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. Its reportable segments are Americas, EMEA and Asia, with reserve power and motive power as its primary product lines.
The filing covers the quarter and six months ended September 27, 2015, representing the second quarter of fiscal 2016. Comparisons are to the quarter and six months ended September 28, 2014. The financial statements are unaudited.
Key financial metrics
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $569.1 million | $629.9 million | $1,131.2 million | $1,264.0 million |
| Gross profit | $154.9 million | $162.5 million | $305.4 million | $325.1 million |
| Gross margin | 27.2% | 25.8% | 27.0% | 25.7% |
| Operating earnings | $59.5 million | $80.1 million | $128.6 million | $151.7 million |
| Operating margin | 10.5% | 12.7% | 11.4% | 12.0% |
| Net earnings attributable to EnerSys | $40.0 million | $56.3 million | $88.4 million | $105.5 million |
| Diluted EPS | $0.87 | $1.16 | $1.91 | $2.15 |
| Operating cash flow | Not separately provided | Not separately provided | $174.6 million | $50.6 million |
Q2 net sales declined 9.7%, while six-month sales declined 10.5%. Gross margin improved because of lower commodity costs, but operating and net margins declined due to lower volume, foreign-currency headwinds, higher operating expenses, legal charges and increased interest expense.
At September 27, 2015, cash and cash equivalents were $320.6 million, total debt was approximately $667.7 million, and available undrawn credit lines were approximately $442.9 million. Long-term debt included $300.0 million of 5.00% Senior Notes due 2023 and $343.1 million outstanding under the 2011 Credit Facility. Short-term borrowings were $24.6 million.
Six-month investing cash outflows were $62.6 million, including $33.5 million of capital expenditures and $39.1 million for acquisitions. Financing cash outflows were $61.4 million, including $120.6 million of treasury-stock purchases, $172.3 million paid to settle the convertible notes, $15.6 million of dividends and net debt-related activity. Cash increased by $51.6 million during the six months.
Material changes versus the prior comparable period
- Sales decreased primarily because of a 9% foreign-currency translation impact and a 3% organic-volume decline in Q2; acquisitions and pricing partly offset the decline.
- EMEA sales fell 18.8% in both Q2 and the six-month period, reflecting significant currency headwinds and lower organic volume. Americas sales declined 3.2% in Q2, while Asia sales declined 9.7%.
- Reserve power sales declined 13.1% in Q2 and 14.1% for six months; motive power sales declined 6.2% and 7.0%, respectively.
- Americas operating earnings improved, supported by product mix, pricing and lower commodity costs. EMEA earnings declined because of currency pressure and lower reserve power demand. Asia reported an operating loss due partly to plant-transition costs, currency effects and reduced telecom sales.
- Q2 included $2.6 million of restructuring and exit charges and a $3.2 million net legal proceedings charge, compared with $1.8 million of restructuring charges and a $16.2 million legal accrual reversal in the prior-year quarter.
- The company issued $300.0 million of 5.00% Senior Notes in April 2015, used primarily to retire its convertible notes and fund the accelerated share repurchase. The convertible notes were extinguished in July 2015 through $172.4 million of cash payments and issuance of 1.9 million treasury shares.
- The company prepaid $180.0 million under an accelerated share repurchase agreement and initially received 2.0 million shares. Additional shares may be delivered by February 25, 2016.
- The effective tax rate declined to 26.1% in Q2 from 28.5% and to 24.3% for six months from 27.1%, primarily due to recognition of tax benefits and changes in the jurisdictional earnings mix.
Guidance, outlook, risks and unusual items
The filing does not provide specific quantitative earnings or revenue guidance. Management described economic activity as mixed, with limited growth in North America and EMEA and slower growth in Asia. Management reported more stable recent revenue and order trends but continued foreign-currency pressure.
Management stated that liquidity was sufficient for short-term requirements, anticipated growth, acquisitions, continued dividends and share repurchases. The company was in compliance with its debt covenants and expected to remain compliant.
- European competition investigations remain ongoing. The company reserved $4.0 million for related investigations and legal charges, but stated that potential losses in the Dutch proceeding cannot yet be estimated and actual losses could differ materially.
- Restructuring programs continued across EMEA, Asia and the Americas. The announced closure of the Cleveland charger facility is expected to generate approximately $2.8 million of charges and reduce approximately 100 employees; charges were expected from Q3 FY2016 through Q1 FY2017.
- Lead, foreign-currency and interest-rate volatility remain significant exposures. A 10% increase in lead costs would have increased cost of goods sold by approximately $14 million in Q2 and $28 million for six months. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.7 million.
- Approximately 60% of sales and expenses are transacted in foreign currencies, and currency translation materially reduced reported revenue.
- Other risks include cyclical customer industries, raw-material availability and pricing, environmental and safety liabilities related to lead and acid, product quality, competition, acquisitions, restructuring execution, debt service, customer credit and potential impairment charges.
- A quarterly dividend of $0.175 per share was approved on October 29, 2015, for payment on December 24, 2015.
Most important facts for investors to verify
- Whether sales and organic volumes stabilize, particularly in EMEA reserve power and Asia telecommunications.
- The ultimate cost and scope of the European competition investigations, including the Dutch proceeding.
- Progress, remaining charges and expected savings from the restructuring programs and Cleveland facility closure.
- Final settlement of the accelerated share repurchase and its effect on diluted share count and EPS.
- Debt reduction, interest costs and covenant capacity following the Senior Notes issuance and convertible-note settlement.
- Currency and lead-cost trends, including the effectiveness and future mark-to-market effects of hedges.
- Cash conversion and working-capital performance, given the increase in primary working capital to $609.5 million, or 26.8% of annualized sales.