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 the Americas, EMEA and Asia segments, with reserve power and motive power product lines.
The filing covers the fiscal third quarter and nine months ended December 31, 2017. The comparable prior-year quarter ended January 1, 2017. Fiscal 2018 results are unaudited and are not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q3 FY2018 | Q3 FY2017 | 9M FY2018 | 9M FY2017 |
|---|---|---|---|---|
| Net sales | $658.9 million | $563.7 million | $1,898.8 million | $1,740.3 million |
| Gross profit | $167.0 million | $155.9 million | $489.9 million | $483.5 million |
| Gross margin | 25.3% | 27.7% | 25.8% | 27.8% |
| Operating earnings | $68.4 million | $55.0 million | $202.0 million | $184.0 million |
| Operating margin | 10.4% | 9.8% | 10.6% | 10.6% |
| Earnings before taxes | $62.5 million | $50.6 million | $178.6 million | $167.6 million |
| Net earnings attributable to EnerSys stockholders | $(25.8) million | $36.2 million | $65.6 million | $126.4 million |
| Diluted EPS | $(0.61) | $0.82 | $1.51 | $2.88 |
Quarterly sales increased 16.9%, driven by 8% organic volume growth, 5% foreign-currency translation and 4% pricing. Nine-month sales increased 9.1%, reflecting 3% organic volume growth, 2% foreign-currency translation and 4% pricing. Reserve power sales rose 20.5% in the quarter and 9.4% year to date; motive power sales rose 13.5% and 8.8%, respectively.
Higher lead and other commodity costs reduced gross margin by 240 basis points in the quarter and 200 basis points year to date. Management estimated commodity-cost impacts of approximately $34 million in the quarter and $102 million year to date, partly offset by pricing, volume and cost savings.
The effective tax rate was 141.2% in the quarter and 63.2% for the nine months, compared with 26.7% and 25.7% in the prior-year periods. The increase primarily reflected a provisional $77.3 million net tax expense from the Tax Cuts and Jobs Act, including a $94.0 million estimated transition tax, partially offset by deferred-tax remeasurement benefits.
Operating cash flow was $129.9 million for the nine months, compared with $166.7 million in the prior-year period. Capital expenditures were $43.1 million, acquisition spending was $3.0 million and cash increased $71.0 million to $571.3 million, aided by a $38.3 million favorable currency-translation effect.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $571.3 million at December 31, 2017, compared with $500.3 million at March 31, 2017.
- Total debt was approximately $706 million, consisting principally of $300 million of 5.00% senior notes due 2023, $395.3 million under the 2017 Credit Facility and $16.8 million of short-term debt.
- The 2017 Credit Facility includes a $600 million senior secured revolver and a $150 million senior secured term loan, maturing September 30, 2022. The Company had $503.8 million of available and undrawn credit lines.
- Primary working capital increased to $689.6 million, or 26.2% of annualized quarterly sales, from $624.8 million, or 24.9%, at March 31, 2017, mainly because of higher inventories.
- The Company repurchased $121.2 million of common stock during the nine months, including a $100 million accelerated share repurchase, and paid $22.3 million of dividends.
- Management stated that the Company was in compliance with its debt covenants and expected sufficient liquidity to fund operations, growth, acquisitions, repurchases and dividends.
Material changes, outlook and unusual items
- The Company refinanced its prior credit facility in August 2017 with the 2017 Credit Facility, using proceeds to repay the prior revolver and term loan.
- The Tax Cuts and Jobs Act produced a significant provisional tax charge and an estimated $94.0 million transition-tax liability payable over eight years. The accounting remained subject to refinement under SAB 118.
- Prior-year results included a $17.0 million charge related to German competition proceedings; no comparable charge was recorded in the current periods. The Company paid $14.8 million related to the motive-power matter and is appealing a proposed $11.4 million reserve-power fine without accruing it.
- Restructuring charges were $1.8 million in the quarter and $4.4 million year to date. Certain European and China programs were completed; additional EMEA and Americas actions were expected to continue into fiscal 2019.
- No specific earnings or revenue guidance is provided in the filing. Management described economic conditions as moderately growing in North America and EMEA and stronger in Asia.
- Lead prices and foreign exchange remain significant exposures. The Company hedged approximately 54 million pounds of lead, representing about 9% of estimated annual requirements, and stated that approximately 100% of remaining-quarter lead costs were known as of December 31, 2017.
Principal risks
Key risks include volatility and availability of lead and other raw materials, inability to fully recover cost increases through pricing, foreign-currency and interest-rate exposure, competition, cyclical customer industries, environmental and workplace-safety liabilities associated with lead and acid, litigation and regulatory proceedings, restructuring execution, acquisitions and integration, debt-service requirements, covenant restrictions, customer credit risk, product-quality issues, cybersecurity and operational disruptions.
Investor verification checklist
- Verify the final accounting for the Tax Cuts and Jobs Act, including the $94.0 million transition tax and deferred-tax remeasurement.
- Monitor whether pricing and cost reductions offset lead-cost inflation and whether gross-margin pressure persists.
- Review the outcome of the appealed German competition fine and any changes in legal reserves.
- Track debt balances, variable-rate exposure, covenant compliance and available revolver capacity after share repurchases or acquisitions.
- Assess inventory growth, working-capital conversion and the decline in operating cash flow versus the prior year.
- Confirm execution and total costs of the remaining restructuring programs and the effect on operating margins.
- Evaluate the sustainability of sales growth across the Americas, EMEA and Asia and across reserve-power and motive-power products.