EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global manufacturer and distributor of industrial energy-storage solutions, including reserve-power and motive-power batteries, chargers, power equipment, accessories, and related services. The company operates through the Americas, Europe, and Asia segments and serves more than 10,000 customers in over 100 countries.
This unaudited Form 10-Q covers the 13-week first quarter of fiscal 2011 ended July 4, 2010, compared with the quarter ended June 28, 2009. The company reported approximately 49.1 million common shares outstanding at August 6, 2010.
Financial performance and liquidity
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $435.0 million | $340.3 million | +27.8% |
| Gross profit | $96.6 million | $77.5 million | +24.7% |
| Gross margin | 22.2% | 22.8% | Down 60 basis points |
| Operating earnings | $37.5 million | $19.5 million | +91.9% |
| Operating margin | 8.6% | 5.7% | Up 290 basis points |
| Net earnings | $23.0 million | $8.4 million | Increase of $14.6 million |
| Net margin | 5.2% | 2.5% | Up 270 basis points |
| Diluted EPS | $0.47 | $0.17 | +$0.30 |
| Cash flow from operations | $(12.7) million | $62.8 million | Declined $75.5 million |
Revenue growth reflected 19% organic volume growth, a 6% acquisition contribution, and a 6% pricing benefit, partly offset by a 3% foreign-currency headwind. Motive-power sales increased 44.4% and reserve-power sales increased 13.6%.
- Europe revenue increased 20.7% to $188.5 million; operating earnings increased to $9.9 million from $0.7 million.
- Americas revenue increased 36.9% to $205.7 million; operating earnings increased 65.5% to $26.0 million.
- Asia revenue increased 20.4% to $40.8 million, while operating earnings decreased 65.0% to $2.3 million because of higher commodity and freight costs and pricing pressure.
Lead costs increased cost of goods sold by approximately $48 million year over year; pricing actions offset approximately $22 million. Operating expenses increased 7.4% to $58.4 million but declined to 13.4% of sales from 16.0%, reflecting operating leverage. The effective tax rate decreased to 27.0% from 31.5% because of changes in the geographic mix of earnings.
Cash and cash equivalents were $173.8 million at July 4, 2010, compared with $201.0 million at March 31, 2010. Investing activities used $12.1 million, including $10.9 million of capital expenditures and $1.2 million for acquisitions. Financing activities provided $0.6 million, as option exercises and related tax benefits offset scheduled debt repayments.
Primary working capital increased to $454.1 million, or 26.1% of annualized quarterly revenue, from $439.7 million, or 24.4%, at March 31, 2010. Inventory increased in preparation for anticipated new business and seasonal plant closures.
Total debt and capital lease obligations were $344.8 million at July 4, 2010, including $196.9 million under the Term A Loan and $172.5 million principal amount of convertible notes, net of a $35.1 million discount. The company had no borrowings under its $125 million revolving facility, approximately $130 million of undrawn committed credit lines, and more than $120 million of uncommitted credit lines. Management stated that the company was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Revenue and operating earnings improved substantially as industrial demand and capital spending recovered from the prior-year downturn.
- Gross margin contracted despite higher pricing because lead and other commodity costs increased faster than pricing recovery.
- Operating margin expanded because of volume growth, price realization, cost reductions, restructuring benefits, and lower restructuring charges.
- Operating cash flow turned negative because the company invested $28.7 million in primary working capital, compared with a $56.8 million working-capital benefit in the prior-year quarter.
- Restructuring charges decreased to $0.7 million from $3.5 million. The company expects approximately $1.0 million of additional charges related to the 2009 restructuring plan in fiscal 2011.
- Comprehensive income changed to a loss of $13.5 million from income of $49.4 million, primarily because of a $33.1 million adverse foreign-currency translation adjustment and a $3.6 million derivative loss.
Outlook, commentary, risks, and unusual items
Management described market conditions as improving and indicated that first-quarter revenue was approximately flat with the fourth quarter of fiscal 2010 after excluding the effect of weaker currencies, despite the company’s typical first-quarter seasonal sales decline. Management expects restructuring actions implemented over the prior three years to provide approximately $36 million of annualized pretax earnings benefit, or $0.51 per share, when fully implemented by the end of fiscal 2011.
The company expects approximately 40% of lead costs for the remaining three quarters of fiscal 2011 to be known through hedges, purchased inventory, and its lead tolling program. A 10% increase in lead costs would increase cost of goods sold by approximately $11 million based on first-quarter revenue and costs. Interest-rate swaps effectively fixed $170 million of variable-rate debt; a 100-basis-point increase in rates would increase annual interest expense by approximately $0.4 million on unhedged variable-rate debt.
- Key risks include cyclical customer industries, commodity-price and availability volatility, the ability to pass costs through to customers, foreign-currency movements, pricing pressure, manufacturing utilization, competition, acquisitions and integration, restructuring execution, debt-service requirements, covenant restrictions, customer credit risk, and environmental and workplace-safety liabilities involving lead and acid.
- Environmental reserves related primarily to the Sumter, South Carolina facility were $3.5 million at July 4, 2010; management believed the reserves were sufficient.
- Management did not expect existing litigation to have a material adverse effect on financial condition, results of operations, or cash flow.
- The company had $31.3 million of product-warranty liabilities at July 4, 2010. Actual claims costs may differ from estimates.
- No material subsequent events requiring recognition or disclosure were identified through issuance of the financial statements.
- Management concluded that disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing actions and restructuring savings can offset continued lead and other commodity-cost inflation.
- Whether the planned inventory build and anticipated reserve-power customer program convert into sustained revenue and cash generation.
- The pace of operating-cash-flow recovery as working-capital investment normalizes.
- Debt amortization, convertible-note terms, interest-rate exposure, covenant compliance, and availability under committed credit facilities.
- The effect of foreign-currency movements and derivative settlements on earnings, comprehensive income, and future cost of goods sold.
- Asia segment profitability, which declined sharply despite revenue growth.
- Environmental, warranty, litigation, restructuring, and acquisition-integration obligations.