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 and related services. It serves more than 10,000 customers in over 100 countries through three geographic segments: Americas, Europe and Asia. Approximately 60% of sales were generated outside the United States.
The filing covers the quarter and nine months ended January 1, 2012, compared with the comparable periods ended January 2, 2011. EnerSys uses a March 31 fiscal year-end and reports primarily on 13-week quarters.
Financial Performance and Key Metrics
| Metric | Quarter Ended Jan. 1, 2012 | Prior-Year Quarter | Change |
|---|---|---|---|
| Net sales | $574.2 million | $508.6 million | 12.9% increase |
| Gross profit | $130.9 million | $117.9 million | 11.0% increase |
| Gross margin | 22.8% | 23.2% | Down 40 basis points |
| Operating earnings | $53.8 million | $48.3 million | 11.3% increase |
| Operating margin | 9.4% | 9.5% | Down 10 basis points |
| Net earnings | $36.9 million | $33.8 million | 9.2% increase |
| Diluted EPS | $0.77 | $0.67 | Increase of $0.10 |
| Metric | Nine Months Ended Jan. 1, 2012 | Prior-Year Period | Change |
|---|---|---|---|
| Net sales | $1.691 billion | $1.416 billion | 19.4% increase |
| Gross profit | $367.2 million | $325.2 million | 12.9% increase |
| Gross margin | 21.7% | 23.0% | Down 130 basis points |
| Operating earnings | $144.9 million | $130.3 million | 11.2% increase |
| Operating margin | 8.6% | 9.2% | Down 60 basis points |
| Net earnings | $98.6 million | $83.3 million | 18.4% increase |
| Diluted EPS | $1.99 | $1.67 | Increase of $0.32 |
Quarterly sales growth reflected approximately 4% organic volume growth, 3% pricing and 6% acquisitions. Nine-month growth reflected approximately 9% organic volume growth, 3% pricing, 3% acquisitions and 4% foreign-currency translation.
- Quarterly sales increased 25.2% in the Americas, 4.7% in Europe and decreased 4.4% in Asia.
- Nine-month sales increased 21.7% in the Americas, 18.0% in Europe and 14.6% in Asia.
- Quarterly motive-power sales increased 16.1%; reserve-power sales increased 9.7%.
- Lead costs increased approximately $23 million for the quarter and $60 million for the nine months. Pricing offset approximately $14 million and $41 million, respectively.
- Operating expenses increased 11.5% for the quarter and 16.2% for the nine months, primarily reflecting higher sales volume.
- The quarterly effective tax rate was 23.0%, compared with 21.6%; the nine-month rate was 24.3%, compared with 25.6%.
Cash Flow, Balance Sheet, Debt and Liquidity
- Operating cash flow for the nine months was $120.0 million, compared with $44.9 million in the prior-year period.
- Capital expenditures were $35.0 million, compared with $41.2 million; acquisitions used $21.0 million, compared with $1.4 million.
- Financing activities used $50.5 million, primarily due to $58.4 million of common-stock repurchases.
- Cash and cash equivalents increased to $119.8 million from $108.9 million at March 31, 2011, but remained below the $205.8 million reported at January 2, 2011.
- Primary working capital was $556.6 million, or 24.2% of annualized quarterly revenue, versus 25.0% at March 31, 2011 and 25.1% in the prior-year quarter.
- Total debt and capital lease obligations were approximately $255.3 million, including $146.6 million of convertible notes, $100.0 million under the revolving credit facility and $6.4 million of China term debt.
- Available and undrawn credit lines totaled $343.0 million, including approximately $261 million of committed lines and $82 million of uncommitted lines. The company reported compliance with its debt covenants.
- The $172.5 million convertible notes have a $40.60 conversion price and an 8.50% effective interest rate; the filing states that principal conversions are currently intended to be settled in cash.
Material Changes Versus the Prior Comparable Period
- Revenue and earnings increased substantially, led by organic volume growth, acquisitions and pricing.
- Profitability ratios declined because higher lead and other commodity costs outpaced pricing recovery.
- Interest expense decreased by $0.8 million for the quarter and $5.4 million for the nine months, primarily because prior-year interest-rate swap costs had been recorded in interest expense and average borrowings were lower.
- Asia performance was affected by a two-month shutdown of the Jiangsu, China facility for an environmental review. The facility reopened conditionally in November 2011.
- The company repurchased 2,646,885 shares for $58.4 million, reducing shares outstanding from 50.0 million at March 31, 2011 to 47.7 million at January 1, 2012.
- During the third quarter, EnerSys completed three acquisitions in South America, South Africa and Germany for a combined net purchase price of $19.9 million, funded with cash on hand.
Outlook, Risks, Contingencies and Unusual Items
The filing does not provide specific quantitative revenue or earnings guidance. Management stated that liquidity and capital resources were sufficient to fund foreseeable organic growth and pursue additional acquisitions. Management also emphasized pricing, product mix improvement, manufacturing-cost reduction and restructuring initiatives.
- Approximately 35% to 40% of revenue was subject to market-based lead-price adjustment agreements, but lead prices remained volatile. A 10% increase in lead costs was estimated to increase cost of goods sold by approximately $15 million for the quarter and $46 million for the nine months.
- Interest-rate exposure remained material: a 100-basis-point increase in rates was estimated to increase annual interest expense by approximately $1.2 million.
- Foreign-currency exposure affected approximately 60% of sales and expenses. The company used lead, currency and interest-rate derivatives but did not use them for speculative purposes.
- Restructuring charges were $1.4 million for the quarter and $2.8 million for the nine months. Management expected approximately $3.6 million of additional fiscal 2012 restructuring charges under certain European plans.
- A $0.9 million legal-settlement refund was recorded in the second quarter, although an appeal remained pending with the Supreme Court of France.
- Environmental reserves for the Sumter, South Carolina facility were $3.0 million. Management believed the reserves were sufficient.
- Warranty liabilities increased to $38.0 million from $32.2 million in the prior-year quarter.
- Key disclosed risks include cyclical customer industries, commodity availability and pricing, environmental and workplace-safety obligations involving lead and acid, foreign operations and currency movements, customer credit risk, product quality, litigation, acquisitions, restructuring execution, debt service and interest rates.
- Management stated that disclosure controls were effective and that no material changes had affected internal control over financial reporting.
Important Facts for Investors to Verify
- Whether pricing actions and cost-reduction programs can recover the continuing impact of lead and other commodity inflation.
- The sustainability of organic volume growth, particularly in the Americas, and the recovery of Asia sales after the Jiangsu closure.
- The integration, purchase-price allocation and financial contribution of the three third-quarter acquisitions.
- Actual utilization of committed and uncommitted credit lines, covenant headroom and refinancing or conversion risks associated with the convertible notes.
- The timing and total cost of remaining restructuring actions and the resolution of the French legal appeal.
- Environmental compliance and potential liabilities at the Sumter facility and the conditionally reopened Jiangsu facility.
- Future effects of foreign-exchange movements, lead prices and derivative valuation changes on earnings, cash flow and accumulated other comprehensive income.