EnerSys Form 10-Q Summary
Business Context and Reporting Period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment and related services. It operates through the Americas, EMEA and Asia segments and sells reserve-power and motive-power products in more than 100 countries.
This filing covers the quarter ended June 30, 2013, the first quarter of fiscal 2014, compared primarily with the quarter ended July 1, 2012. The interim financial statements are unaudited.
Financial Performance and Liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $597.3 million | $593.9 million | Up 0.6% |
| Gross profit | $140.1 million | $148.3 million | Down 5.5% |
| Gross margin | 23.5% | 25.0% | Down 150 basis points |
| Operating earnings | $62.6 million | $70.3 million | Down 10.9% |
| Operating margin | 10.5% | 11.8% | Down 130 basis points |
| Net earnings attributable to EnerSys stockholders | $40.8 million | $45.8 million | Down 10.8% |
| Diluted EPS | $0.83 | $0.95 | Down $0.12 |
| Operating cash flow | $34.4 million | $24.2 million | Up $10.2 million |
Revenue was the highest quarterly level reported by the company, reflecting approximately 1% combined organic volume and pricing growth, partly offset by currency translation. Reserve-power sales increased 1.2%; motive-power sales were essentially flat.
- Americas sales increased 9.2% to $315.6 million, while operating earnings declined 6.3% to $41.7 million.
- EMEA sales declined 2.6% to $231.0 million, and operating earnings declined 6.6% to $16.1 million.
- Asia sales declined 25.4% to $50.7 million, primarily because a large prior-year Japan project had ended; operating earnings declined 41.3% to $5.2 million.
Higher commodity costs and unfavorable product mix compressed margins. Foreign-currency losses increased to approximately $1.8 million from $0.7 million, contributing to the increase in other expense.
Cash and cash equivalents were $240.1 million at June 30, 2013, compared with $249.3 million at March 31, 2013. Primary working capital was $559.3 million, or 23.4% of annualized quarterly revenue, versus 24.2% at March 31, 2013 and 25.2% in the prior-year quarter. Capital expenditures were $12.8 million, and investing activities used $11.7 million.
Total debt was approximately $178.2 million, consisting principally of $157.3 million of long-term debt and $20.7 million of short-term borrowings. The company reported $475.3 million of available and undrawn credit lines, including approximately $349 million of committed lines, and stated that it was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Sales increased modestly, but gross profit declined because of higher commodity costs.
- Operating earnings and diluted EPS declined despite lower operating expenses and lower interest expense.
- Operating cash flow improved as working-capital cash usage fell substantially from the prior-year period.
- Financing activities shifted from net cash inflow in the prior year to a $31.9 million cash outflow, primarily due to $22.0 million of treasury-stock purchases and $6.0 million of dividends.
- The company paid its first reported quarterly common-stock dividend of $0.125 per share and repurchased 441,588 shares for $22.0 million under its repurchase program.
- Interest expense declined to $4.3 million from $4.7 million as average debt outstanding fell to $177.4 million from $266.0 million.
- The $65.0 million notional interest-rate swaps outstanding at March 31, 2013 expired during the quarter; no swaps or borrowings under the U.S. credit agreement remained at June 30, 2013.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide a specific quarterly or annual earnings or revenue guidance range. Management described revenue and order trends as stable but characterized economic conditions as mixed: expansion continued in the Americas and Asia at slower rates, while European austerity and the financial crisis weighed on EMEA.
Restructuring programs continued in EMEA and China. The company recorded $0.4 million of restructuring charges in the quarter and expects approximately $2.7 million of additional EMEA restructuring charges and approximately $0.7 million related to the China facility closure. The filing states that significant litigation is not expected to materially affect financial condition, results or cash flow, but the company remains exposed to environmental, occupational-safety and hazardous-material risks, particularly involving lead and acid.
- Lead-price and foreign-currency volatility remain significant exposures. At June 30, 2013, lead contracts covered approximately 90.9 million pounds, or 19% of estimated annual requirements; approximately 45% of lead costs for the remaining three fiscal quarters were considered known.
- Management estimated that a 10% increase in lead costs would have increased first-quarter cost of goods sold by approximately $14 million.
- Approximately 60% of sales and expenses are transacted in foreign currencies, creating translation and operating exposure.
- Variable-rate debt exposure remained, although management estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $0.2 million.
- On August 2, 2013, after quarter-end, the company amended its $350 million credit facility, extending maturity from March 31, 2016 to September 30, 2018 and increasing flexibility for acquisitions, dividends, joint ventures and share repurchases.
Important Facts for Investors to Verify
- Whether commodity-cost increases can be recovered through customer pricing and whether gross margins stabilize.
- The sustainability of Americas volume growth and the recovery prospects for EMEA and Asia.
- Progress, remaining costs and expected savings from the EMEA and China restructuring programs.
- The availability and geographic location of cash, given that a substantial majority was held by foreign subsidiaries and considered indefinitely reinvested.
- The potential dilution or cash settlement implications of the $172.5 million convertible notes, convertible at $40.60 per share.
- Future cash uses for dividends, share repurchases, acquisitions and capital expenditures.
- Lead, foreign-currency and interest-rate hedge positions and the related impact on future earnings and accumulated other comprehensive income.