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 operates through the Americas, EMEA and Asia segments and sells reserve power and motive power products in more than 100 countries. The filing covers the fiscal second quarter ended September 29, 2013, and the six months then ended, with comparisons to September 30, 2012. Fiscal year-end is March 31.
Financial performance and position
| Metric | Quarter ended Sep. 29, 2013 | Quarter ended Sep. 30, 2012 | Six months ended Sep. 29, 2013 | Six months ended Sep. 30, 2012 |
|---|---|---|---|---|
| Net sales | $568.8 million | $554.2 million | $1,166.1 million | $1,148.1 million |
| Gross profit | $144.4 million | $138.3 million | $284.5 million | $286.6 million |
| Gross margin | 25.4% | 25.0% | 24.4% | 25.0% |
| Operating earnings | $61.0 million | $62.9 million | $123.6 million | $133.1 million |
| Operating margin | 10.7% | 11.4% | 10.6% | 11.6% |
| Net earnings attributable to EnerSys stockholders | $41.3 million | $43.8 million | $82.2 million | $89.6 million |
| Diluted EPS | $0.84 | $0.90 | $1.67 | $1.84 |
- Operating cash flow for the six months was $91.2 million, compared with $78.8 million in the prior-year period.
- Capital expenditures were $24.7 million, compared with $26.7 million in the prior-year period.
- Cash and cash equivalents were $272.7 million at September 29, 2013, compared with $249.3 million at March 31, 2013.
- Total debt consisted primarily of $159.0 million of net carrying value on the 3.375% convertible notes and $20.7 million of short-term borrowings. Available and undrawn credit lines totaled approximately $480.5 million.
- Primary working capital was $586.3 million, or 25.8% of annualized quarterly sales, versus $552.7 million and 24.2% at March 31, 2013.
- The company paid $11.9 million in dividends and repurchased $33.6 million of common stock during the six months. The quarterly dividend was $0.125 per share.
Material changes versus the prior comparable period
- Quarterly sales increased 2.6%, driven by approximately 1% each from organic volume, pricing and currency translation. Six-month sales increased 1.6%.
- Quarterly gross margin improved 40 basis points, primarily from higher volume and pricing, partly offset by higher commodity costs. Six-month gross margin declined 60 basis points because of higher commodity costs.
- Operating earnings declined 3.0% for the quarter and 7.2% for the six months. Operating expenses increased because of higher sales volume, bad debt expense, acquisition-related fees and payroll costs.
- Quarterly sales increased in EMEA by 3.7% and the Americas by 4.0%, but declined in Asia by 6.9%. Six-month Asia sales declined 16.5%, partly because a large Japan project in the prior period had ended.
- Motive power sales increased 7.6% for the quarter and 3.5% for the six months, while reserve power sales decreased 2.0% and 0.4%, respectively.
- Asia operating margin declined to 6.5% for the quarter and 8.3% for the six months, primarily due to unfavorable product mix and higher bad debt expense. Americas margins also declined because of commodity costs, operating expenses and product mix.
- Interest expense declined 16.7% for the quarter and 13.3% for the six months, primarily because of lower average debt outstanding. The effective tax rate declined to 27.0% for the quarter and 27.4% for the six months, partly due to earnings mix and a foreign legal-entity reorganization.
Guidance, outlook, risks and unusual items
- The filing does not provide specific earnings or revenue guidance. Management describes economic conditions as mixed, with continued but slower expansion in the Americas and Asia and ongoing weakness from the European financial crisis and austerity measures.
- Commodity costs, particularly lead, and foreign exchange remain significant exposures. The company had lead contracts covering 94.2 million pounds, approximately 19% of annual lead requirements, and estimated that a 10% increase in lead costs would increase cost of goods sold by approximately $4 million in the quarter and $15 million for the six months.
- Approximately 60% of sales and expenses are transacted in foreign currencies. The company uses commodity and foreign exchange hedges but cannot eliminate future volatility.
- Restructuring charges were $1.1 million for the quarter and $1.5 million for the six months. Several EMEA and China restructuring programs remain in progress, with additional estimated charges and employee reductions expected through fiscal 2015.
- In August 2013, the company amended its 2011 Credit Facility, extending maturity to September 2018 and increasing flexibility for acquisitions, joint ventures, repurchases and dividends. The company stated that it was in compliance with all covenants.
- On October 8, 2013, EnerSys acquired Purcell Systems for approximately $115 million. On November 1, 2013, it acquired Quallion for approximately $30 million. These acquisitions occurred after the reporting period and their financial effects are not reflected in the reported results.
- Material risks include cyclical demand, raw-material availability and pricing, environmental and occupational regulations related to lead and acid, foreign exchange, customer credit, litigation, product quality, restructuring execution, acquisitions and integration, debt-service requirements, cybersecurity and general economic conditions.
- Management stated that litigation was not expected to have a material adverse effect and that disclosure controls and procedures were effective as of the end of the reporting period.
Important facts for investors to verify
- Whether margin pressure from lead costs, operating expenses and product mix persists, particularly in the Americas and Asia.
- The sustainability of sales growth after the conclusion of the prior-year Japan project and amid weaker European conditions.
- The purchase accounting, incremental debt or cash usage, synergies and integration progress associated with the Purcell Systems and Quallion acquisitions.
- The remaining cash restructuring obligations, expected timing and achievement of planned workforce and manufacturing efficiencies.
- The conversion, dilution and settlement implications of the $172.5 million convertible notes, including the $40.60 conversion price and potential 4.25 million shares.
- Working-capital expansion, foreign subsidiary cash availability and the company’s ability to maintain liquidity while funding dividends, repurchases, capital expenditures and acquisitions.
- Lead and foreign-currency hedge coverage, counterparty exposure and the effect of changes in commodity prices and exchange rates on future earnings.