EnerSys 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures and distributes industrial batteries, chargers, power equipment, enclosures and related services. It operates through the Americas, EMEA and Asia segments and sells reserve-power and motive-power products globally. The filing covers the first quarter of fiscal 2015, a 13-week period ended June 29, 2014, compared with the quarter ended June 30, 2013.
Financial Performance and Position
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $634.1 million | $597.3 million | 6.2% increase |
| Gross profit | $162.6 million | $140.1 million | 16.0% increase |
| Gross margin | 25.6% | 23.5% | Up 210 basis points |
| Operating earnings | $71.7 million | $62.6 million | 14.5% increase |
| Operating margin | 11.3% | 10.5% | Up 80 basis points |
| Net earnings attributable to EnerSys | $49.2 million | $40.8 million | 20.4% increase |
| Diluted EPS | $0.99 | $0.83 | 19.3% increase |
| Operating cash flow | $41.8 million | $34.4 million | 21.6% increase |
- Revenue increased in the Americas by 4.8%, EMEA by 4.7% and Asia by 20.8%. Reserve-power sales rose 6.3% and motive-power sales rose 6.0%.
- Cash and cash equivalents were $234.9 million at June 29, 2014, compared with $240.1 million at March 31, 2014. Primary working capital was $683.0 million, or 26.9% of annualized quarterly revenue, versus 25.1% at March 31, 2014.
- Total debt and capital lease obligations were $358.9 million, including $30.1 million of short-term debt and $328.8 million of long-term debt and capital leases. Available and undrawn credit under all lines was approximately $317.6 million.
- Capital expenditures were $14.8 million. Cash used for financing included $45.6 million of treasury-stock purchases and $8.2 million of dividends. The quarterly dividend was $0.175 per share.
- The effective tax rate declined to 25.3% from 27.8%, primarily because of a valuation-allowance release and changes in the geographic mix of earnings.
Material Changes Versus the Prior Comparable Period
- Sales growth was primarily acquisition-driven, contributing approximately 6%, with a 1% foreign-currency benefit, partly offset by a 1% decline in organic volume.
- Gross-margin expansion reflected lower commodity costs and benefits from EMEA restructuring programs.
- Operating expenses increased 15.5%, primarily due to higher sales volume, acquisitions, acquisition-related fees and payroll costs.
- EMEA operating earnings, excluding restructuring charges, increased substantially, with margin improving to 11.8% from 7.0%. Americas margin declined to 12.5% from 13.2%, while Asia margin declined to 5.6% from 10.3% because of underutilization in China and costs in India.
- Restructuring charges increased to $1.8 million from $0.4 million. The company expects additional fiscal 2015 restructuring charges of approximately $3.4 million for the disclosed programs.
- Average debt outstanding increased to $325.2 million from $177.4 million, primarily because of borrowings under the credit facility, increasing interest expense to $4.9 million from $4.3 million.
Guidance, Outlook, Risks and Unusual Items
- Management described the Americas economy as strengthening, Asia as the fastest-growing region, and EMEA as stabilized with expected moderate growth. It reported stable recent revenue and order trends and no substantial recent commodity-cost changes.
- On July 8, 2014, the credit facility was amended to provide a $500 million senior secured revolving facility and a $150 million incremental term-loan facility, intended in part to support expected cash settlement of convertible-note principal.
- The $172.3 million principal amount of 3.375% convertible notes became convertible on demand after the company’s share price exceeded the applicable threshold. Holders could elect conversion from July 1 through September 30, 2014. The conversion price was approximately $40.16 per share, with 4.29 million potential shares; management intended to settle principal in cash.
- EnerSys recorded a $58.2 million legal-proceedings charge in fiscal 2014 related to an adverse Altergy arbitration award. The company filed a motion to vacate the award on July 11, 2014; a hearing was scheduled for late September 2014. The filing states that the challenge may not succeed.
- Key exposures include lead prices, foreign-currency movements, variable interest rates, cyclical customer industries, competition, acquisitions and integration, restructuring execution, environmental and workplace-safety obligations, product quality, litigation and credit risk. A 100-basis-point increase in interest rates would raise annualized interest expense by approximately $1.9 million; a 10% increase in lead cost was estimated to increase quarterly cost of goods sold by approximately $15 million.
- The company hedged approximately 103.2 million pounds of lead, representing about 22% of estimated annual requirements, and had approximately $91.9 million of foreign-currency contracts outstanding.
- On August 5, 2014, EnerSys declared another $0.175 per-share dividend and authorized an additional $60 million stock-repurchase program.
Most Important Facts to Verify
- Whether convertible-note holders exercised conversion rights and the resulting cash funding, debt levels and share dilution.
- The outcome of the Altergy arbitration challenge and any required adjustment to the $58.2 million accrual.
- Execution, total cost and savings realization of the EMEA restructuring programs.
- Whether gross-margin gains from lower lead costs and restructuring benefits are sustainable as commodity prices and currencies change.
- Progress in improving working-capital efficiency, particularly inventory growth and the increase in primary working capital to 26.9% of annualized revenue.
- Compliance with credit-facility covenants and the effect of higher variable-rate borrowings on interest expense and liquidity.