EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys manufactures and distributes industrial batteries, chargers, power equipment, accessories, enclosures and related services. It operates through the Americas, EMEA and Asia regions and serves more than 10,000 customers in over 100 countries. The filing covers the 13-week first quarter of fiscal 2018 ended July 2, 2017, with comparison to the quarter ended July 3, 2016.
Key financial metrics
| Metric | Q1 FY2018 | Q1 FY2017 | Change |
|---|---|---|---|
| Net sales | $622.6 million | $600.6 million | +3.7% |
| Gross profit | $163.1 million | $166.3 million | -2.0% |
| Gross margin | 26.2% | 27.7% | -150 bps |
| Operating earnings | $69.6 million | $66.0 million | +5.4% |
| Operating margin | 11.2% | 11.0% | +20 bps |
| Income before taxes | $61.0 million | $59.0 million | +3.3% |
| Net earnings attributable to EnerSys | $48.2 million | $44.6 million | +8.1% |
| Diluted EPS | $1.09 | $1.02 | +6.9% |
| Operating cash flow | $21.6 million | $67.6 million | -68.0% |
| Capital expenditures | $13.1 million | $7.5 million | Higher |
The effective tax rate declined to 20.7% from 24.4%, primarily because of changes in the geographic mix of earnings. The company paid a quarterly dividend of $0.175 per share.
Cash and cash equivalents were $543.0 million at July 2, 2017, compared with $500.3 million at March 31, 2017. Total debt was approximately $659.3 million, consisting primarily of $300.0 million of 5.00% senior notes, $338.8 million under the 2011 Credit Facility and $25.0 million of short-term borrowings. Available and undrawn credit lines totaled approximately $421.7 million. Management stated that the company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Sales increased $22.0 million, driven by 4% pricing and 1% organic volume growth, partly offset by a 1% foreign-currency translation impact.
- Americas sales rose 7.5%, while EMEA sales increased 1.0% and Asia sales declined 6.5%.
- Reserve power sales increased 3.1% and motive power sales increased 4.2%.
- Gross profit declined despite higher sales because lead costs increased approximately $34 million; price recoveries and cost-saving initiatives only partly offset the impact.
- Operating expenses declined 6.4%, helped by the absence of a $6.3 million ERP implementation write-off recorded in the prior-year quarter.
- EMEA operating earnings declined 31.7%, primarily because pricing recovery lagged unfavorable lead-cost impacts. Asia operating earnings declined 22.4%, principally because of slower telecom spending in China. Americas operating earnings increased 23.9%.
- Operating cash flow fell substantially as working capital increased. Primary working capital rose to $661.9 million, or 26.6% of annualized quarterly sales, from $624.8 million, or 24.9%, at March 31, 2017.
- The company repurchased 261,117 shares for $21.2 million during the quarter and held 11.2 million treasury shares at July 2, 2017.
Outlook, commentary, risks and unusual items
- Management described North American and EMEA economic activity as limited, while Asia continued to grow more rapidly than the other regions but at a slower pace than in prior years.
- Lead costs remained volatile and had risen over the prior year. Approximately 30% of revenue was subject to lead-indexed pricing agreements. For the remaining three quarters of fiscal 2018, management estimated that approximately 46% of lead costs were known through hedges, purchases and the lead tolling program.
- A 10% increase in lead costs was estimated to increase quarterly cost of goods sold by approximately $17 million. A 100-basis-point increase in interest rates was estimated to increase annualized interest expense by approximately $3.4 million.
- Restructuring charges were $0.8 million in the quarter, primarily for EMEA severance. The company expects approximately $1.0 million of additional restructuring charges for one EMEA program and expects the programs to be completed during fiscal 2018.
- European competition matters remained material. The company reserved $27.1 million for related investigations and legal matters at July 2, 2017. It paid a $14.4 million German fine on July 11, 2017, agreed to pay a $10.8 million Dutch fine payable by August 11, 2017, and was appealing a separate proposed German fine of $11.4 million that was not accrued.
- The company uses derivatives to manage lead and foreign-currency exposure and does not use them for speculation. Approximately 61.5 million pounds of lead were hedged at July 2, 2017.
- After quarter-end, on August 4, 2017, the company refinanced its credit facility with a $600.0 million revolving facility and a $150.0 million term loan maturing September 30, 2022, extending the prior maturity. On August 9, 2017, it announced a new $100.0 million stock-repurchase authorization.
- Key risks include commodity and foreign-exchange volatility, pricing recovery, cyclical customer demand, competition, environmental and safety liabilities involving lead and acid, regulatory investigations, litigation, debt and interest-rate exposure, acquisitions, restructuring execution, product quality and potential impairment charges.
Important facts for investors to verify
- Whether price increases and cost-reduction actions can offset continuing lead-cost inflation without further gross-margin erosion.
- The pace of recovery in EMEA and Asia, particularly Chinese telecom demand, and the sustainability of Americas volume growth.
- The final resolution, payment requirements and potential additional exposure from the German, Dutch and other European competition proceedings.
- Working-capital trends and the resulting conversion of earnings into operating cash flow.
- Terms, pricing and covenant requirements of the credit facility refinanced after quarter-end, as well as refinancing and variable-rate debt exposure.
- Future restructuring costs and completion of the company’s EMEA programs.
- The effect of foreign-exchange movements, lead hedges and the company’s ability to pass commodity-cost changes through to customers.