EnerSys Form 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures stored-energy solutions, industrial batteries, energy systems, motive power products, specialty batteries, chargers, and related services worldwide. This unaudited Form 10-Q covers the 13-week first quarter of fiscal 2021 ended July 5, 2020, compared with the quarter ended June 30, 2019. The company reorganized its reportable segments around global lines of business: Energy Systems, Motive Power, and Specialty; prior periods were recast.
Key Financial Metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $704.9 million | $780.2 million | Down 9.7% |
| Gross profit | $175.0 million | $201.5 million | Down 13.2% |
| Gross margin | 24.8% | 25.8% | Down 100 bps |
| Operating earnings | $53.2 million | $68.3 million | Down 22.1% |
| Operating margin | 7.5% | 8.8% | Down 130 bps |
| Net earnings attributable to EnerSys | $35.2 million | $48.6 million | Down 27.6% |
| Diluted EPS | $0.82 | $1.13 | Down $0.31 |
| Operating cash flow | $116.6 million | $30.4 million | Up $86.2 million |
| Capital expenditures | $26.3 million | $17.3 million | Up $9.0 million |
Cash and cash equivalents were $384.4 million at July 5, 2020, compared with $327.0 million at March 31, 2020. Available and undrawn credit lines were approximately $701.3 million. Total debt consisted of $46.8 million of short-term debt and $1.08 billion of long-term debt, net of issuance costs. The company stated that it was in compliance with its debt covenants.
The quarterly dividend remained $0.175 per share. A subsequent $0.175 per-share dividend was approved on August 12, 2020. Primary working capital was $776.6 million, or 27.5% of annualized quarterly sales, versus $833.5 million and 26.7% at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- Sales declined primarily because of an 11% decrease in organic volume, a 2% adverse foreign-currency impact, and a 1% pricing decrease, partly offset by a 4% contribution from the NorthStar acquisition.
- Energy Systems sales were essentially flat at $353.4 million, supported by telecommunications and data-center demand.
- Motive Power sales decreased 23.7% to $262.8 million, reflecting COVID-19-related shutdowns and reduced production at industrial customers.
- Specialty sales increased 8.2% to $88.7 million, although organic volume declined; NorthStar contributed to the increase.
- Lower volume and higher manufacturing costs reduced gross and operating margins, partly offset by lower commodity costs, cost reductions, lower operating expenses, and a $3.7 million business-interruption insurance settlement recognized as a reduction of cost of goods sold.
- Net cash from operations increased substantially, primarily because of a $67.0 million reduction in primary working capital, including lower accounts receivable and inventories.
- The company used $39.5 million in financing activities, including debt repayments, dividends, and taxes related to equity awards. No open-market treasury-stock repurchases were made during the quarter, although 56,024 shares were acquired through employee equity-plan transactions.
- The effective tax rate declined to 15.4% from 17.0%, primarily because of Swiss tax reform and changes in the mix of earnings among tax jurisdictions. The quarter included a $1.9 million tax benefit related to Swiss tax reform.
Outlook, Risks, Contingencies, and Unusual Items
- Management reported that COVID-19 most significantly affected Motive Power and expected recovery as restrictions ease and economic activity improves. Energy Systems benefited from demand for broadband, telecommunications, and remote-data infrastructure. Specialty demand was mixed, with weaker truck OEM demand partly offset by aftermarket and defense activity.
- Management expected year-over-year benefits from lower commodity costs in fiscal 2021, accompanied by some related reductions in selling prices. Approximately 30% of revenue was subject to lead-indexed pricing agreements.
- The Richmond, Kentucky plant fire resulted in cumulative charges of $26.3 million through July 5, 2020, including a $9.3 million charge in the quarter. Insurance advances totaled $22.0 million, and business-interruption recoveries totaled $8.7 million. The total insurance claim may exceed $50 million; final recovery and timing remain uncertain.
- Approximately $6.5 million of restructuring costs remained estimated through the end of fiscal 2021. The company also continued actions related to exiting diesel-electric submarine battery manufacturing.
- Key risks include COVID-19 and broader economic conditions, cyclical industrial demand, lead and other raw-material costs, foreign-currency volatility, variable-rate debt, customer credit risk, environmental and workplace exposure to lead and acid, litigation and competition investigations, product quality, facility or supply-chain disruption, insurance recovery, acquisitions, goodwill impairment, and cybersecurity.
- A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $5.4 million on variable-rate debt. A 10% increase in lead costs would have increased quarterly cost of goods sold by approximately $14 million based on the company’s estimate.
- The company adopted the expected-credit-loss standard on April 1, 2020 without a material impact on results, financial position, or cash flows. Management noted that COVID-19-related estimates could change materially as conditions develop.
Investor Verification Checklist
- Verify the pace of recovery in Motive Power volumes and whether Energy Systems demand remains resilient.
- Track gross-margin recovery, manufacturing-cost actions, commodity pricing, and the effect of lower selling prices.
- Review the Richmond plant’s operating status, additional costs, insurance proceeds, and final claim resolution.
- Monitor leverage, revolver and term-loan repayments, variable-rate exposure, covenant compliance, and refinancing needs ahead of the 2023 and 2027 notes and 2022 credit-facility maturity.
- Assess working-capital conversion and whether the unusually strong operating cash flow is sustained.
- Evaluate NorthStar integration, segment performance, goodwill allocation, and potential impairment risk.
- Review pending European competition matters, environmental obligations, warranty reserves, and other litigation contingencies.
- Confirm subsequent dividend payments and the company’s stated ability to fund acquisitions, share repurchases, and ongoing capital expenditures.