EnerSys Form 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 fiscal third quarter and nine months ended January 2, 2022, compared with January 3, 2021.
Financial Results and Key Metrics
| Metric | Q3 FY2022 | Q3 FY2021 | 9M FY2022 | 9M FY2021 |
|---|---|---|---|---|
| Net sales | $844.0 million | $751.1 million | $2,450.3 million | $2,164.4 million |
| Gross profit | $184.3 million | $189.3 million | $555.4 million | $541.8 million |
| Gross margin | 21.8% | 25.2% | 22.7% | 25.0% |
| Operating earnings | $51.2 million | $56.1 million | $161.8 million | $164.7 million |
| Operating margin | 6.1% | 7.5% | 6.6% | 7.6% |
| Net earnings attributable to EnerSys | $36.3 million | $38.6 million | $115.8 million | $109.5 million |
| Diluted EPS | $0.85 | $0.89 | $2.69 | $2.54 |
- Quarterly sales increased 12.4%, driven by 10% organic volume growth and 3% pricing, partly offset by a 1% foreign-currency translation impact. Nine-month sales increased 13.2%.
- Quarterly gross profit declined 2.6% despite higher sales. Gross margin fell 340 basis points because freight, component, raw-material, labor and other inflationary costs exceeded pricing recovery.
- Operating expenses were $130.7 million in the quarter and $380.5 million for nine months. Restructuring and exit charges were $2.5 million and $13.2 million, respectively.
- The effective tax rate was 15.3% for the quarter and 14.2% for nine months, versus 11.9% and 13.7% in the prior-year periods.
- Operating cash flow was negative $78.0 million for nine months, compared with positive $272.1 million in the prior-year period. Primary working capital increased to $989.9 million, or 29.3% of annualized quarterly sales, versus 24.5% at March 31, 2021.
- Capital expenditures were $52.4 million for nine months. Cash and cash equivalents were $397.1 million at January 2, 2022, down from $451.8 million at March 31, 2021.
- Total debt was approximately $1.225 billion, consisting of $33.5 million of short-term debt and $1.191 billion of long-term debt, net of issuance costs. Available and undrawn credit lines were approximately $570.7 million.
- The Company paid $22.2 million in dividends and repurchased 1,422,569 shares for $114.5 million during the nine months. It repurchased an additional 446,969 shares for approximately $33.1 million through February 9, 2022.
Material Changes Versus Prior Comparable Period
- Energy Systems sales rose 14.2% in the quarter and 9.2% for nine months, but operating earnings declined sharply to $3.5 million for the quarter and $11.8 million for nine months, primarily because of higher lead and freight costs, component shortages and unfavorable mix.
- Motive Power sales increased 11.5% in the quarter and 19.9% for nine months. Nine-month operating earnings increased 42.5%, reflecting volume recovery and pricing, although the prior-year period included $6.7 million of insurance recoveries.
- Specialty sales increased 9.0% in the quarter and 8.5% for nine months. Nine-month operating earnings increased 14.4%, while quarterly operating earnings declined 12.1% because of lower margins in certain aerospace and defense projects.
- Debt increased from $1.004 billion at March 31, 2021 to approximately $1.225 billion at January 2, 2022, primarily following the amended credit facility and increased revolver borrowings.
- Inventory increased to $671.4 million from $518.2 million at March 31, 2021, reflecting supply-chain delays, new products, higher input costs and elevated customer backlog.
- The Company entered into a second amended credit facility scheduled to mature September 30, 2026, with an $850.0 million revolving facility and term loans totaling approximately $214.2 million outstanding at quarter-end.
Outlook, Commentary, Risks and Unusual Items
- Management reported robust market demand and expected strong economic growth in North America, China and EMEA, but did not provide specific revenue, earnings or EPS guidance in the filing.
- Supply-chain disruptions, shortages of electronic components, higher freight costs, inflation and hiring difficulties continue to pressure margins. Customer pricing generally lags lead and other cost increases by six to nine months.
- Management expects year-over-year headwinds from commodity inflation, partly offset by higher selling prices and a continuing shift toward Energy Systems and non-lead chemistries.
- The Hagen, Germany closure is expected to generate approximately $60.0 million of total charges, with approximately $1.9 million of restructuring costs remaining to be incurred by the end of fiscal 2022. The program reduced approximately 200 employees.
- Other exit activities included facility sales in Bulgaria and Spain, which generated credits to exit charges of $1.2 million and $0.7 million, respectively.
- The Company entered into cross-currency interest-rate swaps with $300.0 million of aggregate notional value, maturing December 15, 2027, to hedge foreign investments. A 100-basis-point increase in interest rates would increase annual interest expense by approximately $6.3 million on variable-rate debt.
- European competition investigations, environmental obligations involving lead and acid, product warranty claims, litigation and regulatory inquiries remain potential contingencies. No reserve was recorded for the European competition investigations as of January 2, 2022, and the ultimate outcome remains uncertain.
- Management stated that the Company was in compliance with its debt covenants and believed available liquidity was sufficient for foreseeable operating, investment, dividend and acquisition needs.
Most Important Facts to Verify
- Whether pricing actions and productivity improvements can offset continuing freight, labor, component and commodity inflation, particularly in Energy Systems.
- Whether elevated inventory and receivables convert to cash as supply-chain constraints ease and customer backlog is fulfilled.
- The pace and remaining cash cost of the Hagen closure and other restructuring programs.
- Debt reduction plans, revolver utilization, covenant headroom and refinancing requirements for the $300.0 million of 5.00% notes due April 2023.
- The financial exposure and timing associated with European competition investigations, environmental matters and warranty obligations.
- Whether the reported strong demand and expected economic recovery translate into sustained volume growth without further margin deterioration.