Business Context and Reporting Period
EnerSys manufactures, markets and distributes industrial batteries, chargers, power equipment, enclosures and related services globally. Its reportable segments are Americas, EMEA and Asia, and its primary product lines are reserve power and motive power.
This unaudited Form 10-Q covers the second quarter and first six months of fiscal 2015, ended September 28, 2014, with comparisons to September 29, 2013. The company serves more than 10,000 customers in over 100 countries, and approximately 60% of net sales are generated outside the United States.
Financial Performance and Position
| Metric | Quarter Ended Sep. 28, 2014 | Prior-Year Quarter | Six Months Ended Sep. 28, 2014 | Prior-Year Six Months |
|---|---|---|---|---|
| Net sales | $629.9 million | $568.8 million | $1,264.0 million | $1,166.1 million |
| Gross profit | $162.5 million | $144.4 million | $325.1 million | $284.5 million |
| Gross margin | 25.8% | 25.4% | 25.7% | 24.4% |
| Operating earnings | $80.1 million | $61.0 million | $151.7 million | $123.6 million |
| Operating margin | 12.7% | 10.7% | 12.0% | 10.6% |
| Net earnings attributable to EnerSys | $56.3 million | $41.3 million | $105.5 million | $82.2 million |
| Diluted EPS | $1.16 | $0.84 | $2.15 | $1.67 |
| Operating cash flow | Not separately provided | Not separately provided | $50.6 million | $91.2 million |
Quarterly net earnings attributable to EnerSys stockholders increased 36.2%, while diluted EPS increased 38.1%. Six-month net earnings increased 28.4%, and diluted EPS increased 28.7%. The approximate net margins were 8.9% for the quarter and 8.3% for the six-month period.
At September 28, 2014, cash and cash equivalents were $239.9 million. Total debt, including short-term debt, was approximately $462.4 million, compared with approximately $322.0 million at March 31, 2014. Undrawn availability under all credit lines was approximately $524.9 million. Primary working capital was $692.7 million, or 27.5% of annualized quarterly sales, versus $666.9 million and 25.1% at March 31, 2014.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 10.7%, driven by 7% organic volume growth and 6% acquisition contribution, partly offset by a 2% foreign-currency translation impact. Six-month sales increased 8.4%.
- Americas quarterly sales increased 15.8%, EMEA sales increased 4.5%, and Asia sales increased 9.7%. Reserve power sales increased 12.9%, while motive power sales increased 8.7%.
- Gross margin improved 40 basis points in the quarter and 130 basis points for the six months, primarily from lower commodity costs, favorable product mix and EMEA restructuring benefits.
- Operating expenses rose 17.9% in the quarter and 16.7% for the six months, reflecting higher volume, acquisitions and related fees, stock-based compensation, payroll costs and implementation of a new Americas ERP system.
- EMEA operating performance improved substantially, while Americas operating earnings excluding the legal accrual reversal declined due to pricing, stock-based compensation, ERP costs and weaker-than-expected early contribution from Purcell. Asia margins declined because of weaker India results and lower Chinese telecom sales.
- Operating cash flow declined to $50.6 million from $91.2 million, primarily because of increased receivables and inventories, the $40.0 million Altergy settlement payment and other working-capital uses.
- The company repurchased 1.855 million shares for $120.9 million during the six months, compared with $33.6 million in the prior-year period.
Outlook, Commentary, Risks and Unusual Items
Management reported strengthening economic activity in North America and Asia, strong activity in the Middle East and Africa, and limited growth in South America and Western Europe. Revenue and order trends were described as stable, and commodity-cost changes had been less substantial recently. The filing does not provide a specific earnings or revenue guidance range.
- The company amended its credit facility, increasing it to a $500 million revolving facility plus a $150 million term loan. Management stated that liquidity is sufficient for expected operations, acquisitions, stock repurchases and dividends.
- The convertible notes became convertible after the stock price exceeded the applicable conversion threshold. The $172.3 million principal amount may require cash funding for principal, with potential additional settlement in cash or shares. Approximately 4.3 million shares could be involved in conversion consideration.
- The Altergy matter was settled for a $40.0 million payment by EnerSys and a $2.0 million payment to EnerSys for its equity interest. The company reversed $16.2 million of previously accrued legal expense, creating a material benefit to current-period operating earnings.
- Restructuring and other exit charges were $1.8 million in the quarter and $3.6 million for the six months. Additional fiscal 2015 charges of approximately $2.7 million were expected for disclosed EMEA programs, with completion expected during fiscal 2015.
- Key risks include lead and other raw-material price volatility, foreign-currency movements, variable-rate debt, environmental and workplace-safety obligations involving lead and acid, litigation, customer credit risk, economic cyclicality, integration of acquisitions, restructuring execution, product quality, cybersecurity and potential goodwill impairment.
- A 100-basis-point increase in interest rates would increase annualized interest expense by approximately $3.0 million. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $16 million for the quarter and $31 million for the six months, absent offsetting actions.
- Subsequent to quarter-end, EnerSys declared a $0.175 per-share dividend and announced an additional $60.0 million stock-repurchase authorization.
Most Important Facts to Verify
- Whether the $16.2 million Altergy legal-accrual reversal and related $2.0 million equity-interest proceeds should be excluded when assessing recurring operating performance.
- The timing, cash funding and potential dilution associated with conversion of the $172.3 million convertible notes.
- Whether increased inventory and receivables, reflected in the 27.5% primary-working-capital ratio, normalize or continue to consume cash.
- Progress and remaining costs of EMEA restructuring programs and the expected timing of Purcell earnings accretion.
- Exposure to lead prices, foreign-currency movements and variable interest rates despite the company’s hedging activities.
- Compliance with credit-facility covenants and the effect of debt-funded share repurchases and dividends on liquidity.