ENS

Enersys 10-Q Summary: Quarter Ended December 28, 2008

Business Context and Reporting Period

This Form 10-Q covers the fiscal quarter and nine-month period ended December 28, 2008 (Fiscal 2009). Enersys is the world's largest manufacturer of industrial batteries, operating in two segments: Reserve Power and Motive Power. The company operates globally with approximately 60% of manufacturing capacity and sales outside the United States. The reporting period coincides with a deteriorating global economic climate, slowing industrial production, and significant volatility in lead prices and foreign exchange rates.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Quarterly sales decreased 16.7% ($92.5 million) year-over-year, driven by a 15% decline in organic volume in the Motive Power segment and a 28% sales drop in the European region due to economic slowdown and currency weakness. However, nine-month sales increased 9.3% due to price recovery actions earlier in the year.
• Profitability: Despite lower sales volume, Net Earnings increased 90.7% for the quarter and 102.2% for the nine months. This was driven by a 440 basis point improvement in gross margin (quarterly) due to significantly lower lead costs (down ~$25 million in the quarter) and cost reduction initiatives.
• One-Time Items: The nine-month period included a $11.3 million gain on the sale of facilities (primarily the Manchester, England plant) and a $3.4 million charge related to a French legal settlement. Restructuring charges were $3.2 million for the nine months, down from $11.4 million in the prior year.
• Currency Impact: Foreign currency translation resulted in a $44 million decrease in sales for the quarter due to a weaker Euro, but generated a $13.8 million net foreign currency transaction gain in "Other Income."

Guidance, Outlook, and Risks

• Restructuring: In February 2009 (subsequent to the period end), the company announced a plan to restructure Italian operations, estimating total charges of approximately $23 million ($17.5 million expected in Q4 2009). This is expected to yield $13 million in annual pre-tax savings.
• Commodity Outlook: Lead prices have declined significantly from 2008 highs. While this reduced costs in the current period, the company notes that selling prices have begun to decline sequentially as commodity costs fall, which may pressure future margins.
• Liquidity: The company refinanced its debt in mid-2008, issuing $172.5 million in convertible notes and a new $350 million senior secured credit facility. Cash increased by $84.7 million during the nine-month period. Management believes they have adequate funds to meet requirements and are in compliance with all covenants.
• Risks: Key risks include the global economic downturn affecting unit sales, volatility in lead prices, foreign currency exchange rate fluctuations, and the ability to pass cost increases to customers.

Investor Verification Checklist

• Lead Price Sensitivity: Verify the correlation between current spot lead prices and the company's ability to adjust selling prices in real-time to maintain margins.
• European Exposure: Assess the impact of the Euro's weakness on future revenue translation and the specific performance of the European region, which saw a 28% sales drop in the quarter.
• Restructuring Execution: Monitor the timing and cost of the newly announced Italian restructuring and the completion of the ongoing European restructuring program.
• Debt Covenants: Review the specific financial covenants in the new $350 million credit facility to ensure compliance given the economic downturn.
• Working Capital Trends: Track "Primary Working Capital" days sales outstanding, as the company noted an increase in receivables in the Americas and Europe due to credit risk concerns.