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 three geographic segments: Americas, Europe and Asia. Products are divided primarily between reserve power and motive power.
The filing covers the first quarter of fiscal 2012, a 13-week period ended July 3, 2011. The comparable period ended July 4, 2010. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $569.2 million | $435.0 million | 30.9% increase |
| Gross profit | $122.0 million | $96.6 million | 26.2% increase |
| Gross margin | 21.4% | 22.2% | Down 80 basis points |
| Operating earnings | $48.7 million | $37.5 million | 30.0% increase |
| Operating margin | 8.6% | 8.6% | Flat |
| Earnings before taxes | $44.1 million | $31.5 million | 39.7% increase |
| Net earnings | $33.5 million | $23.0 million | 45.5% increase |
| Basic diluted EPS | $0.67 / $0.66 | $0.47 / $0.47 | Higher in both measures |
| Operating cash flow | $17.0 million | $(12.7) million | Improved by $29.7 million |
Net sales growth consisted of approximately 16% organic volume growth, 3% pricing, 2% acquisitions and 10% foreign-currency effects. Reserve power sales increased 28.1% and motive power sales increased 33.4%.
Segment sales were $253.0 million in Europe, $259.2 million in the Americas and $57.0 million in Asia. Segment operating margins were approximately 5.6%, 12.2% and 5.9%, respectively.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $116.6 million at July 3, 2011, compared with $108.9 million at March 31, 2011.
- Total assets were $1.87 billion and total equity was $1.03 billion at July 3, 2011.
- Total debt and capital lease obligations were approximately $263.4 million, including $250.8 million of long-term debt and capital leases and $12.6 million of short-term debt.
- Debt included $143.4 million of net carrying value for the convertible notes, $100.0 million drawn under the $350.0 million revolving credit facility, and $6.2 million under the China term loan.
- The company reported approximately $261 million of undrawn committed credit lines and approximately $83 million of uncommitted lines. It was in compliance with its debt covenants.
- Primary working capital increased to $585.2 million from $547.3 million at March 31, 2011; the primary working capital percentage increased to 25.7% from 25.0%.
Material changes versus the prior comparable period
- Revenue growth was broad-based across all regions and product lines, with particularly strong organic volume growth in the Americas and Asia.
- Higher lead costs reduced gross margin. Lead costs increased approximately $18 million year over year, while selling-price increases offset approximately $14 million.
- Operating expenses grew 24.7% but declined as a percentage of sales from 13.4% to 12.8%, reflecting operating leverage.
- Interest expense declined to $3.4 million from $6.0 million, primarily because interest-rate swap losses had been included in interest expense in the prior-year period. Current-period swap losses of $0.7 million were recorded in other expense.
- The effective tax rate declined to 24.0% from 27.0%, primarily due to changes in the mix of earnings among tax jurisdictions.
- Cash flow from operations improved substantially, although $25.8 million of cash was used for increased primary working capital during a period of rising sales.
- The company repurchased 294,200 shares for $9.8 million and had 49,997,751 shares outstanding at July 3, 2011.
- Comprehensive income was $51.2 million, compared with a comprehensive loss of $13.5 million in the prior-year period, largely reflecting favorable foreign-currency translation.
Guidance, outlook, commentary and risks
The filing does not provide a specific numerical revenue or earnings forecast. Management stated that liquidity and capital resources were sufficient to fund foreseeable organic growth and support further acquisition opportunities. Management also continued to emphasize pricing actions, product mix improvements and cost-reduction programs.
Management noted that the global economic recovery appeared to be slowing and that lead prices and foreign currencies remained volatile. Approximately 35% to 40% of revenue was subject to market-based lead-price adjustments. The company estimated that a 10% increase in lead costs would increase cost of goods sold by approximately $15 million for the quarter.
- A three-week strike at a European manufacturing plant was expected to reduce first-half fiscal 2012 results by approximately $3 million, with most of the impact expected in the second quarter.
- Restructuring charges were $0.4 million in the quarter. Additional fiscal 2012 restructuring charges were expected, including approximately $0.3 million related to the Oerlikon acquisition plan, $0.6 million related to earlier European and American actions, and $1.0 million related to a later European restructuring plan.
- Environmental reserves related primarily to the Sumter, South Carolina facility were $3.2 million. Management believed the reserves were sufficient based on available information.
- The company is exposed to lead prices, foreign-exchange movements, variable interest rates, customer credit risk, cyclical demand, competition, environmental and safety regulation, litigation, product quality, restructuring execution and acquisition integration.
- A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $1.0 million on variable-rate debt.
Important facts for investors to verify
- Whether pricing actions continue to offset lead-cost inflation without materially reducing demand or market share.
- The duration and financial impact of the European plant strike and whether additional disruptions occur.
- Progress and cash costs of restructuring programs, including the remaining expected charges.
- Working-capital requirements as sales growth continues, particularly inventory and receivables.
- Availability and covenant capacity under the revolving credit facility, including the liquidity test related to the convertible notes.
- Potential dilution or cash obligations associated with the $172.5 million convertible notes, including the 4.25 million potential shares and 2015 holder repurchase provisions.
- Exposure to lead prices, foreign currencies and variable interest rates despite the company’s hedging programs.
- Warranty, environmental and other contingent liabilities; the filing states that existing litigation is not expected to be material.