EnerSys Fiscal 2012 Second-Quarter 10-Q Summary
Business Context and Reporting Period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries and related chargers, power equipment, accessories and services. It serves more than 10,000 customers in over 100 countries through three geographic segments: Americas, Europe and Asia. The company sells reserve power and motive power products, with approximately 60% of sales generated outside the United States.
The filing covers the 13-week second quarter and six months of fiscal 2012 ended October 2, 2011, compared with the quarter and six months ended October 3, 2010. The financial statements are unaudited.
Financial Performance and Key Metrics
| Metric | Q2 FY2012 | Q2 FY2011 | Change |
|---|---|---|---|
| Net sales | $547.1 million | $472.8 million | 15.7% increase |
| Gross profit | $114.4 million | $110.7 million | 3.3% increase |
| Gross margin | 20.9% | 23.4% | Down 250 basis points |
| Operating earnings | $42.4 million | $44.5 million | 4.6% decrease |
| Operating margin | 7.8% | 9.4% | Down 160 basis points |
| Earnings before taxes | $38.4 million | $37.4 million | 2.7% increase |
| Net earnings | $28.3 million | $26.5 million | 6.6% increase |
| Diluted EPS | $0.57 | $0.53 | Increase |
| Metric | Six Months FY2012 | Six Months FY2011 | Change |
|---|---|---|---|
| Net sales | $1.116 billion | $907.8 million | 23.0% increase |
| Gross profit | $236.4 million | $207.3 million | 14.0% increase |
| Gross margin | 21.2% | 22.8% | Down 160 basis points |
| Operating earnings | $91.2 million | $82.0 million | 11.2% increase |
| Operating margin | 8.2% | 9.0% | Down 80 basis points |
| Net earnings | $61.8 million | $49.6 million | 24.6% increase |
| Diluted EPS | $1.23 | $1.00 | Increase |
Quarterly sales growth reflected approximately 8% organic volume growth, 3% pricing, 2% acquisitions and 3% foreign-currency translation. Six-month growth reflected 12% organic volume growth, 3% pricing, 2% acquisitions and 6% currency translation.
- Q2 segment sales increased 18.3% in Europe, 14.1% in the Americas and 11.8% in Asia.
- Motive power sales increased 24.1% in the quarter and 28.8% year to date; reserve power sales increased 8.1% and 17.2%, respectively.
- Lead costs increased approximately $19 million in the quarter and $37 million year to date. Pricing offset approximately $13 million and $27 million, respectively.
- Q2 operating earnings increased in Europe but declined in the Americas and fell sharply in Asia. Asia’s margin declined to 0.9% from 8.7%.
- Effective tax rates declined to 26.3% from 29.0% in the quarter and to 25.1% from 28.1% year to date, primarily because of changes in the geographic mix of earnings.
Cash Flow, Balance Sheet, Debt and Liquidity
| Metric | October 2, 2011 | March 31, 2011 |
|---|---|---|
| Cash and cash equivalents | $95.6 million | $108.9 million |
| Total assets | $1.809 billion | $1.828 billion |
| Total debt and capital leases | $290.8 million, including current debt | $253.4 million, including current debt |
| Total equity | $942.4 million | $979.0 million |
| Undrawn credit lines | $314.3 million, including $242.0 million committed | $356.4 million |
Operating activities provided $27.2 million in the first six months, compared with $7.1 million in the prior-year period. Capital expenditures used $24.2 million, and investing activities used $25.2 million. Financing activities used $12.9 million, primarily because of $49.9 million of net share repurchases, partially offset by $19.0 million of revolving-credit borrowings and $16.3 million of short-term debt increases. Cash declined by $13.3 million during the period.
Primary working capital increased to $576.1 million, or 26.3% of annualized quarterly sales, from $547.3 million, or 25.0%, at fiscal year-end. Management stated that liquidity remained strong and that the company was in compliance with all debt covenants.
Long-term debt included $145.0 million of convertible notes net of discount, $119.0 million outstanding under the 2011 revolving credit facility and $6.3 million under the China term loan. The convertible notes have $172.5 million principal outstanding and a $40.60 conversion price.
Material Changes, Outlook and Unusual Items
- Margins were pressured by higher lead and freight costs, pricing pressure and product mix, despite higher volumes, price increases and cost-reduction programs.
- Asia results were affected by approximately $1.0 million of Chongqing facility start-up costs and $0.4 million of costs associated with the temporary closure of the Jiangsu, China facility for an environmental review. The Jiangsu facility reopened conditionally in November 2011, with final terms still under negotiation.
- A three-week strike at a Polish manufacturing plant reduced Europe operating earnings by approximately $2 million.
- The company recorded $0.9 million of income from a French legal settlement refund; an appeal remained pending before the French Supreme Court.
- Restructuring charges were $0.9 million in the quarter and $1.3 million year to date, primarily for European staff reductions. Management expected approximately $1.5 million of additional fiscal 2012 charges related to one European restructuring plan and approximately $0.1 million related to the Oerlikon acquisition plan.
- The company repurchased 2.65 million shares for $58.4 million during the six months, reducing shares outstanding from 50.0 million to 47.7 million.
- Subsequent to quarter-end, EnerSys announced or completed transactions involving a South African battery joint venture, a German lithium-ion battery joint venture and the acquisition of Industrial Battery Holding/EnerSystem in South America. The aggregate investment was approximately $40 million and was expected to become effective in the third quarter of fiscal 2012.
- The filing provides no specific quantitative revenue, earnings or margin guidance. Management expressed confidence in funding organic growth and pursuing acquisitions but cautioned that results remain sensitive to commodity prices, currency movements and economic conditions.
Principal Risks and Contingencies
- Lead price volatility, foreign-exchange movements and variable interest rates; a 10% increase in lead cost was estimated to raise cost of goods sold by approximately $15 million for the quarter and $31 million for the six-month period.
- Environmental, occupational-safety and hazardous-material liabilities associated with lead and acid. The company had $3.1 million reserved for environmental liabilities at its Sumter, South Carolina facility.
- Potential disruption or additional requirements related to the Jiangsu environmental review.
- Customer cyclicality, pricing pressure, competition, product quality, supply-chain disruption and foreign-operational risks.
- Acquisition integration, restructuring execution, debt-service requirements and compliance with credit-facility covenants.
- Litigation is considered immaterial by management, but the French legal matter remained subject to appeal.
Investor Verification Checklist
- Verify whether lead-price increases and customer pricing actions allowed gross and operating margins to recover.
- Monitor the Jiangsu facility’s final regulatory conditions, operating continuity and related costs.
- Assess Asia profitability and the economics of the Chongqing facility ramp-up.
- Review leverage, available committed borrowing capacity, covenant headroom and the impact of acquisition funding.
- Evaluate whether working-capital growth converts into sustainable operating cash flow.
- Confirm the purchase accounting, integration progress and expected returns from the announced South Africa, Germany and South America transactions.
- Track restructuring reserves, remaining charges and benefits from European cost reductions.