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 and related services. Operations are organized into the Americas, EMEA and Asia regions, with reserve power and motive power as the primary product lines. The filing covers the 13-week first quarter of fiscal 2016 ended June 28, 2015; the comparable period ended June 29, 2014.
Key financial metrics
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $562.1 million | $634.1 million |
| Gross profit | $150.4 million | $162.6 million |
| Gross margin | 26.8% | 25.6% |
| Operating earnings | $69.0 million | $71.7 million |
| Operating margin | 12.3% | 11.3% |
| Earnings before taxes | $62.0 million | $65.8 million |
| Net earnings attributable to EnerSys stockholders | $48.4 million | $49.2 million |
| Diluted EPS | $1.03 | $0.99 |
| Operating cash flow | $82.3 million | $41.8 million |
Cash and cash equivalents were $444.8 million at June 28, 2015, compared with $268.9 million at March 31, 2015. Total assets were $2.35 billion and total equity was $1.10 billion. Capital expenditures were $19.7 million. The company paid $7.8 million in dividends, or $0.175 per share.
Debt consisted of $300.0 million of 5.00% senior notes due 2023, $150.0 million of term-loan borrowings under the 2011 Credit Facility, $172.2 million of convertible notes classified as current, and $18.9 million of short-term borrowings. No revolver balance was outstanding at quarter-end. Available and undrawn credit lines totaled approximately $652.2 million.
Material changes versus the prior comparable period
- Sales declined $72.0 million, or 11.4%, reflecting a 9% foreign-currency translation impact, a 3% organic-volume decline and a 1% pricing benefit.
- Americas sales decreased 4.2%, EMEA sales decreased 18.7% and Asia sales decreased 21.0%. Reserve power sales declined 15.1%; motive power sales declined 7.7%.
- Gross profit declined 7.5%, but gross margin increased 120 basis points because of lower commodity costs and improved pricing.
- Operating earnings declined 3.7%, although operating margin increased 100 basis points, aided by a $4.3 million gain on the sale of an Asian facility. Americas operating earnings improved, while EMEA and Asia weakened.
- Interest expense increased 30.0% to $6.3 million because average debt outstanding increased to approximately $608.0 million from $325.2 million.
- The effective tax rate decreased to 22.7% from 25.3%, primarily due to recognition of a previously unrecognized foreign tax position and changes in the earnings mix by jurisdiction.
- Operating cash flow nearly doubled, supported by a $31.0 million reduction in primary working capital, compared with a working-capital use in the prior-year quarter.
Guidance, outlook, risks and unusual items
Management described North American economic activity as strengthening, EMEA growth as limited and Asia as growing more slowly than in prior years. Revenue and order rates were described as stable on a consolidated basis, but foreign-currency movements reduced reported revenue. No specific earnings or revenue guidance was provided in the filing.
Management expects to complete ongoing restructuring programs during fiscal 2016 or fiscal 2017. Approximately $0.8 million of additional charges were expected for the EMEA program and approximately $1.6 million for the Jiangdu, China program. The company also recorded $1.2 million of restructuring charges in the quarter and a $0.6 million severance charge related to two executives.
On July 17, 2015, after quarter-end, EnerSys paid $172.4 million in cash to settle the principal and accrued interest on its convertible notes and issued 1,889,431 treasury shares for the conversion premium. The company also completed the acquisition of ICS Industries Pty. Ltd. on July 23, 2015.
Key risks include foreign-currency volatility, lead and other commodity costs, the ability to pass cost increases to customers, cyclical demand, environmental and workplace-safety obligations related to lead and acid, restructuring execution, acquisitions and integration, debt service, variable interest rates, customer credit, product quality, litigation, regulatory changes and potential goodwill impairment. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $1.7 million. A 10% increase in lead costs was estimated to increase quarterly cost of goods sold by approximately $14 million.
The company hedged approximately 110.4 million pounds of lead, representing about 21% of annual lead requirements, and had $109.3 million of foreign-currency forward contracts outstanding. Approximately 60% of sales and expenses are transacted in foreign currencies.
Most important facts for investors to verify
- Whether revenue and organic volume recover from the substantial EMEA and Asia declines and foreign-currency headwinds.
- Whether gross-margin improvement from pricing and lower commodity costs is sustainable.
- The effect of the July 2015 convertible-note settlement, including the $172.4 million cash payment and 1.9 million shares issued.
- Debt reduction, refinancing needs and compliance with the secured credit facility’s covenants.
- Completion costs and operating benefits from the EMEA, China and executive restructuring programs.
- Integration and financial contribution from the ICS Industries acquisition.
- Exposure to lead prices, foreign exchange rates, variable interest rates and environmental liabilities.
- Primary working capital, which increased to $624.9 million and 27.8% of annualized revenue at quarter-end.