EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global manufacturer, marketer and distributor of industrial batteries, chargers, power equipment, accessories, enclosures and related services. It serves more than 10,000 customers in over 100 countries through three geographic segments: Americas, EMEA and Asia. Primary product lines are reserve power and motive power.
The unaudited report covers the 13-week first quarter of fiscal 2019 ended July 1, 2018, compared with the first quarter ended July 2, 2017. The company adopted ASC 606, Revenue from Contracts with Customers, on April 1, 2018 using the modified retrospective method, with no opening retained-earnings adjustment.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $670.9 million | $622.6 million | Up 7.8% |
| Gross profit | $165.3 million | $163.5 million | Up 1.2% |
| Gross margin | 24.6% | 26.2% | Down 160 bps |
| Operating earnings | $64.2 million | $70.0 million | Down 8.3% |
| Operating margin | 9.6% | 11.2% | Down approximately 170 bps |
| Net earnings attributable to EnerSys | $45.9 million | $48.2 million | Down 4.9% |
| Diluted EPS | $1.08 | $1.09 | Down $0.01 |
| Operating cash flow | $25.6 million | $21.6 million | Up $4.0 million |
Revenue growth comprised approximately 5% organic volume growth, 2% pricing and 1% foreign-currency translation. Americas sales increased 10.7%, EMEA sales increased 5.7% and Asia sales decreased 1.6%. Reserve power sales increased 6.2% and motive power sales increased 9.3%.
Higher lead and other commodity costs reduced gross profit margin; management estimated the commodity impact at approximately $16 million. The company raised selling prices, and approximately 30% of revenue was subject to lead-indexed pricing arrangements. Interest expense increased to $6.5 million from $5.7 million, primarily because of higher interest rates, despite lower average debt outstanding.
- Cash and cash equivalents were $512.5 million at July 1, 2018, compared with $522.1 million at March 31, 2018.
- Operating activities generated $25.6 million; capital expenditures were $15.5 million.
- Cash used in investing activities was $15.5 million. No business acquisitions occurred in the quarter.
- Cash provided by financing activities was $8.5 million, including $64.0 million of revolver borrowings and $54.5 million of repayments.
- Total debt principal was approximately $615.0 million, consisting of $595.0 million of long-term debt principal and $19.9 million of short-term borrowings. Long-term debt included $300.0 million of 5.00% senior notes due 2023 and $295.0 million outstanding under the 2017 Credit Facility.
- Available and undrawn credit lines totaled approximately $540.2 million. Management stated that liquidity was sufficient for short-term requirements, anticipated growth, dividends and potential acquisitions.
- Primary working capital was $672.6 million, or 25.1% of annualized quarterly sales, versus 25.7% at March 31, 2018 and 26.6% in the prior-year quarter.
Material changes versus the prior comparable period
- Sales growth was offset by commodity inflation, resulting in lower gross and operating margins and lower operating earnings.
- Americas operating earnings fell to $47.7 million from $53.8 million, primarily because of higher commodity costs. EMEA operating earnings increased to $17.2 million from $13.8 million before restructuring charges, benefiting from pricing and cost savings. Asia operating earnings fell to $1.5 million from $3.2 million because of lower organic volume and higher commodity costs.
- The company recorded $1.2 million of EMEA restructuring charges, a $0.5 million non-cash inventory write-off and a $0.6 million fixed-asset write-off associated with converting India operations from primarily reserve power production to motive power production.
- Foreign-currency translation reduced cash by $28.2 million, compared with a $19.7 million positive impact in the prior-year quarter. Accumulated other comprehensive loss increased to $112.1 million from $41.7 million, principally because of foreign-currency translation losses.
- The effective income tax rate declined to 19.7% from 20.7%, reflecting jurisdictional earnings mix and Tax Cuts and Jobs Act impacts. Tax accounting for certain Tax Act provisions remained provisional, and the company had not selected an accounting policy for GILTI as of the filing date.
- Stock-based compensation expense decreased to $4.3 million from $5.2 million. No share repurchases were made under the $100 million authorization during the quarter, although 43,944 shares were acquired through equity-plan-related transactions.
Guidance, outlook, management commentary, risks and unusual items
No specific earnings or revenue guidance was provided in the filing. Management cited moderate economic growth in North America and EMEA and faster growth in Asia, but noted mixed regional conditions. It expects commodity costs and foreign-currency exposures to remain volatile and stated that it increased prices during the quarter to respond to higher commodity costs.
Management expects approximately 48% of the remaining fiscal-year lead requirement cost to be known through hedges, prior purchases and the lead tolling program. A 10% increase in lead costs was estimated to increase quarterly cost of goods sold by approximately $18 million. A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.1 million on variable-rate debt.
- Restructuring programs remain in progress, including an estimated additional $3.5 million of EMEA charges expected through fiscal 2020. Certain other programs are expected to be completed in fiscal 2019.
- The company is appealing an approximately $11.4 million German competition-authority fine related to reserve power operations and has not accrued the fine. Competition-related reserves totaled $0.9 million at July 1, 2018.
- Environmental and occupational-safety risks relate particularly to lead and acid handling. A reserve of $1.1 million remained for cleanup obligations at a former South Carolina facility.
- Warranty liabilities were $49.7 million at quarter-end, compared with $46.7 million a year earlier.
- Lead, foreign-currency and interest-rate volatility, global economic conditions, pricing execution, competition, product quality, environmental regulation, litigation, restructuring execution, acquisitions, goodwill impairment and debt covenants were identified as material risk factors.
- The company reported compliance with its credit agreement and senior notes covenants. Its secured credit facility matures September 30, 2022 and restricts certain transactions, asset sales, dividends and other actions absent specified conditions or waivers.
Important facts for investors to verify
- Whether pricing actions and lead-indexed contracts adequately offset continuing commodity inflation and restore gross margins.
- Progress and remaining costs of the EMEA and India restructuring and exit programs.
- Asia volume trends, particularly the effect of slower telecommunications spending in China.
- Finalization of provisional Tax Act accounting and the selected GILTI accounting method.
- Outcome and potential cash impact of the appealed German competition matter and other regulatory proceedings.
- Variable-rate debt exposure, revolver utilization and continued compliance with credit-facility covenants.
- Foreign-currency translation effects on reported earnings, equity and cash balances.
- Conversion of the $65.9 million of unsatisfied performance obligations into revenue, including approximately $45.9 million expected in fiscal 2019.