EnerSys 10-Q Summary: Fiscal 2017 Second Quarter
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. The filing covers the 13-week quarter and six months ended October 2, 2016, compared with September 27, 2015.
Key Financial Metrics
| Metric | Quarter Ended Oct. 2, 2016 | Prior-Year Quarter | Six Months Ended Oct. 2, 2016 | Prior-Year Six Months |
|---|---|---|---|---|
| Net sales | $576.0 million | $569.1 million | $1,176.7 million | $1,131.2 million |
| Gross profit | $161.3 million | $154.9 million | $327.6 million | $305.4 million |
| Gross margin | 28.0% | 27.2% | 27.8% | 27.0% |
| Operating earnings | $62.9 million | $59.5 million | $128.9 million | $128.6 million |
| Operating margin | 10.9% | 10.5% | 11.0% | 11.4% |
| Net earnings attributable to EnerSys | $45.6 million | $40.0 million | $90.2 million | $88.4 million |
| Diluted EPS | $1.04 | $0.87 | $2.06 | $1.91 |
| Operating cash flow | Not separately provided | Not separately provided | $113.9 million | $174.6 million |
Quarterly diluted EPS increased 19.5%, while six-month diluted EPS increased 7.9%. The effective tax rate was 26.2% for the quarter and 25.3% for the six-month period, compared with 26.1% and 24.3%, respectively, in the prior-year periods.
At October 2, 2016, cash and cash equivalents were $440.3 million, compared with $397.3 million at March 31, 2016. Total debt was approximately $626.7 million, consisting primarily of $300.0 million of 5.00% senior notes due 2023, $305.0 million under the 2011 Credit Facility and $21.7 million of short-term borrowings. Approximately $473.1 million of credit lines were available and undrawn. The company stated that it was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales rose 1.2%, driven by 2% organic volume growth and 1% acquisition contribution, partly offset by a 2% foreign-currency translation headwind.
- Six-month sales increased 4.0%, reflecting 4% organic volume growth and 2% acquisition contribution, partly offset by a 2% currency headwind.
- Asia sales increased 23.5% in the quarter and 36.7% for six months, while EMEA sales declined 4.7% and 2.2%, respectively. Americas sales increased modestly.
- Reserve power sales increased 1.2% in the quarter and 6.5% year to date; motive power sales increased 1.3% and 1.8%, respectively.
- Gross margin expanded 80 basis points in both comparison periods, primarily from higher organic volume and lower commodity costs, despite a $2.7 million South Africa-related inventory write-off.
- Operating expenses increased 4.4% in the quarter and 10.6% year to date, primarily due to payroll costs, acquisitions and professional fees. Six-month operating expenses included a $7.7 million Americas ERP implementation charge, including a $6.3 million write-off of previously capitalized costs.
- Operating cash flow declined $60.7 million year to date, principally because of a $38.1 million increase in primary working capital, including higher inventories and lower accounts payable.
- Investing cash use declined to $32.9 million from $62.6 million, reflecting lower capital expenditures and acquisition spending and the absence of the prior-year comparison-period facility-sale proceeds.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific earnings or revenue guidance. Management described economic activity as mixed, with limited growth in North America and EMEA and continued, although slower, growth in Asia. Management reported relatively stable recent revenue and order rates, flat selling prices in the quarter and no substantial recent commodity-cost changes.
- The company initiated an exit plan for its South Africa joint venture because of a weak economic environment, limited mining-industry growth and competitive pressure. The quarter included approximately $5.5 million of exit charges, including a $2.7 million inventory write-off, and management expects approximately $5.0 million of additional exit charges in fiscal 2017.
- Restructuring programs are expected to generate additional charges, including approximately $600 thousand for European actions, $3.1 million for EMEA motive-power actions through fiscal 2018 and $100 thousand related to the Jiangdu, China facility.
- European competition investigations in Germany and the Netherlands remain unresolved. The company had approximately $1.9 million reserved for remaining investigations and related legal charges but stated that potential losses from the German and Dutch proceedings cannot currently be estimated.
- The company faces exposure to lead prices, foreign exchange rates and variable interest rates. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.3 million; a 10% increase in lead costs would increase cost of goods sold by approximately $14 million for the quarter and $28 million for six months, before considering hedges and other offsets.
- Approximately 50% of sales and expenses are transacted in foreign currencies. Lead and foreign-currency forward contracts are used for hedging and not speculation.
- Warranty reserves were $48.1 million at October 2, 2016, compared with $40.1 million at September 27, 2015.
- The Board approved a quarterly dividend of $0.175 per share, payable December 30, 2016.
- Disclosure controls and procedures were assessed as effective, with no reported material change in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether Asia growth offsets continuing weakness in EMEA, particularly in reserve-power telecommunications markets.
- The timing and ultimate cost of the South Africa exit and other restructuring programs.
- The outcome and potential financial exposure from the German and Dutch competition investigations.
- Whether elevated inventories and working capital convert into cash or continue to constrain operating cash flow.
- Progress and additional costs associated with the Americas ERP implementation after the $6.3 million capitalized-cost write-off.
- Sensitivity of margins and earnings to lead prices, foreign exchange movements and variable-rate debt.
- Compliance with credit-facility covenants and the company’s ability to maintain liquidity while pursuing acquisitions, capital expenditures, dividends and potential share repurchases.