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, enclosures and related services. It operates through the Americas, EMEA and Asia segments and serves more than 10,000 customers in over 100 countries. The filing covers the 13-week quarter and nine months ended December 29, 2019, representing fiscal 2020. Comparisons are primarily with the quarter and nine months ended December 30, 2018.
Fiscal 2020 results include the September 30, 2019 acquisition of NorthStar and a full comparable-period contribution from Alpha, acquired December 7, 2018. NorthStar manufactures and distributes thin plate pure lead batteries and battery enclosures.
Key financial metrics
| Metric | Q3 FY2020 | Q3 FY2019 | 9M FY2020 | 9M FY2019 |
|---|---|---|---|---|
| Net sales | $763.7 million | $680.0 million | $2,306.1 million | $2,011.4 million |
| Gross profit | $185.2 million | $164.5 million | $584.1 million | $490.8 million |
| Gross margin | 24.3% | 24.2% | 25.3% | 24.4% |
| Operating earnings | $43.1 million | $50.0 million | $170.1 million | $177.5 million |
| Operating margin | 5.6% | 7.3% | 7.4% | 8.8% |
| Net earnings attributable to EnerSys | $27.3 million | $48.4 million | $138.6 million | $141.7 million |
| Diluted EPS | $0.64 | $1.12 | $3.23 | $3.31 |
Net cash provided by operating activities was $175.8 million for the nine months, compared with $166.4 million in the prior-year period. Capital expenditures were $60.9 million, and cash used for acquisitions was $176.5 million, primarily for NorthStar. Cash and equivalents declined to $272.5 million from $299.2 million at March 31, 2019.
At December 29, 2019, short-term debt was $36.7 million and long-term debt, net of issuance costs, was $1.088 billion. Principal debt included $600 million of senior notes and $497.3 million under the amended credit facility. The company had approximately $749.5 million of available and undrawn credit lines and stated that it was in compliance with debt covenants.
Primary working capital was $857.1 million, or 28.1% of annualized quarterly sales, versus 26.2% at March 31, 2019 and 24.9% at December 30, 2018. The increase was attributed principally to inventory accumulation related to the Richmond, Kentucky plant fire.
Material changes versus the prior comparable period
- Third-quarter sales increased 12.3%, while nine-month sales increased 14.6%. Management attributed the growth primarily to Alpha and NorthStar acquisitions, partly offset by lower organic volume, pricing reductions and currency translation.
- Reserve power sales increased 36.0% in the quarter and 35.6% year to date. Motive power sales declined 10.0% in the quarter and 4.7% year to date.
- Americas sales increased 25.1% in the quarter and 30.6% year to date, while EMEA sales declined 7.1% and 7.0%, respectively; Asia sales declined 3.1% and 11.9%.
- Gross margin improved modestly in the quarter and by 90 basis points year to date, primarily because lower commodity costs more than offset pricing declines, although manufacturing costs increased.
- Operating expenses rose 18.5% in the quarter and 28.6% year to date, reflecting Alpha-related costs, product-development investment and currency effects. Operating margin contracted because of the Richmond fire, ERP execution challenges, weaker organic volumes and higher restructuring costs.
- Interest expense increased 56.6% in the quarter and 60.3% year to date, primarily because of higher average debt used to finance the Alpha acquisition.
- The effective tax rate was 16.2% in the quarter versus a 13.3% benefit in the prior-year quarter. The year-to-date rate was 0.7% versus 10.4%, benefiting from Swiss tax reform and changes in the geographic mix of earnings.
Guidance, outlook, commentary and risks
The filing does not provide a specific numerical earnings or revenue guidance range. Management cited a recent slowdown in economic activity across its markets and expects continued year-over-year benefits from lower commodity costs in fiscal 2020, accompanied by related reductions in selling prices. Management also stated that liquidity supports organic growth, dividends, stock repurchases and potential acquisitions.
- The Richmond, Kentucky motive-power facility fire occurred on September 19, 2019. The company estimates the insurance claim may exceed $50 million, incurred $10.0 million of related costs through December 29, 2019, and received $12.0 million in insurance advances. Recovery timing and ultimate insurance proceeds remain uncertain.
- Restructuring, exit and other charges were $9.4 million in the quarter and $18.1 million year to date. Programs include EMEA and Americas efficiency actions, the closure of the Targovishte, Bulgaria facility, and strategic shifts toward maintenance-free lead-acid and lithium products.
- Management identified risks from cyclical customer industries, economic weakness, lead and other raw-material prices, foreign exchange, tariffs and trade restrictions, variable-rate debt, environmental and product-liability exposure, litigation, acquisition integration, goodwill impairment and operational disruptions.
- The company hedges lead and foreign-currency exposures but remains exposed to market movements. A 100-basis-point increase in applicable variable interest rates would increase annualized interest expense by approximately $5.4 million; a 10% increase in lead costs would have increased cost of goods sold by approximately $15 million in the quarter and $47 million year to date.
- The filing added risks related to Brexit, international trade restrictions and health epidemics, including potential disruption to Chinese operations, suppliers and customers.
Most important facts for investors to verify
- Whether the Richmond plant is restored on schedule and whether insurance recoveries cover property damage, inventory, cleanup, business interruption and lost revenue.
- Whether organic volume weakness, particularly in EMEA and motive power, persists after acquisition-related growth is excluded.
- Progress in integrating NorthStar and Alpha, realizing synergies and managing acquisition-related amortization, inventory step-up and debt service.
- Compliance with the 3.50x maximum leverage covenant after the temporary acquisition-related increase expired on December 28, 2019.
- The sustainability of improved gross margins as lead prices, customer pricing and manufacturing costs change.
- The ultimate costs and timing of restructuring, facility closure, environmental matters, competition investigations and other contingencies.
- Impact of the company’s high foreign earnings mix, Swiss tax reform, currency movements and future accounting changes.