EnerSys Form 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures and distributes stored-energy solutions, batteries, chargers, power equipment and related services globally. The filing covers the fiscal third quarter and nine months ended January 3, 2021, compared with January 3, 2020 and December 29, 2019, respectively. Effective April 1, 2020, management reorganized reporting around three global lines of business: Energy Systems, Motive Power and Specialty; prior periods were recast.
Key Financial Metrics
| Metric | Q3 FY2021 | Q3 FY2020 | 9M FY2021 | 9M FY2020 |
|---|---|---|---|---|
| Net sales | $751.1 million | $763.7 million | $2,164.4 million | $2,306.1 million |
| Gross profit | $189.3 million | $185.2 million | $541.8 million | $584.1 million |
| Gross margin | 25.2% | 24.3% | 25.0% | 25.3% |
| Operating earnings | $56.1 million | $43.1 million | $164.7 million | $170.1 million |
| Operating margin | 7.5% | 5.6% | 7.6% | 7.4% |
| Net earnings attributable to EnerSys stockholders | $38.6 million | $27.3 million | $109.5 million | $138.6 million |
| Diluted EPS | $0.89 | $0.64 | $2.54 | $3.23 |
| Operating cash flow | Not separately provided | Not separately provided | $272.1 million | $175.8 million |
Cash and equivalents were $488.7 million at January 3, 2021, up from $327.0 million at March 31, 2020. Total debt, including short-term debt and net long-term debt, was approximately $1.095 billion, compared with approximately $1.151 billion at March 31, 2020. Available and undrawn credit lines were approximately $737.9 million. Management stated that the company was in compliance with its debt covenants.
Primary working capital was $793.9 million, or 26.4% of annualized quarterly revenue, compared with $833.5 million and 26.7% at March 31, 2020. Capital expenditures were $53.7 million for the nine-month period. Financing activities used $92.6 million, including debt repayments and $22.3 million of dividends. The quarterly dividend remained $0.175 per share; a subsequent $0.175 dividend was approved for payment in March 2021.
Material Changes Versus the Prior Comparable Period
- Third-quarter sales declined 1.7%, driven by a 3% organic-volume decline associated with COVID-19, partly offset by a 1% foreign-currency benefit. Nine-month sales declined 6.1%, reflecting an 8% organic-volume decline, a 1% pricing decline and a 3% contribution from the NorthStar acquisition.
- Third-quarter operating earnings increased 30.1% and operating margin expanded 190 basis points, despite higher restructuring and exit charges. The improvement reflected lower operating expenses, reduced travel and selling costs, the absence of the prior-year Richmond plant fire impact and insurance recoveries.
- Nine-month operating earnings declined 3.2%, while operating margin increased modestly to 7.6%. Lower volume and manufacturing inefficiencies related to the pandemic reduced profitability.
- Third-quarter net earnings increased 41.5%, while nine-month net earnings declined 21.0%. The nine-month comparison was affected by the prior-year period's unusually low tax expense, including Swiss tax reform benefits.
- Energy Systems sales declined 2.4% in the quarter and 1.0% year to date. Motive Power sales declined 3.5% and 16.5%, respectively, and remained the segment most affected by COVID-19. Specialty sales increased 6.6% and 12.5%, respectively.
- Operating cash flow increased by $96.3 million year over year, primarily due to working-capital improvements and insurance-related receipts. The prior-year period included $176.5 million paid for the NorthStar acquisition; no acquisition cash payment was recorded in the current nine-month period.
Guidance, Outlook, Commentary and Risks
The filing does not provide a specific quantitative earnings or revenue guidance range. Management reported that recent Motive Power order intake was close to pre-pandemic levels, while COVID-19 absenteeism and reduced industrial production continued to affect the segment. Energy Systems benefited from demand for telecommunications, broadband and data-center products, although project delays and 5G deployment timing remained concerns. Specialty benefited from recovering truck OEM demand, aftermarket demand and steady defense activity.
- EnerSys committed to substantially close its Hagen, Germany facility, which produces flooded motive-power batteries. Total charges are estimated at approximately $70.0 million, consisting of approximately $50.0 million of cash charges and $20.0 million of non-cash charges, with most expected by the end of calendar 2021. Approximately 200 positions are expected to be eliminated. $15.2 million of restructuring and exit charges were recorded in the quarter, including Hagen-related severance and asset write-offs.
- The company estimated approximately $10.9 million of additional restructuring costs, mainly related to new fiscal 2021 plans, to be incurred by the end of fiscal 2021.
- The Richmond, Kentucky plant-fire insurance claims were settled for $46.1 million. The settlement produced a $4.4 million net gain in the quarter, and the company received the remaining $5.6 million of proceeds on January 4, 2021.
- Lead, foreign-currency and interest-rate volatility remain material exposures. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $13 million for the quarter and $40 million for the nine-month period. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $5.0 million.
- COVID-19, cyclical customer demand, commodity prices, pricing recovery, manufacturing efficiency, supply-chain disruptions, environmental and safety obligations, competition, litigation, foreign exchange and debt-service requirements could materially affect results.
- European competition investigations and related customer claims remain uncertain. The company disclosed no reserve balance for those matters as of January 3, 2021. Environmental liabilities also include a $1.1 million reserve related to the former Yuasa facility in Sumter, South Carolina.
- The company adopted the expected-credit-loss standard effective April 1, 2020 without a material impact. Management stated that COVID-19-related estimates, including credit losses, asset recoverability, goodwill, taxes, pensions and contingencies, could change as conditions evolve.
Most Important Facts for Investors to Verify
- Whether Motive Power volumes and margins recover as industrial production normalizes and whether order intake remains near pre-pandemic levels.
- The timing and final cost of the Hagen closure, including the estimated $70.0 million total charges and approximately 200 employee reductions.
- The sustainability of cost reductions and the extent to which quarterly margin improvement depended on insurance recoveries and other unusual items.
- Progress toward refinancing or repaying the approximately $320.0 million final term-loan payment due in September 2022 and the maturity of the $300.0 million 2023 Notes.
- Exposure to lead prices, foreign-exchange movements, variable interest rates and the company’s ability to pass higher costs through customer pricing.
- The effect of COVID-19 on demand, absenteeism, project schedules, manufacturing efficiency and supply chains.
- Potential outcomes of competition investigations, environmental matters, product warranties and other litigation or regulatory proceedings.
- NorthStar integration and profitability, including the disclosed control-assessment exclusion for NorthStar, which represented 8.3% of total assets at January 3, 2021.