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 and related services. Its products serve reserve-power and motive-power markets through the Americas, EMEA and Asia segments.
This filing covers the fiscal third quarter and nine months ended January 1, 2017. The comparable prior-year periods ended December 27, 2015. The company reports on 13-week quarters; the filing is for fiscal 2017, although the requested metadata identifies the period as 2016 Q3.
Key Financial Metrics
| Metric | Quarter Ended Jan. 1, 2017 | Prior Comparable Quarter | Nine Months Ended Jan. 1, 2017 | Prior Comparable Nine Months |
|---|---|---|---|---|
| Net sales | $563.7 million | $573.6 million | $1,740.3 million | $1,704.8 million |
| Gross profit | $155.9 million | $145.9 million | $483.5 million | $451.2 million |
| Gross margin | 27.7% | 25.4% | 27.8% | 26.5% |
| Operating earnings | $55.0 million | $55.5 million | $184.0 million | $184.0 million |
| Operating margin | 9.8% | 9.7% | 10.6% | 10.8% |
| Net earnings attributable to EnerSys | $36.2 million | $38.5 million | $126.4 million | $126.9 million |
| Diluted EPS | $0.82 | $0.86 | $2.88 | $2.76 |
| Operating cash flow | Not separately provided | Not separately provided | $166.7 million | $232.7 million |
Cash and cash equivalents were $467.1 million at January 1, 2017, compared with $397.3 million at March 31, 2016. Total debt was approximately $636.4 million, consisting of $35.9 million of short-term debt and $600.6 million of long-term debt net of issuance costs. Available and undrawn credit lines totaled approximately $451.3 million.
Dividends were $0.175 per share for the quarter and $0.525 per share for the nine-month period. Total equity was $1.059 billion at January 1, 2017.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined 1.7%, primarily from a 3% foreign-currency translation headwind and a 1% organic-volume decline, partly offset by pricing and acquisitions.
- Nine-month sales increased 2.1%, reflecting 2% organic-volume growth and 2% acquisition-related growth, partly offset by a 2% foreign-currency translation impact.
- Quarterly sales increased in the Americas by 2.5% but declined in EMEA by 5.5% and Asia by 9.6%. For nine months, Americas increased 2.4%, EMEA declined 3.3% and Asia increased 18.2%.
- Quarterly gross margin improved 230 basis points and nine-month gross margin improved 130 basis points, driven by manufacturing efficiencies, cost reductions and lower commodity costs. The nine-month period included a $2.1 million inventory adjustment related to the South Africa exit.
- Operating earnings were essentially flat despite a $17.0 million legal-proceedings charge in the current-year quarter. Excluding restructuring, exit and legal items, segment operating performance improved, particularly in the Americas, EMEA and Asia.
- Net earnings attributable to EnerSys declined 5.8% in the quarter but were broadly flat for nine months. Diluted nine-month EPS increased because of lower diluted share count following prior-year convertible-note activity.
- Operating cash flow declined $66.0 million year over year, mainly because of a $47.7 million increase in primary working capital, including higher inventory and lower accounts payable.
- Accumulated other comprehensive loss increased to $170.7 million from $97.3 million at March 31, 2016, primarily because of a $74.9 million foreign-currency translation loss.
Guidance, Outlook, Risks and Unusual Items
- Management described economic conditions as mixed, with limited growth in North America and EMEA and slower-than-historical growth in Asia. No specific earnings or revenue guidance was provided in the filing.
- Management expects inventory turns to return to normal levels in the fourth quarter, which is normally the company’s highest-sales quarter.
- The company expects to complete various restructuring programs during fiscal 2017 or fiscal 2018. Approximately $3.3 million of additional restructuring and related charges were expected for identified programs, based on the filing’s estimates.
- The South Africa joint venture was placed into liquidation and deconsolidated after economic weakness, limited mining-industry growth and increased competition. Nine-month exit charges totaled $3.3 million, including a $2.1 million inventory adjustment.
- The company recorded a $17.0 million charge for German competition proceedings. It estimated possible German losses of $17.0 million to $26.0 million and stated that the Dutch proceeding could not yet be estimated. Total reserves for remaining investigations and related matters were $18.8 million at January 1, 2017.
- Goodwill impairment testing for the Purcell EMEA reporting unit showed fair value exceeding carrying value by only approximately 3%. Management stated that small changes in projections could result in a future impairment charge.
- The company recorded an $8.3 million charge related to an Americas ERP implementation, including a $6.3 million write-off of previously capitalized costs after problems at a pilot location.
- Lead, foreign currency and interest-rate volatility remain material risks. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.4 million. A 10% increase in lead costs would have increased cost of goods sold by approximately $14 million for the quarter and $42 million for nine months, before considering hedges and pricing actions.
- The company was in compliance with its debt covenants and stated that it expected to maintain compliance. Approximately 50% of sales and expenses are transacted in foreign currencies, and approximately 50% of sales are generated outside the United States.
Most Important Facts for Investors to Verify
- Reconcile reported operating earnings and EPS with and without the $17.0 million legal charge, restructuring and exit items, and ERP write-off.
- Monitor the outcome and potential additional exposure from the German and Dutch competition investigations.
- Verify whether inventory normalizes in the fourth quarter and whether working-capital pressure improves.
- Assess the Purcell EMEA goodwill headroom and the risk of a future impairment charge.
- Track foreign-currency effects, lead prices, hedge effectiveness and the company’s ability to pass commodity costs through to customers.
- Review debt maturities, variable-rate exposure, credit-facility availability and covenant compliance.
- Confirm the financial and operational completion of the South Africa liquidation and remaining restructuring programs.