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. This unaudited report covers the 13-week quarter and six months ended September 29, 2019, the second quarter of fiscal 2020; comparable periods ended September 30, 2018.
Fiscal 2020 results include the December 2018 Alpha acquisition, which expanded EnerSys's broadband, telecom, renewable, industrial and traffic energy-solutions businesses. NorthStar was acquired on September 30, 2019, immediately after the reporting period, for $78.0 million in cash plus assumed debt of $104.5 million.
Financial performance and liquidity
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $762.1 million | $660.5 million | $1,542.4 million | $1,331.4 million |
| Gross profit | $197.3 million | $160.9 million | $398.8 million | $326.2 million |
| Gross margin | 25.9% | 24.4% | 25.9% | 24.5% |
| Operating earnings | $58.7 million | $63.4 million | $127.0 million | $127.5 million |
| Operating margin | 7.7% | 9.6% | 8.2% | 9.6% |
| Net earnings attributable to EnerSys | $62.7 million | $47.4 million | $111.3 million | $93.3 million |
| Diluted EPS | $1.47 | $1.11 | $2.59 | $2.19 |
| Operating cash flow | Not separately reported | Not separately reported | $105.1 million | $84.0 million |
Gross margin expanded by 150 basis points in the quarter and 140 basis points year to date, primarily from lower commodity costs and Alpha's higher margins. Operating expenses rose to 17.4% of sales from 14.6% in the quarter, reflecting Alpha-related costs and investments in new product development. The effective tax rate was negative 29.5% in the quarter and negative 4.0% year to date, primarily due to Swiss tax reform and earnings mix; the company recorded a $21.0 million deferred tax asset related to amortizable goodwill.
Cash and cash equivalents were $424.8 million at September 29, 2019, compared with $299.2 million at March 31, 2019. Available and undrawn credit lines totaled approximately $425.6 million. Primary working capital was $815.3 million, or 26.7% of annualized quarterly sales, versus 26.2% at March 31, 2019 and 25.2% at September 30, 2018.
Debt included $300.0 million of 5.00% senior notes due 2023, $822.6 million under the amended credit facility and $34.4 million of short-term borrowings. Total debt principal was approximately $1.16 billion, implying debt less cash of approximately $731.5 million before other cash-like items and debt adjustments. The company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Quarterly sales increased 15.4% and six-month sales increased 15.8%. Management attributed the increase primarily to a 22% contribution from Alpha, partly offset by lower organic volume, foreign currency translation and pricing.
- Americas sales increased 35.1% in the quarter, while EMEA sales declined 10.4% and Asia sales declined 19.9%. Reserve power sales increased 36.2%; motive power sales declined 3.4%.
- Operating earnings declined 7.3% in the quarter and 0.4% year to date despite higher sales and gross profit. ERP execution challenges at the Richmond, Kentucky facility, missed sales opportunities, higher manufacturing costs, tariffs and weaker organic volume pressured results.
- Interest expense increased 57.5% in the quarter and 62.4% year to date because of higher average debt used primarily to fund the Alpha acquisition.
- Operating cash flow increased $21.0 million year to date. Capital expenditures were $43.4 million, treasury-stock purchases were $34.6 million and dividends paid were $14.9 million.
- Foreign currency translation reduced other comprehensive income by $35.4 million year to date, contributing to accumulated other comprehensive loss of $176.1 million at quarter-end.
Guidance, outlook, risks and unusual items
- No quantitative earnings or revenue guidance is provided in the filing. Management expects continued year-over-year benefits from lower commodity costs, with related reductions in selling prices.
- Management cited a slowdown in economic activity across operating regions, weaker Chinese demand, cyclical customer industries, commodity and foreign-exchange volatility, pricing pressure and competition.
- A September 19 fire at the Richmond, Kentucky facility resulted in a $1.9 million write-off of fixed assets and inventory and a corresponding $1.9 million insurance receivable. The company was still assessing property damage, business interruption and insurance recovery.
- Restructuring, exit and other charges were $6.3 million in the quarter and $8.7 million year to date. The company wrote off $5.5 million of assets related to shifting from traditional flooded batteries toward maintenance-free lead-acid and lithium products, and recorded a $0.9 million gain on the sale of submarine-battery licenses and assets.
- Restructuring programs remain in progress across the Americas, EMEA and Asia, with additional charges and completion dates extending through fiscal 2021 for certain programs.
- Key exposures include lead costs, foreign exchange, variable interest rates, environmental and workplace-safety obligations involving lead and acid, product warranties, litigation and competition investigations, execution of acquisitions and potential goodwill impairment.
- A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $8.7 million. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $15 million for the quarter and $32 million for the six-month period.
- EnerSys adopted the new lease standard on April 1, 2019, recording approximately $84.9 million of right-of-use assets and $87.2 million of lease liabilities without a material impact on operating results, financial position or cash flows.
- Management disclosed that Alpha represented $146.0 million of second-quarter sales, $297.1 million of six-month sales and $949.2 million of assets; Alpha was excluded from the scope of the company's internal-control effectiveness assessment for the acquisition year.
Most important facts for investors to verify
- Whether Richmond ERP and fire-related disruptions are resolved and whether insurance proceeds cover property damage, business interruption and lost revenue.
- Organic volume trends, particularly in reserve power, Asia and the motive power business, after separating Alpha's acquisition contribution.
- Debt reduction, covenant headroom, variable-rate exposure and financing requirements following the NorthStar acquisition.
- The sustainability of gross-margin benefits from lower lead costs and the extent to which lower selling prices offset those benefits.
- The final accounting, integration performance and synergies from Alpha and NorthStar, including potential goodwill or intangible-asset impairment.
- Future restructuring, environmental, warranty, litigation and competition-related cash obligations.
- The durability of the unusually favorable effective tax rates resulting from Swiss tax reform and earnings mix.