EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global provider of stored-energy solutions, including Energy Systems, Motive Power batteries and chargers, and Specialty batteries. The filing covers the 13-week second quarter and six months of fiscal 2023 ended October 2, 2022, compared with periods ended October 3, 2021.
Financial performance and position
| Metric | Q2 FY2023 | Q2 FY2022 | Change |
|---|---|---|---|
| Net sales | $899.4 million | $791.4 million | 13.7% increase |
| Gross profit | $194.9 million | $177.9 million | 9.6% increase |
| Gross margin | 21.7% | 22.5% | Down 80 basis points |
| Operating earnings | $54.3 million | $49.7 million | 9.2% increase |
| Operating margin | 6.0% | 6.3% | Down 30 basis points |
| Net earnings attributable to EnerSys | $34.5 million | $35.6 million | 3.2% decrease |
| Diluted EPS | $0.84 | $0.82 | Increase |
| Interest expense | $15.5 million | $9.6 million | 61.5% increase |
| Metric | Six months FY2023 | Six months FY2022 | Change |
|---|---|---|---|
| Net sales | $1.798 billion | $1.606 billion | 12.0% increase |
| Gross profit | $380.4 million | $371.1 million | 2.5% increase |
| Gross margin | 21.1% | 23.1% | Down 200 basis points |
| Operating earnings | $104.4 million | $110.6 million | 5.6% decrease |
| Net earnings attributable to EnerSys | $65.5 million | $79.6 million | 17.7% decrease |
| Diluted EPS | $1.59 | $1.83 | Decrease |
Second-quarter sales growth reflected 10% organic growth and 9% pricing, partially offset by a 5% unfavorable foreign-currency translation impact. Six-month growth reflected 9% organic volume growth and 8% pricing, partially offset by a 5% currency impact.
- Segment sales: Q2 Energy Systems increased 18.2% to $437.0 million, Motive Power increased 5.4% to $338.0 million, and Specialty increased 23.3% to $124.4 million.
- Cash flow: Operating activities used $70.3 million in the first six months versus $65.6 million used in the prior-year period. The primary working-capital outflow was $178.2 million, driven principally by higher inventories and receivables.
- Investing: Investing activities provided $4.1 million, including $43.4 million from termination of a net investment hedge, offset by $39.7 million of capital expenditures.
- Liquidity: Cash and cash equivalents were $294.4 million at October 2, 2022, down from $402.5 million at March 31, 2022. Available and undrawn committed credit lines were approximately $653 million; total undrawn lines, including uncommitted facilities, were $737.7 million.
- Debt: Long-term debt, net of issuance costs, was $1.296 billion, compared with $1.243 billion at March 31, 2022. The company had $702.1 million outstanding under its Second Amended Credit Facility and $600 million of Senior Notes outstanding.
- Shareholder returns: The company repurchased 358,365 shares for $22.9 million during the six months and paid $14.2 million in dividends. The quarterly dividend remained $0.175 per share.
Material changes versus the prior comparable period
- Revenue growth was strong across all segments, led by Energy Systems and Specialty, but higher freight, labor, energy, component, raw-material and other inflationary costs reduced gross and operating margins.
- Energy Systems operating earnings improved materially, while Motive Power and Specialty operating margins declined due to cost inflation and unfavorable currency effects.
- Interest expense increased substantially because of higher average debt, higher short-term interest rates, and $1.2 million of third-party fees related to the credit-facility amendment.
- Cash conversion weakened as inventory increased to $812.0 million from $715.7 million at March 31, 2022. Primary working capital increased to $1.173 billion, or 32.6% of annualized quarterly sales, from 28.7% at March 31, 2022.
- Accumulated other comprehensive loss increased to $257.4 million, principally because of a $108.4 million foreign-currency translation loss during the six months.
Guidance, outlook, risks and unusual items
The filing does not provide a formal quantitative earnings or revenue forecast. Management stated that overall market demand remained robust but expected continued headwinds from elevated commodity, labor and energy costs, with related customer price increases. Customer pricing generally lags changes in lead and other costs by approximately six to nine months.
- EnerSys entered into a third amendment to its credit facility providing a delayed-draw term loan of up to $300 million, available through March 15, 2023. Management expects to use this facility to refinance the $300 million of 5% Senior Notes maturing April 30, 2023.
- The company committed to close its Ooltewah, Tennessee facility, which produces flooded motive-power batteries. Total estimated charges are approximately $18.5 million, including $9.2 million of cash charges and $9.3 million of non-cash charges. Approximately 165 employees are expected to be affected, with completion expected by calendar 2023.
- The company recorded $11.6 million of restructuring and exit charges in the first six months, including $7.3 million of fixed-asset write-offs and $1.5 million of inventory write-offs related primarily to the Ooltewah closure.
- Key exposures include lead and other commodity prices, foreign exchange, variable-rate debt, supply-chain disruptions, inflation, labor availability, geopolitical developments, COVID-19 effects, environmental and product-liability matters, competition investigations, litigation, and potential goodwill or asset impairments.
- A 100-basis-point increase in interest rates would increase annual interest expense by approximately $7.4 million on variable-rate debt. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $20 million for the quarter and $43 million for the six-month period.
- European competition investigations remain unresolved. The company had no reserve recorded for these matters at October 2, 2022, and stated that the scope, timing and outcome remain uncertain.
- Management reported compliance with all debt covenants and stated that disclosure controls and procedures were effective.
Important facts for investors to verify
- Whether pricing actions and supply-chain improvements can offset continuing commodity, freight, labor and energy inflation.
- The refinancing plan and final funding terms for the $300 million Senior Notes maturity in April 2023.
- Inventory reduction, working-capital normalization and restoration of positive operating cash flow.
- The remaining cost and timing of the Ooltewah closure and other restructuring programs.
- Foreign-currency effects, variable-rate debt sensitivity and the effectiveness of lead and currency hedges.
- Potential financial exposure from competition investigations, environmental matters, litigation and product warranties.
- Whether the reported strong demand persists amid slowing economic conditions in North America, China and EMEA.