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. It serves more than 10,000 customers in over 100 countries through the Americas, EMEA and Asia segments. Products are divided between reserve power and motive power.
The filing covers the first quarter of fiscal 2017 ended July 3, 2016, compared with the quarter ended June 28, 2015. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Net sales | $600.6 million | $562.1 million | Up 6.9% |
| Gross profit | $166.3 million | $150.4 million | Up 10.6% |
| Gross margin | 27.7% | 26.8% | Up 90 basis points |
| Operating earnings | $66.0 million | $69.0 million | Down 4.4% |
| Operating margin | 11.0% | 12.3% | Down 130 basis points |
| Earnings before taxes | $59.0 million | $62.0 million | Down 4.8% |
| Net earnings attributable to EnerSys | $44.6 million | $48.4 million | Down 7.9% |
| Diluted EPS | $1.02 | $1.03 | Down $0.01 |
| Operating cash flow | $67.6 million | $82.3 million | Down $14.8 million |
Reserve power sales increased 12.0% to $296.0 million, while motive power sales increased 2.3% to $304.6 million. By geography, Americas sales increased 4.0% to $329.7 million, EMEA sales increased 0.2% to $197.1 million, and Asia sales increased 52.4% to $73.8 million.
Cash and cash equivalents were $413.6 million at July 3, 2016, compared with $397.3 million at March 31, 2016. Available and undrawn credit lines totaled approximately $478.3 million. Total debt consisted principally of $300.0 million of 5.00% senior notes due 2023 and $313.8 million of borrowings under the 2011 Credit Facility, plus $12.8 million of short-term debt. The company reported compliance with its debt covenants.
Capital expenditures were $7.5 million and cash paid for acquisitions was $12.4 million. The company paid $7.6 million in common dividends, or $0.175 per share. The board subsequently approved another $0.175 per-share quarterly dividend payable September 30, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected approximately 6% organic volume growth and 3% acquisition-related growth, partly offset by a 2% foreign-currency translation impact.
- Gross margin improved because of higher volume and lower commodity costs, although higher warranty and manufacturing costs partially offset the benefit.
- Operating expenses increased to $99.0 million from $84.5 million. The increase included a $7.3 million charge related to an Americas ERP implementation, including a $6.3 million write-off of previously capitalized costs.
- Operating earnings declined despite higher sales because the current period did not include the $4.3 million gain on the sale of a Chinese facility recognized in the prior-year quarter.
- Interest expense declined to $5.7 million from $6.3 million, primarily because the convertible notes had been redeemed; this benefit was partly offset by higher average debt.
- The effective tax rate increased to 24.4% from 22.7%, primarily because of changes in earnings by tax jurisdiction and the prior-year recognition of a previously unrecognized foreign tax position.
- Operating cash flow declined primarily because the prior-year period benefited from a larger working-capital release and other favorable items.
- Cash used in investing activities increased to $19.8 million from $11.4 million because of acquisitions, despite lower capital expenditures and the absence of prior-year facility-sale proceeds.
- There were no treasury-stock repurchases during the quarter, although 129,393 shares were acquired from equity-plan participants for tax or option-related purposes.
Outlook, Commentary, Risks and Unusual Items
Management described economic activity as mixed, with limited growth in North America and EMEA and slower, but still comparatively faster, growth in Asia. Revenue and order trends were described as stable, while foreign-currency movements continued to reduce reported revenue. Approximately 30% of revenue was subject to lead-indexed pricing arrangements.
Restructuring programs were ongoing in EMEA, the Americas and Asia. The company expects approximately $1.9 million of additional charges for certain existing programs during fiscal 2017. A new EMEA program is expected to generate approximately $3.8 million of additional charges through fiscal 2018, and a China facility transfer and cleanup program is expected to generate approximately $0.6 million of additional charges through fiscal 2017.
The company hedges lead and foreign-currency exposures but remains exposed to commodity, currency and interest-rate volatility. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.3 million. A 10% increase in lead costs would have increased first-quarter cost of goods sold by approximately $14 million. For the remaining three quarters of fiscal 2017, management estimated that approximately 39% of lead costs were known.
Legal and regulatory matters include ongoing European competition investigations in Germany and the Netherlands. The Belgian proceeding was settled for a $2.0 million fine paid in March 2016. The company held a reserve of $1.8 million for remaining investigations and related legal charges, but stated that potential losses from the German and Dutch proceedings could not currently be estimated.
Other risks include environmental and occupational-safety obligations related to lead and acid, product warranty claims, potential goodwill or asset impairments, acquisition and integration risks, customer credit risk, debt and covenant requirements, foreign exchange exposure, and changing economic conditions. The company identified Brexit-related trade, legal, economic and currency uncertainty as an additional risk.
The company early adopted new share-based-payment accounting guidance, recording approximately $0.7 million of excess tax benefits through income tax expense. Management stated that disclosure controls and procedures were effective as of July 3, 2016.
Important Facts for Investors to Verify
- Whether the ERP implementation issues and $6.3 million capitalized-cost write-off represent a one-time event or indicate further implementation costs or operational disruption.
- Progress, remaining charges and expected savings from the restructuring programs, including the planned employee reductions.
- Outcomes and potential financial exposure from the German and Dutch competition investigations.
- Trends in reserve-power demand in emerging EMEA telecom markets and the sustainability of rapid Asia growth.
- Lead prices, foreign exchange movements and the company’s ability to recover cost increases through pricing.
- Debt balances, variable-rate exposure, credit-facility availability and compliance with covenants.
- Whether the decline in operating margin and operating cash flow reverses as unusual charges, working-capital movements and acquisition effects normalize.
- Potential effects of Brexit and broader currency, trade and regulatory changes on international operations.