Enersys 10-Q Summary: Quarter Ended September 28, 2008
Business Context and Reporting Period
This filing is a Quarterly Report on Form 10-Q for Enersys, the world's largest manufacturer of industrial batteries, for the fiscal quarter ended September 28, 2008 (Fiscal 2009 Q2). The company operates two primary segments: Reserve Power (backup power for telecommunications, UPS, and utilities) and Motive Power (batteries for forklifts, mining, and rail). The company reports on a fiscal year ending March 31.
Key Financial Metrics
| Metric | Q2 2009 (Sep 28, 2008) | Q2 2008 (Sep 30, 2007) | YTD 2009 (6 Months) | YTD 2008 (6 Months) |
|---|---|---|---|---|
| Net Sales | $526.8 million | $461.5 million | $1,118.8 million | $891.3 million |
| Gross Profit | $109.0 million (20.7%) | $92.0 million (19.9%) | $221.6 million (19.8%) | $178.6 million (20.0%) |
| Operating Earnings | $43.9 million (8.3%) | $31.5 million (6.8%) | $91.9 million (8.2%) | $50.7 million (5.7%) |
| Net Earnings | $25.2 million | $16.8 million | $50.7 million | $24.2 million |
| Diluted EPS | $0.50 | $0.35 | $1.00 | $0.50 |
| Cash from Operations (YTD) | $64.3 million (vs. $1.1 million YTD 2008) | |||
| Total Debt (Long-term + Current) | $446.0 million (Sep 28, 2008) | |||
| Cash and Equivalents | $85.6 million (Sep 28, 2008) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 14.1% in the quarter and 25.5% year-to-date. Growth was driven by selling price increases (approx. 10% in Q2, 14% YTD) and favorable foreign currency translation (stronger Euro), partially offset by a 1% decline in organic volume in the quarter due to slowing global industrial production.
- Profitability: Operating earnings rose 39.1% in the quarter and 81.2% YTD. Gross margin improved 80 basis points in the quarter as price increases outpaced raw material cost increases.
- One-Time Items:
- Gain on Sale: A $10.9 million pre-tax gain was recorded YTD from the sale of the Manchester, England facility, including the release of $6.6 million in environmental reserves.
- Legal Charge: A $3.4 million charge was recorded YTD related to a French court ruling regarding a 1999 hotel fire (EnerSys Sarl liability).
- Restructuring: Restructuring charges were $1.0 million in the quarter and $3.2 million YTD, primarily for European staff reductions.
- Debt Refinancing: The company refinanced its debt structure in May/June 2008, issuing $172.5 million in convertible notes and a new $350 million senior secured credit facility. This reduced the average interest rate to 5.0% (Q2) from 6.5% (prior year).
Outlook, Risks, and Management Commentary
- Market Conditions: Management notes that while market conditions were strong in fiscal 2008, the economic climate has deteriorated since then, with worldwide industrial production and capital spending slowing. This has impacted unit sales volume, particularly in the Motive Power segment.
- Commodity Costs: Lead costs remain volatile. While lead prices peaked in late 2007, they have declined significantly in 2008 (falling to ~$0.52/lb in October 2008). Management expects selling prices may decline in future quarters as commodity costs drop.
- Restructuring: The European restructuring program is ongoing, with total estimated charges of $18.0 million. Approximately $1.6 million in additional charges are expected for the remainder of fiscal 2009.
- Accounting Changes: The company adopted SFAS 159 and SFAS 157 (Fair Value) in Q1 2009 with no material effect. Pending adoption of FSP APB 14-1 (Convertible Debt) in fiscal 2010 is expected to increase interest expense by ~$5 million annually due to debt discount accretion.
- Subsequent Event: On October 30, 2008, the company purchased 1.8 million shares of its common stock for $19.8 million from an institutional shareholder.
Investor Verification Checklist
- Lead Price Exposure: Verify the current spot price of lead and the company's hedging position (9% of requirements hedged at $0.82/lb as of Sep 28, 2008) to assess future margin pressure or benefit.
- Organic Volume Trends: Confirm if the 5% organic volume decline in Motive Power Q2 is a temporary fluctuation or a structural shift due to the global economic slowdown.
- Debt Covenants: Review the specific financial covenants in the new $350 million credit facility to ensure compliance given the deteriorating economic environment.
- Legal Contingency: Monitor the status of the appeal regarding the French hotel fire litigation to determine if the $3.4 million charge is final.
- Working Capital: Track "Primary Working Capital" (Receivables + Inventory - Payables), which increased to $562.8 million (26.7% of annualized sales), indicating potential liquidity tightening or inventory buildup.