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. It serves more than 10,000 customers in over 100 countries through the Americas, Europe and Asia segments. The filing covers the quarter and six months ended September 30, 2012, representing fiscal 2013 second quarter and first half; the comparable prior periods ended October 2, 2011.
Financial performance and position
| Metric | Quarter ended September 30, 2012 | Prior comparable quarter | Six months ended September 30, 2012 | Prior comparable six months |
|---|---|---|---|---|
| Net sales | $554.2 million | $547.1 million | $1,148.1 million | $1,116.4 million |
| Gross profit | $138.3 million | $114.4 million | $286.6 million | $236.4 million |
| Gross margin | 25.0% | 20.9% | 25.0% | 21.2% |
| Operating earnings | $62.9 million | $42.4 million | $133.1 million | $91.2 million |
| Operating margin | 11.4% | 7.8% | 11.6% | 8.2% |
| Net earnings attributable to EnerSys stockholders | $43.8 million | $28.3 million | $89.6 million | $61.8 million |
| Diluted EPS | $0.90 | $0.57 | $1.84 | $1.23 |
| Operating cash flow | Not separately provided | Not separately provided | $78.8 million | $27.2 million |
Quarterly sales increased 1.3%, while first-half sales increased 2.8%. Quarterly gross profit rose 20.9% and first-half gross profit rose 21.3%, primarily because of lower lead costs and higher volume. Lead cost reductions lowered cost of goods sold by approximately $20 million in the quarter and $41 million in the first six months.
Cash and cash equivalents were $212.3 million at September 30, 2012, compared with $160.5 million at March 31, 2012. Total assets were $2.0 billion. Total debt, including capital lease obligations and current debt, was approximately $249.0 million, compared with approximately $256.1 million at March 31, 2012. The company reported approximately $285 million of undrawn committed credit lines and $108 million of available uncommitted lines, and stated that it was in compliance with its debt covenants.
Primary working capital increased to $607.2 million, or 27.4% of annualized quarterly sales, from $578.6 million, or 24.4%, at March 31, 2012. Capital expenditures were $26.7 million in the first six months. Financing activities provided $2.9 million, while cash increased $51.9 million during the period.
Material changes versus the prior comparable period
- Americas sales increased 9.7% in the quarter and 10.6% year to date; Asia sales increased 25.2% and 22.0%, respectively.
- Europe sales declined 12.2% in the quarter and 9.2% year to date, reflecting weaker volume, unfavorable currency translation and pricing pressure.
- Reserve power sales increased 6.7% in the quarter and 7.8% year to date, while motive power sales declined 3.9% and 1.6%, respectively.
- Operating earnings increased 48.2% in the quarter and 46.1% year to date. Americas and Asia margins improved materially; Europe earnings declined in the quarter but its margin improved to 6.5%.
- Interest expense increased 21.0% in the quarter and 29.0% year to date, primarily because of higher interest rates in Asia and South America associated with recent acquisitions.
- The effective tax rate increased to 28.0% from 26.3% in the quarter and to 28.6% from 25.1% year to date, primarily because of geographic earnings mix and expiration of certain U.S. corporate tax exemptions.
- Prior-year results included $0.9 million of legal settlement income; no comparable income was recorded in fiscal 2013.
Guidance, outlook, risks and unusual items
The filing does not provide a specific earnings or revenue guidance range. Management described the Americas recovery as continuing, Asia as expanding at a slower rate, and Europe as constrained by the financial crisis and austerity measures. Management expects to continue cost reduction and product-mix initiatives.
Restructuring programs in Europe are expected to reduce approximately 45 employees under the fiscal 2013 program, with estimated total charges of $4.5 million; $1.2 million had been recorded in the first six months. Additional fiscal 2013 charges of approximately $1.1 million were expected under that program. Earlier European restructuring programs also remained in progress.
Lead, foreign currency and interest-rate volatility are significant exposures. At September 30, 2012, the company had hedged approximately 46.8 million pounds of lead purchases, representing about 10% of annual requirements, and had $90.4 million of foreign currency forward contracts. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $14 million for the quarter and $28 million for the six months. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $0.9 million.
Other risks include cyclical customer industries, pricing ability, raw-material availability, environmental and safety obligations related to lead and acid, currency movements, competition, product quality, acquisitions and integration, debt restrictions, customer credit risk, litigation, labor matters, disaster recovery and information-system security. Management stated that litigation was not expected to be material and that no material subsequent events occurred through issuance of the financial statements.
Most important facts for investors to verify
- Whether gross-margin improvement is sustainable as lead prices, pricing formulas and hedge benefits change.
- Whether European demand and operating performance stabilize amid continued economic weakness.
- The timing and final cost of the European restructuring programs.
- Working-capital efficiency, particularly the rise in receivables and inventories relative to sales.
- Debt maturities, convertible-note settlement terms and compliance with credit-facility covenants.
- The effect of foreign currency movements and the expiration of interest-rate swaps between February and May 2013.
- Whether acquisitions continue to generate the reported volume and margin benefits.