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 quarter and six months ended September 30, 2018, representing fiscal 2019 second quarter and year-to-date results; the comparable prior-year quarter ended October 1, 2017.
Key financial metrics
| Metric | Q2 FY2019 | Q2 FY2018 | Six months FY2019 | Six months FY2018 |
|---|---|---|---|---|
| Net sales | $660.5 million | $617.3 million | $1,331.4 million | $1,239.9 million |
| Gross profit | $160.9 million | $160.3 million | $326.2 million | $323.7 million |
| Gross margin | 24.4% | 26.0% | 24.5% | 26.1% |
| Operating earnings | $63.4 million | $64.4 million | $127.5 million | $134.3 million |
| Operating margin | 9.6% | 10.4% | 9.6% | 10.8% |
| Net earnings attributable to EnerSys | $47.4 million | $43.2 million | $93.3 million | $91.4 million |
| Diluted EPS | $1.11 | $1.00 | $2.19 | $2.09 |
| Operating cash flow | Not separately provided | Not separately provided | $84.0 million | $45.5 million |
Q2 net earnings margin was approximately 7.2%, compared with approximately 7.0% in the prior-year quarter. The effective tax rate declined to 18.6% from 21.7%; the six-month rate declined to 19.1% from 21.2%, primarily due to jurisdictional earnings mix and Tax Cuts and Jobs Act effects.
- Q2 sales increased 7.0%, comprising 7% organic volume growth and 2% pricing, partly offset by a 2% unfavorable foreign-currency translation effect.
- Americas sales rose 13.8% to $388.6 million; EMEA sales rose 3.1% to $204.0 million; Asia sales fell 12.9% to $67.9 million.
- Reserve power sales increased 7.2% to $313.4 million, while motive power sales increased 6.8% to $347.1 million.
- Higher lead and other commodity costs reduced gross margin by 160 basis points in both Q2 and the six-month period. Management estimated commodity-cost increases of approximately $14 million in Q2 and $30 million year to date.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $545.2 million at September 30, 2018, compared with $522.1 million at March 31, 2018.
- Total debt was approximately $613.7 million, consisting primarily of $300.0 million of 5.00% senior notes due 2023 and $305.0 million outstanding under the 2017 Credit Facility, plus $14.1 million of short-term debt.
- The 2017 Credit Facility matures September 30, 2022 and includes a $600 million revolver and a $150 million term loan. Available and undrawn credit lines totaled approximately $531.1 million.
- Management stated that the company was in compliance with debt covenants and believed liquidity was sufficient for operations, capital expenditures, dividends and acquisition opportunities.
- Primary working capital was $666.0 million, or 25.2% of annualized quarterly sales, versus $701.6 million and 25.7% at March 31, 2018.
Material changes versus the prior comparable period
- Revenue growth did not translate into operating earnings growth: Q2 operating earnings decreased 1.6%, and six-month operating earnings decreased 5.1%.
- Americas operating earnings increased to $48.3 million in Q2, while EMEA declined to $13.8 million and Asia declined to $2.3 million. Asia weakness reflected lower organic volume, including a slowdown in Chinese telecom spending.
- Other income was $1.3 million in Q2 versus other expense of $2.8 million in the prior-year quarter, largely reflecting improved foreign-currency results.
- Operating cash flow increased by $38.6 million year to date, despite $35.5 million of capital expenditures and working-capital needs.
- Foreign currency translation reduced accumulated other comprehensive income by $86.3 million during the six months, contributing to accumulated other comprehensive loss of $131.9 million at September 30, 2018.
- The company adopted ASC 606 revenue recognition and ASU 2017-07 pension-cost presentation in fiscal 2019. Management reported no cumulative retained-earnings adjustment from ASC 606 adoption.
Guidance, outlook, risks and unusual items
The filing does not provide formal revenue or earnings guidance. Management described economic conditions as mixed, with moderate growth in North America and EMEA and faster growth in Asia, but noted continuing volatility in lead, freight, foreign exchange and interest rates. Approximately 30% of revenue was subject to lead-indexed pricing arrangements, and management increased prices where permitted.
- For the remaining two quarters of fiscal 2019, management estimated that approximately 56% of lead costs were known through hedges, purchases already made and the lead tolling program. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $18 million for Q2-equivalent volume and $36 million for the six-month period.
- Restructuring and exit charges included $2.9 million in restructuring charges and a $0.5 million inventory write-off year to date. The India operation was shifted from primarily reserve power production to motive power production.
- EnerSys announced a $750 million acquisition of the Alpha Group on October 29, 2018, consisting of $650 million in cash and $100 million in cash or EnerSys shares. The transaction was expected to close within 30 to 60 days, subject to customary and regulatory approvals, and would be funded with cash, credit facilities and new debt.
- Competition investigations remained a contingency. The company held $0.9 million of reserves for European competition matters, while appealing a proposed German fine of $11.4 million that had not been accrued.
- Other risks include hazardous-material and environmental obligations, product warranties, commodity availability and pricing, foreign exchange, variable-rate debt, customer credit, litigation, acquisition integration and potential goodwill impairment.
Important facts for investors to verify
- Whether commodity-cost inflation and freight expenses continue to pressure gross and operating margins despite pricing actions.
- The trajectory of Asia sales and operating profitability, particularly Chinese telecom demand.
- The final consideration, financing mix, regulatory approvals and integration performance of the Alpha acquisition.
- The outcome and potential cash impact of the appealed German competition fine and other legal matters.
- The final accounting effects of the Tax Cuts and Jobs Act, including GILTI, FDII and provisional transition-tax amounts.
- Execution of EMEA and Asia restructuring programs and the remaining approximately $3.1 million of expected EMEA restructuring charges.