comparability may be limited. Certain financial covenants in our Second Amended Credit Facility are based on EBITDA, subject to adjustments, which are shown above. Continued availability of credit under our Second Amended Credit Facility is critical to our ability to meet our business plans. We believe that an understanding of the key terms of our credit agreement is important to an investor's understanding of our financial condition and liquidity risks. Failure to comply with our financial covenants, unless waived by our lenders, would mean we could not borrow any further amounts under our revolving credit facility and would give our lenders the right to demand immediate repayment of all outstanding revolving credit and term loans. We would be unable to continue our operations at current levels if we lost the liquidity provided under our credit agreements. Depreciation and amortization in this table excludes the amortization of deferred financing fees, which is included in interest expense. (2)The
$51.5 millionadjustment to EBITDA in fiscal 2022 primarily related to $24.3 millionof non-cash stock compensation, $26.0 millionof restructuring and other exit charges, impairment of indefinite-lived intangibles of $1.2 million. The $56.3 millionadjustment to EBITDA in fiscal 2021 primarily related to $19.8 millionof non-cash stock compensation, $33.2 millionof restructuring and other exit charges, business integration costs of $7.3 million, partially offset by $3.9 millionof gain ( $4.4 milliongain less insurance deductibles) relating to the final settlement of the Richmond, KYfire claim. (3)Debt includes finance lease obligations and letters of credit and is net of all U.S.cash and cash equivalents and foreign cash and investments, as defined in the Second Amended Credit Facility. In fiscal 2022, the amounts deducted in the calculation of net debt were U.S.cash and cash equivalents and foreign cash investments of $402 million, and in fiscal 2021, were $399 million. (4)These ratios are included to show compliance with the leverage ratios set forth in our credit facilities. We show both our current ratios and the maximum ratio permitted or minimum ratio required under our Second Amended Credit Facility, for fiscal 2022 and fiscal 2021, respectively. (5)As defined in the Second Amended Credit Facility, interest expense used in the consolidated interest coverage ratio excludes non-cash interest of $2.1 millionfor both years of fiscal 2022 and fiscal 2021. 45 -------------------------------------------------------------------------------- Table of Contents RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS See Note 1 to the Consolidated Financial Statements - Summary of Significant Accounting Policies for a description of certain recently issued accounting standards that were adopted or are pending adoption that could have a significant impact on our Consolidated Financial Statements or the Notes to the Consolidated Financial Statements.
Related party transactions
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