EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys manufactures, markets and distributes industrial batteries, chargers, enclosures, accessories and related services in more than 100 countries. Its reportable segments are Americas, EMEA and Asia, and its primary product lines are reserve power and motive power. This unaudited Form 10-Q covers the 13-week quarter and nine months ended December 28, 2014, the third quarter of fiscal 2015. The comparable quarter ended December 29, 2013.
Key financial metrics
| Metric | Q3 FY2015 | Q3 FY2014 | Nine months FY2015 | Nine months FY2014 |
|---|---|---|---|---|
| Net sales | $611.6 million | $643.0 million | $1,875.6 million | $1,809.2 million |
| Gross profit / margin | $157.3 million / 25.7% | $167.1 million / 26.0% | $482.4 million / 25.7% | $451.6 million / 25.0% |
| Operating earnings / margin | $68.7 million / 11.2% | $58.9 million / 9.2% | $220.4 million / 11.8% | $182.6 million / 10.1% |
| Earnings before taxes | $64.6 million | $46.2 million | $209.5 million | $158.5 million |
| Net earnings attributable to EnerSys | $49.3 million | $55.3 million | $154.7 million | $137.5 million |
| Diluted EPS | $1.04 | $1.10 | $3.19 | $2.77 |
Quarterly sales declined 4.9%, while nine-month sales increased 3.7%. Quarterly operating earnings increased 16.5%, and nine-month operating earnings increased 20.8%. The quarterly effective tax rate was 23.6%, compared with a prior-year benefit rate of 13.5%; the nine-month rate was 26.0%, compared with 15.5%.
- Operating cash flow for the nine months was $132.9 million, compared with $99.1 million in the prior-year period.
- Capital expenditures were $47.2 million, compared with $48.9 million; investing cash outflow was $45.0 million versus $193.7 million, principally because the prior year included $146.2 million of business acquisitions.
- Cash and cash equivalents were $280.0 million at December 28, 2014, compared with $240.1 million at March 31, 2014.
- Total debt, including capital lease obligations, was approximately $513.2 million, comprising $14.4 million of short-term debt and $498.9 million of long-term debt and leases, versus approximately $322.0 million at March 31, 2014.
- Available and undrawn credit lines totaled $472.3 million, including $154.1 million of uncommitted lines. The Company reported compliance with its debt covenants.
- Primary working capital was $656.9 million, or 26.9% of annualized quarterly revenue, versus 25.1% at March 31, 2014.
- Dividends were $0.175 per share in the quarter and $0.525 per share for the nine months. The Company repurchased 2.8 million shares for $176.0 million during the nine months.
Material changes versus the prior comparable period
- Quarterly sales fell across all regions: Americas declined 3.9%, EMEA 3.6% and Asia 15.2%. Management attributed the consolidated decline primarily to a 6% foreign-currency translation impact and a 2% organic-volume decline, partly offset by acquisitions and pricing.
- Nine-month sales increased in all regions, led by Americas growth of 5.2%; acquisitions were a major contributor. Asia’s quarterly decline reflected lower organic volume, including reduced sales to a major Chinese telecommunications customer under a lower-volume tender program.
- Quarterly gross margin declined 30 basis points because of lower organic volume and higher commodity costs. Nine-month gross margin increased 70 basis points, supported by volume, lower commodity costs, favorable mix and EMEA restructuring benefits.
- Operating earnings benefited from substantially lower restructuring charges and the absence of the prior-year $5.2 million Asia goodwill impairment. Nine-month results also included a $16.2 million net reversal of the previously recorded Altergy legal accrual.
- Americas operating margin declined to 13.0% in the quarter and 12.3% for the nine months, affected by lower pricing for one customer, weaker-than-expected Purcell contribution, stock-based compensation and ERP implementation costs.
- Excluding restructuring charges, EMEA operating margin improved to 11.5% in the quarter and 11.1% for the nine months, reflecting improved mix, 4G expansion, emerging-market reserve-power demand, premium product adoption and restructuring execution.
- Asia operating margin declined to 4.4% in the quarter and 5.4% for the nine months, primarily due to a temporary plant shutdown in China, reduced Chinese telecom sales and currency effects in Australia and Japan.
Outlook, commentary, risks and unusual items
Management described economic activity as strengthening in North America, limited in South America and EMEA, and fastest-growing in Asia. Revenue and order trends were described as recently stable, while commodity costs had not been substantial overall. The filing does not provide a specific earnings or revenue guidance range.
- The July 2014 credit-facility amendment added a $150 million term loan and increased revolving commitments, providing liquidity for operations and potential cash settlement of the convertible notes.
- The $172.3 million principal amount of 3.375% convertible notes was convertible beginning January 1, 2015. The Company intended to fund at least the principal conversion amount with credit-facility borrowings; up to approximately 4.3 million shares could be issuable for conversion consideration depending on settlement terms.
- Restructuring continued in EMEA and Asia. The Company expects approximately $0.3 million of additional fiscal 2015 charges for one EMEA program, approximately $0.6 million for other EMEA programs, and expects the Jiangdu, China facility to close or substantially transfer production during fiscal 2016.
- Lead and foreign-currency exposures remain material. The Company had hedged approximately 102.9 million pounds of lead purchases and $118.5 million of foreign-currency contracts. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.4 million; a 10% increase in lead cost was estimated to increase cost of goods sold by approximately $16 million for the quarter and $47 million for the nine months.
- Foreign-currency translation reduced other comprehensive income by $42.9 million in the quarter and $95.9 million for the nine months. Approximately 60% of sales and expenses are transacted in foreign currencies.
- The Altergy dispute was settled during the period: EnerSys paid $40.0 million, received $2.0 million for its equity interest, and reversed approximately $16.2 million of the prior legal accrual net of fees. The filing states that other litigation is not expected to be material. Environmental reserves for the former Sumter, South Carolina facility were $2.9 million.
- Key risks include cyclical customer industries, lead prices and availability, foreign exchange, pricing recovery, competitive conditions, environmental and safety liabilities, product quality, acquisitions and integration, restructuring execution, goodwill impairment, variable-rate debt, liquidity, litigation and information-system disruptions.
Important facts for investors to verify
- Whether the convertible notes are converted, redeemed or otherwise settled and the resulting cash funding, share issuance and dilution.
- Progress and remaining costs of the EMEA and Jiangdu restructuring programs, including the expected fiscal 2016 facility closure.
- Asia demand trends, particularly Chinese telecommunications volumes, and whether Americas and Purcell profitability recover.
- Foreign-currency, lead-price and variable-interest-rate effects on margins and cash flow.
- Debt covenant compliance, available borrowing capacity and the use of cash for repurchases, dividends and potential acquisitions.
- The sustainability of reported earnings after excluding the Altergy legal-accrual reversal, lower prior-year restructuring charges and the prior-year goodwill impairment.
- Implementation effects of the forthcoming revenue-recognition standard, which management was still evaluating.