EnerSys Fiscal 2022 Second-Quarter 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures and distributes stored-energy solutions, industrial batteries, chargers, power equipment, specialty batteries and related services. Reportable segments are Energy Systems, Motive Power and Specialty. The filing covers the 13-week quarter and six months ended October 3, 2021, compared with October 4, 2020, within fiscal 2022.
Key Financial Metrics
| Metric | Quarter Ended Oct. 3, 2021 | Prior-Year Quarter | Six Months Ended Oct. 3, 2021 | Prior-Year Six Months |
|---|---|---|---|---|
| Net sales | $791.4 million | $708.4 million | $1,606.3 million | $1,413.3 million |
| Gross profit | $177.9 million | $177.6 million | $371.1 million | $352.5 million |
| Gross margin | 22.5% | 25.1% | 23.1% | 24.9% |
| Operating earnings | $49.7 million | $55.4 million | $110.6 million | $108.6 million |
| Operating margin | 6.3% | 7.8% | 6.9% | 7.7% |
| Net earnings attributable to EnerSys | $35.6 million | $35.7 million | $79.6 million | $70.9 million |
| Diluted EPS | $0.82 | $0.83 | $1.83 | $1.65 |
| Operating cash flow | Not separately provided | Not separately provided | $(65.6) million | $217.3 million |
At October 3, 2021, cash and cash equivalents were $407.5 million, compared with $451.8 million at March 31, 2021. Total debt, including short-term debt and long-term debt net of issuance costs, was approximately $1.112 billion, versus approximately $1.004 billion at March 31, 2021. Available and undrawn credit lines were approximately $689.0 million.
Inventories increased to $641.0 million from $518.2 million at fiscal year-end. Primary working capital was $930.6 million, or 29.4% of annualized quarterly sales, compared with $797.9 million and 24.5% at March 31, 2021.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 11.7%, driven by 11% organic volume growth and 1% pricing growth. Six-month sales increased 13.7%, driven by 11% organic volume growth, 2% foreign-currency translation and 1% pricing.
- Motive Power sales rose 21.6% in the quarter and 24.7% for the six months, reflecting strong recovery from prior-year pandemic-related weakness, higher volumes and pricing.
- Energy Systems sales rose 8.5% in the quarter and 6.7% for the six months, but operating earnings declined substantially because of freight costs, component shortages, raw-material inflation and unfavorable mix.
- Specialty sales declined 2.9% in the quarter due mainly to packaging shortages but increased 8.3% for the six months.
- Gross margin declined 260 basis points in the quarter and 180 basis points for the six months. Management cited supply-chain disruption, freight, component shortages, inflation in raw materials, supplies and utilities.
- Quarterly operating earnings declined 10.3%, while six-month operating earnings increased 1.8%. The six-month comparison included $10.7 million of restructuring and exit charges versus $4.5 million in the prior-year period.
- Operating cash flow declined by $282.8 million year over year, primarily because of a $142.3 million use of primary working capital, higher inventories, severance payments and other accrued-expense payments.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide explicit earnings or revenue guidance. Management stated that market demand remained robust but identified supply-chain disruptions, material and transportation cost increases, electronic-component shortages and hiring difficulties. Customer pricing generally lags lead and other cost increases by approximately six to nine months, creating near-term margin risk.
- The Hagen, Germany facility closure is expected to generate approximately $60.0 million of total charges, including approximately $40.0 million of cash costs and $20.0 million of non-cash inventory and equipment write-offs. Approximately 200 employees are affected, and most charges are expected by the end of calendar 2021.
- Fiscal 2022 included $10.7 million of restructuring and exit charges and a $1.0 million inventory write-off related to exit activities. Facility sales in Bulgaria and Spain generated credits to exit charges of $1.2 million and $0.7 million, respectively.
- On July 15, 2021, EnerSys amended its credit facility, extending maturity to September 30, 2026, increasing the revolver commitment to $850.0 million and refinancing term-loan obligations. The company reported compliance with all debt covenants.
- Senior notes include $300.0 million of 5.00% notes due April 2023 and $300.0 million of 4.375% notes due December 2027. Variable-rate exposure remains material; a 100-basis-point rate increase would increase annual interest expense by approximately $5.2 million.
- Lead-price and foreign-currency volatility remain significant risks. A 10% increase in lead costs would increase cost of goods sold by approximately $17.0 million for a quarter and $33.0 million for six months, based on the filing’s estimates.
- COVID-19 effects, global supply-chain disruption, commodity inflation, foreign exchange, environmental liabilities involving lead and acid, product quality, litigation and European competition investigations remain key risks. No reserve was recorded for the disclosed European competition investigations as of October 3, 2021.
- Subsequent to quarter-end, EnerSys repurchased 742,811 shares for approximately $57.0 million, exhausting the existing $100.0 million authorization, and announced a new $100.0 million authorization. The board also approved a quarterly dividend of $0.175 per share.
Most Important Facts for Investors to Verify
- Whether pricing actions and lead-indexed contracts offset ongoing freight, component, labor and raw-material inflation.
- The pace and final cost of the Hagen, Germany closure and other restructuring programs.
- Inventory normalization, working-capital conversion and the recovery of operating cash flow.
- Energy Systems margin recovery and the sustainability of Motive Power’s volume and margin improvement.
- Refinancing or repayment plans for the $300.0 million of senior notes due in April 2023.
- Potential outcomes and financial exposure from European competition investigations, environmental matters and other litigation.
- Compliance with debt covenants and the effect of variable interest rates and foreign-currency movements.