EnerSys Fiscal 2022 First-Quarter 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures stored-energy solutions, industrial batteries, chargers, power equipment and related services. Reportable segments are Energy Systems, Motive Power and Specialty. The filing covers the 13-week quarter ended July 4, 2021, compared with the quarter ended July 5, 2020.
Key Financial Metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Net sales | $814.9 million | $704.9 million | +15.6% |
| Gross profit | $193.2 million | $175.0 million | +10.4% |
| Gross margin | 23.7% | 24.8% | -110 bps |
| Operating earnings | $60.9 million | $53.2 million | +14.4% |
| Operating margin | 7.5% | 7.5% | Flat |
| Net earnings attributable to EnerSys | $43.9 million | $35.2 million | +24.9% |
| Diluted EPS | $1.01 | $0.82 | +$0.19 |
| Operating cash flow | $(48.1) million | $116.6 million | $(164.7) million |
Segment sales were $371.2 million for Energy Systems, $336.1 million for Motive Power and $107.6 million for Specialty. Motive Power and Specialty operating performance improved substantially, while Energy Systems operating earnings declined to $7.1 million from $22.1 million.
Cash and cash equivalents were $406.2 million at July 4, 2021, compared with $451.8 million at March 31, 2021. Available and undrawn credit lines totaled approximately $745.8 million. Total debt, including short-term debt and long-term debt net of issuance costs, was approximately $1.06 billion. The company reported compliance with its debt covenants.
Primary working capital was $851.5 million, or 26.1% of annualized quarterly sales, compared with $797.9 million and 24.5% at March 31, 2021. Capital expenditures were $16.4 million. Financing cash inflows included net borrowings, while the company paid $31.5 million for treasury stock and $7.4 million in dividends.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected a 12% increase in organic volume and a 4% favorable foreign-currency translation impact. Motive Power benefited most from recovery from prior-year COVID-19 restrictions.
- Energy Systems sales increased 5.0%, but its operating margin fell to 1.9% from 6.2% because of lower-margin growth, higher freight and tariff costs, and imported-electronics supply-chain pressures.
- Motive Power sales increased 27.9%, and operating margin increased to 15.1% from 10.4%, supported by volume recovery, pricing and productivity.
- Specialty sales increased 21.3%, while operating margin rose to 10.2% from 5.9%, reflecting stronger transportation, aerospace and defense demand.
- Gross margin contracted despite higher gross profit, primarily due to mix and higher input, freight and tariff costs. Operating expenses increased 3.4% but declined as a percentage of sales.
- Operating cash flow turned negative because of a $58.2 million primary-working-capital use, including higher inventories and payments of accrued expenses, including Hagen severance.
- The company recorded $7.8 million of restructuring and exit charges, compared with $1.4 million in the prior-year quarter. Q1 charges primarily related to the Hagen, Germany facility closure; facility-sale gains partially offset charges.
- Interest expense declined 10.4% to $9.1 million, principally because average debt outstanding declined to $1.03 billion from $1.16 billion.
Guidance, Outlook, Commentary, Risks and Unusual Items
The filing does not provide clear quantified revenue, earnings or EPS guidance. Management described recovering global economies but noted uneven regional recovery, COVID-19 effects, supply-chain disruptions involving plastic resins and electronic components, transportation challenges and hiring difficulties.
Management expects year-over-year headwinds from higher commodity prices, particularly lead, with some corresponding selling-price increases. Approximately 30% of revenue is subject to lead-indexed pricing arrangements. The company had hedged approximately 50.0 million pounds of lead at an average cost of $0.97 per pound and estimated that approximately 44% of remaining fiscal-year lead costs were known.
The Hagen, Germany closure is expected to generate approximately $60.0 million of total charges, including approximately $40.0 million of cash charges and $20.0 million of non-cash charges. Approximately 200 employees are affected, and the majority of remaining charges were expected by the end of calendar 2021.
Key risks include commodity-price and availability volatility, the ability to pass costs through to customers, foreign-currency and variable-interest-rate exposure, COVID-19 and supply-chain disruption, environmental and hazardous-material liabilities, competition, product quality, restructuring execution, customer credit risk, cybersecurity, litigation and European competition investigations. No reserve was recorded for the disclosed European competition investigations, whose scope and outcome remain uncertain.
After quarter-end, on July 15, 2021, EnerSys amended its credit facility, extending maturity to September 30, 2026, refinancing the existing term loan, resetting amortization and increasing the revolving credit limit. The board also approved a quarterly dividend of $0.175 per share.
Important Facts for Investors to Verify
- Whether volume growth and pricing actions offset higher lead, plastics, steel, copper, electronics, freight and tariff costs.
- The timing and total cash cost of the Hagen closure and whether additional restructuring or impairment charges arise.
- Working-capital normalization and the recovery of operating cash flow after the quarter’s negative $48.1 million result.
- The terms, capacity and covenant implications of the July 15, 2021 credit-facility amendment, particularly the refinancing of debt due in 2022.
- Progress in Energy Systems margins, which declined materially despite sales growth.
- The potential financial impact of European competition investigations, environmental matters, warranty claims and other litigation; the filing does not provide a clear loss estimate for the competition matters.
- Exposure to variable interest rates: management estimated that a 100-basis-point increase would raise annual interest expense by approximately $4.7 million.