EnerSys Fiscal 2013 First-Quarter 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures, markets and distributes industrial batteries, chargers, power equipment, accessories and related services. It serves more than 10,000 customers in over 100 countries through the Americas, Europe and Asia segments. The company’s primary product lines are reserve power and motive power.
The filing covers the 13-week quarter ended July 1, 2012, the first quarter of fiscal 2013, compared with the quarter ended July 3, 2011. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $593.9 million | $569.2 million | Up 4.3% |
| Gross profit | $148.3 million | $122.0 million | Up 21.6% |
| Gross margin | 25.0% | 21.4% | Up 360 basis points |
| Operating earnings | $70.3 million | $48.7 million | Up 44.2% |
| Operating margin | 11.8% | 8.6% | Up 320 basis points |
| Earnings before taxes | $64.3 million | $44.1 million | Up 45.8% |
| Net earnings attributable to EnerSys | $45.8 million | $33.5 million | Up 36.7% |
| Basic diluted EPS | $0.96 / $0.95 | $0.67 / $0.66 | Improved |
| Net cash from operating activities | $24.2 million | $17.0 million | Up $7.2 million |
| Capital expenditures | $16.1 million | $11.7 million | Up $4.4 million |
The effective tax rate increased to 29.1% from 24.0%, primarily because of changes in the geographic mix of earnings, expiration of certain U.S. tax exemptions and fewer favorable discrete items.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $180.7 million at July 1, 2012, compared with $160.5 million at March 31, 2012.
- Total debt and capital lease obligations were $261.4 million, including $150.0 million of net carrying value for the 3.375% convertible notes and $94.9 million outstanding under the 2011 Credit Facility.
- Available and undrawn credit lines totaled $357.6 million, including approximately $261 million of committed facilities and $97 million of uncommitted facilities.
- Management stated that the company was in compliance with its debt covenants and believed it had sufficient liquidity to fund foreseeable organic growth and pursue acquisitions.
- Primary working capital increased to $597.5 million from $578.6 million at March 31, 2012; the primary working capital percentage increased to 25.2% from 24.4%.
Material Changes Versus the Prior Comparable Period
- Sales growth reflected a 7% increase from organic volume and a 3% contribution from acquisitions, partially offset by a 6% negative foreign-currency translation impact.
- Americas sales increased 11.5% to $288.9 million, Asia sales increased 19.2% to $67.9 million, and Europe sales declined 6.3% to $237.1 million.
- Reserve power sales increased 8.8% to $289.3 million, while motive power sales increased 0.4% to $304.6 million.
- Gross-profit improvement was driven principally by higher volume, lower commodity costs and cost-reduction programs. Management estimated that lower lead costs reduced cost of sales by approximately $21 million year over year.
- Operating margins improved in Europe to 7.3%, in the Americas to 15.4% and in Asia to 13.1%.
- Interest expense increased 38.6% to $4.7 million, primarily because of higher interest expense in Asia and South America and higher average debt.
- Comprehensive income attributable to EnerSys stockholders fell to $9.2 million from $51.2 million, mainly because of a $32.0 million unfavorable foreign-currency translation adjustment and a $5.3 million after-tax derivative loss.
- The company made no common-stock repurchases during the quarter, compared with $9.8 million of repurchases in the prior-year quarter.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear quantitative earnings, revenue or margin guidance figure. Management reported neutral sequential trends in revenue and order rates on a consolidated basis, continued economic recovery in the Americas, slower expansion in Asia and weaker economic conditions in Europe.
Management expects commodity costs, particularly lead, and foreign exchange rates to remain volatile. Approximately 35% of revenue was subject to market-based lead-price adjustments. For the remaining three quarters of fiscal 2013, management estimated that approximately 31% of lead costs were known through hedges, purchases and the lead-tolling program.
- A 10% increase in lead costs was estimated to increase quarterly cost of goods sold by approximately $14 million.
- Interest-rate swaps fixed the rate on $85.0 million of variable-rate debt; a 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $0.9 million.
- European restructuring programs were expected to reduce approximately 80 employees, with approximately $760,000 of additional restructuring charges expected in fiscal 2013. The company did not expect significant additional charges for an earlier European restructuring program.
- Key risks include cyclical customer markets, raw-material availability and pricing, foreign exchange, economic weakness in Europe, environmental and occupational-safety obligations related to lead and acid, product quality, litigation, acquisitions, debt service, covenant compliance, customer credit risk and operational or information-system disruptions.
- The company uses lead, foreign-currency and interest-rate derivatives for hedging and stated that it does not use derivatives for speculative purposes.
Management reported no significant changes in litigation or environmental matters since March 31, 2012, and no material subsequent events through issuance of the financial statements. Disclosure controls and procedures were assessed as effective.
Important Facts for Investors to Verify
- Whether the gross-margin benefit from lower lead costs and restructuring savings is sustainable as commodity prices change.
- The effect of European economic weakness and foreign-currency movements on sales, margins and accumulated comprehensive income.
- Progress and final costs of the European restructuring programs, including the remaining $760,000 expected charge.
- Debt levels, variable-rate exposure, convertible-note terms and continued compliance with credit-facility covenants.
- Working-capital conversion, particularly the increase in receivables and the resulting cash-flow impact.
- Whether organic volume growth and acquisition contributions continue across the Americas, Europe and Asia.
- Potential environmental, product-warranty and litigation costs; the warranty reserve was $42.5 million at July 1, 2012.