EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys manufactures, markets and distributes industrial batteries, chargers, power equipment, accessories, enclosures and related services in more than 100 countries. Reportable segments are Americas, EMEA and Asia; products are primarily reserve power and motive power. The filing covers the quarter and nine months ended December 29, 2013, the third quarter of fiscal 2014, compared with December 30, 2012.
Key financial metrics
| Metric | Q3 FY2014 | Q3 FY2013 | 9M FY2014 | 9M FY2013 |
|---|---|---|---|---|
| Net sales | $643.0 million | $557.3 million | $1,809.2 million | $1,705.4 million |
| Gross profit | $167.1 million | $143.7 million | $451.6 million | $430.3 million |
| Gross margin | 26.0% | 25.8% | 25.0% | 25.2% |
| Operating earnings | $58.9 million | $59.7 million | $182.6 million | $192.9 million |
| Operating margin | 9.2% | 10.7% | 10.1% | 11.3% |
| Net earnings attributable to EnerSys | $55.3 million | $39.2 million | $137.5 million | $128.8 million |
| Diluted EPS | $1.10 | $0.80 | $2.77 | $2.65 |
| Operating cash flow | Not separately reported | Not separately reported | $99.1 million | $135.5 million |
Quarterly sales increased 15.4%, including approximately 9% organic volume growth and 6% from acquisitions. Nine-month sales increased 6.1%, including approximately 4% organic growth and 2% from acquisitions. Reserve power sales rose 24.0% in the quarter, while motive power sales rose 7.6%.
Cash and cash equivalents were $211.6 million at December 29, 2013, compared with $249.3 million at March 31, 2013. Primary working capital was $653.6 million, or 25.4% of annualized quarterly sales, versus $552.7 million and 24.2% at March 31, 2013.
Total debt and capital lease obligations were approximately $314.0 million, comprising $32.6 million of short-term debt and $281.4 million of long-term debt and capital leases. The company had $349.1 million of undrawn availability under its credit lines and was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth was strongest in the Americas, up 18.6% for the quarter, followed by Asia, up 29.3%, and EMEA, up 8.6%.
- Gross margin improved 20 basis points in the quarter but declined 20 basis points for the nine-month period, primarily reflecting higher commodity costs.
- Operating earnings declined despite higher sales because of $12.9 million of quarterly restructuring charges and a $5.2 million goodwill impairment charge, compared with $3.8 million of restructuring charges and no impairment charge in the prior-year quarter.
- Other expense increased to $8.2 million from $1.3 million in the quarter, primarily due to $6.5 million of write-offs related to non-operating assets and higher foreign-currency losses.
- The effective tax rate decreased to negative 13.5% from 28.2% in the quarter and to 15.5% from 28.5% for nine months, primarily due to a $24.9 million reversal of a deferred tax valuation allowance and changes in the geographic earnings mix.
- Operating cash flow fell by $36.4 million year to date, while investing cash use increased substantially because of $146.2 million spent on acquisitions and $48.9 million on capital expenditures.
- EnerSys completed the acquisitions of Purcell Systems for $119.5 million and Quallion for $25.8 million. It also repurchased $49.6 million of stock and paid $17.8 million of dividends during the first nine months.
Guidance, outlook, commentary and risks
Management reported strong economic activity in the Americas, slowing but improving telecommunications-related activity in Asia, and a stabilized EMEA economy expected to experience flat to moderate growth. Management stated that revenue and order rates were recently stable and commodity-cost changes had not been substantial. No specific quantitative earnings or revenue guidance was provided.
Restructuring programs are focused primarily on EMEA manufacturing efficiency. Fiscal 2014 programs were estimated at approximately $27.0 million of total charges and an eventual reduction of approximately 460 employees; $11.9 million had been recorded through the first nine months, with approximately $7.0 million of additional fiscal 2014 charges expected.
The $172.5 million principal amount of 3.375% Convertible Notes became convertible at the holders' option from January 2 through March 31, 2014. EnerSys intended to fund principal settlement by drawing on its $350 million credit facility, with the remaining conversion value potentially settled in cash, shares or a combination. The notes' estimated fair value was $305.3 million versus a $160.9 million carrying amount.
Key risks include lead and other commodity-price volatility, foreign-exchange exposure, variable-rate debt, customer and industry cyclicality, environmental and occupational-safety obligations involving lead and acid, restructuring execution, acquisition integration, product quality, competition, litigation, and liquidity requirements arising from potential convertible-note conversion or repurchase. A 100-basis-point increase in interest rates was estimated to increase annual interest expense by approximately $1.5 million; a 10% increase in lead costs was estimated to increase cost of goods sold by approximately $16 million in the quarter and $44 million year to date.
Management stated that litigation was not expected to be material, disclosure controls were effective, and there were no material changes in internal control over financial reporting.
Most important facts to verify
- Whether convertible-note holders exercised conversion rights and the resulting cash, debt and share impact after December 29, 2013.
- The final purchase-price allocations and operating contribution of Purcell Systems and Quallion.
- Progress, remaining charges and cash costs associated with the EMEA and Asia restructuring programs.
- Whether working-capital expansion and acquisition spending continue to reduce operating cash conversion.
- Trends in lead prices, foreign-exchange rates, commodity pass-through pricing and Americas operating margins.
- Subsequent acquisition of UTS Holdings for approximately $30 million and the continuing quarterly dividend commitment.