EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, accessories, enclosures and related services. It serves more than 10,000 customers in over 100 countries through the Americas, EMEA and Asia segments, with reserve-power and motive-power product lines.
This report covers the 13-week third quarter and nine months of fiscal 2019 ended December 30, 2018, compared primarily with the quarter and nine months ended December 31, 2017. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 FY2019 | Q3 FY2018 | 9M FY2019 | 9M FY2018 |
|---|---|---|---|---|
| Net sales | $680.0 million | $658.9 million | $2,011.4 million | $1,898.8 million |
| Gross profit | $164.5 million | $167.3 million | $490.8 million | $491.0 million |
| Gross margin | 24.2% | 25.4% | 24.4% | 25.9% |
| Operating earnings | $50.0 million | $68.8 million | $177.5 million | $203.1 million |
| Operating margin | 7.3% | 10.5% | 8.8% | 10.7% |
| Net earnings attributable to EnerSys | $48.4 million | $(25.8) million | $141.7 million | $65.6 million |
| Diluted EPS | $1.12 | $(0.61) | $3.31 | $1.51 |
| Operating cash flow | Not separately provided | Not separately provided | $166.4 million | $129.9 million |
Q3 sales increased 3.2%; nine-month sales increased 5.9%. Motive-power sales increased 5.6% in the quarter and 7.2% year to date, while reserve-power sales increased 0.8% and 4.6%, respectively.
At December 30, 2018, cash and cash equivalents were $397.2 million, compared with $522.1 million at March 31, 2018. Total current assets were $1.60 billion and total assets were $3.22 billion. Primary working capital was $827.8 million, or 24.9% of annualized quarterly sales.
Total debt, including short-term debt and long-term debt net of issuance costs, was approximately $1.09 billion, compared with approximately $598 million at March 31, 2018. The company had approximately $504.9 million of available and undrawn credit lines and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales growth was led by the Americas, which increased 13.8% in Q3, including contributions from Alpha. EMEA declined 3.2% and Asia declined 25.4% in the quarter.
- Gross margin declined 120 basis points in Q3 and 150 basis points for the nine-month period, primarily because commodity costs increased by approximately $10 million in Q3 and $40 million year to date. Pricing, volume and cost savings partially offset the pressure.
- Operating earnings declined 27.4% in Q3 and 12.6% year to date. Operating expenses increased because of payroll-related costs and Alpha acquisition expenses; restructuring and exit charges also increased.
- Net earnings benefited from a substantially lower tax burden. Q3 included a $13.5 million income-tax benefit from a reduction in the Tax Act transition-tax liability; the prior-year quarter included a $88.3 million tax expense and a 141.2% effective tax rate.
- Operating cash flow improved by $36.5 million year to date, but cash declined $125.0 million because of the Alpha acquisition, capital expenditures and unfavorable foreign-currency translation.
Acquisition, outlook, risks and unusual items
- On December 7, 2018, EnerSys acquired Alpha Technologies for $750.0 million, consisting of $650.0 million cash and $100.0 million of EnerSys stock. Alpha contributed $26.8 million of reported Q3 sales and a $4.4 million net loss before transaction, integration and acquisition-financing effects.
- The acquisition generated preliminary goodwill of $336.3 million and increased intangible assets materially. Purchase accounting remains preliminary and may change during the measurement period.
- EnerSys amended its credit facility to fund the transaction. At quarter-end, the company had $344.0 million outstanding on the revolver and $449.1 million under the term loan. Management expects sufficient liquidity for operations, capital expenditures, dividends and additional acquisition opportunities.
- Management expects continued exposure to volatile lead and other commodity costs, freight, tariffs, foreign exchange and variable interest rates. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $8.0 million.
- Restructuring and other exit charges were $5.4 million in Q3 and $8.3 million year to date. These included $3.5 million related to the planned sale of a German subsidiary and actions in EMEA, the Americas and Asia.
- The company is pursuing restructuring and Alpha integration synergies, but cautions that expected benefits may not be realized or may take longer than anticipated. Other stated risks include weak telecom demand in China, cyclical end markets, environmental and product-liability exposure, litigation, Brexit, customer credit risk, cybersecurity and potential goodwill impairment.
- EnerSys adopted ASC 606 and updated pension-cost presentation in fiscal 2019. It expects to adopt the new lease standard on April 1, 2019, which will add lease assets and liabilities to the balance sheet; the effect on earnings and cash flow had not been determined.
- A $0.175-per-share quarterly dividend was approved for payment on March 29, 2019. The company repurchased 298,003 shares for $25.0 million during the nine months.
Important facts for investors to verify
- Whether Alpha integration costs, operating losses and preliminary purchase accounting assumptions change materially.
- The pace of recovery in gross margins as pricing actions offset lead, freight, tariff and other input-cost inflation.
- Debt reduction, interest-rate sensitivity, covenant headroom and the company’s ability to maintain liquidity after the acquisition.
- Performance in Asia, particularly the effect of slower telecom spending in China and softer Australian demand.
- Progress and remaining costs of EMEA, Asia and other restructuring programs, including the planned German subsidiary sale.
- Potential changes to tax benefits, the effective tax rate and the impact of GILTI, FDII and other Tax Act provisions.
- Finalization of Alpha’s valuation, goodwill and intangible-asset lives, as well as any future impairment risk.