EnerSys Form 10-Q Summary
Business Context and Reporting Period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment and related services. It serves more than 10,000 customers in over 100 countries through the Americas, Europe and Asia segments. The filing covers the 13-week third quarter and first nine months of fiscal 2013 ended December 30, 2012, compared with the periods ended January 1, 2012.
Key Financial Metrics
| Metric | Q3 FY2013 | Q3 FY2012 | 9M FY2013 | 9M FY2012 |
|---|---|---|---|---|
| Net sales | $557.3 million | $574.2 million | $1,705.4 million | $1,690.6 million |
| Gross profit | $143.7 million | $130.9 million | $430.3 million | $367.2 million |
| Gross margin | 25.8% | 22.8% | 25.2% | 21.7% |
| Operating earnings | $59.7 million | $53.8 million | $192.9 million | $144.9 million |
| Operating margin | 10.7% | 9.4% | 11.3% | 8.6% |
| Net earnings attributable to EnerSys stockholders | $39.2 million | $36.9 million | $128.8 million | $98.6 million |
| Diluted EPS | $0.80 | $0.77 | $2.65 | $1.99 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $135.5 million | $120.0 million |
- Quarterly sales declined 2.9%, while nine-month sales increased 0.9%.
- Quarterly gross profit increased 9.8%; nine-month gross profit increased 17.2%, primarily because of lower commodity costs.
- The effective tax rate increased to 28.2% in the quarter and 28.5% for the nine months, from 23.0% and 24.3%, respectively, primarily because of geographic earnings mix and expiration of certain U.S. tax exemptions.
- Cash and cash equivalents were $228.6 million at December 30, 2012, compared with $160.5 million at March 31, 2012.
- Total debt, including short-term debt and current maturities, was approximately $238.8 million at December 30, 2012, compared with approximately $256.1 million at March 31, 2012. Net debt was approximately $10.2 million.
- Available and undrawn credit lines totaled $411.4 million, including approximately $303.7 million of committed lines and $107.7 million of uncommitted lines. The company stated that it was in compliance with all debt covenants.
- Primary working capital increased to $611.7 million, or 27.4% of annualized quarterly revenue, from $578.6 million, or 24.4%, at March 31, 2012.
Material Changes Versus the Prior Comparable Period
- Quarterly sales declined in Europe by 6.5% and in the Americas by 1.9%, while Asia sales increased 10.2%. For the nine-month period, Europe declined 8.3%, while the Americas increased 6.1% and Asia increased 18.5%.
- Quarterly reserve power sales decreased 4.4% and motive power sales decreased 1.6%. For the nine months, reserve power sales increased 3.6%, while motive power sales decreased 1.6%.
- Quarterly operating earnings increased 11.1%, led by a 27.1% increase in the Americas. Nine-month operating earnings increased 33.1%, with Americas earnings up 40.9% and Asia earnings up 164.3%.
- Operating expenses increased 6.0% in the quarter and 5.2% for the nine months, driven mainly by higher incentive compensation and costs from recent acquisitions.
- Restructuring charges increased to $3.8 million in the quarter and $5.4 million for the nine months, compared with $1.4 million and $2.8 million, respectively, in the prior-year periods.
- Operating cash flow increased $15.5 million year over year, despite $35.6 million of cash used for higher primary working capital.
- Capital expenditures were $37.6 million, compared with $35.0 million in the prior-year period. The prior-year period also included $21.0 million of business acquisitions.
- The company repurchased $22.6 million of common stock during the nine months, compared with $58.4 million in the prior-year period.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide a specific revenue or earnings guidance range in the filing.
- Management expected fourth-quarter gross profit margin and operating margins to decline because lead and other commodity costs had increased during the third quarter. Pricing typically lags commodity-cost movements.
- Approximately 35% of revenue was subject to agreements that adjust pricing based on a market-based lead index. The company had hedged approximately 57.6 million pounds of lead, representing approximately 12% of annual lead requirements.
- Restructuring programs involved European manufacturing and selling, general and administrative operations, as well as the closure of the Chaoan, China facility and transfer of production to Chongqing. The company expected approximately $3.5 million of additional fiscal 2013 charges for one European program and expected the broader manufacturing-efficiency program to continue through fiscal 2015.
- The company recorded $2.7 million of third-quarter restructuring charges related to the Chaoan facility, including $2.3 million of non-cash fixed-asset and inventory write-offs. It expected to complete the closure and sell the related property during fiscal 2014.
- Key risks include cyclical customer industries, lead-price volatility, foreign-currency movements, environmental and workplace-safety requirements related to lead and acid, pricing pressure, competition, operational disruptions, acquisitions and integration, debt and variable interest rates, litigation, product quality, customer credit risk and information-system security.
- A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $13 million for the quarter and $41 million for the nine months. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $0.8 million on variable-rate debt.
- Management stated that litigation was not expected to be material, no material subsequent events had occurred through issuance of the financial statements, and disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Whether higher lead and other commodity costs reduce fourth-quarter gross and operating margins as management anticipated.
- Whether Europe’s declining sales and weak economic conditions stabilize, and whether Americas and Asia growth continues.
- Progress, cash costs and timing of the European and Chaoan restructuring programs, including the expected additional charges.
- Inventory growth and the increase in primary working capital as a percentage of sales.
- Availability and covenant compliance under the credit facilities, including the maturity and refinancing implications of the $172.5 million convertible notes.
- Exposure to lead prices, foreign exchange and variable interest rates despite the company’s hedging activities.