EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global provider of stored-energy solutions, including industrial batteries, energy systems, motive-power batteries, specialty batteries, chargers, power equipment, and related services. Reportable segments are Energy Systems, Motive Power, and Specialty.
The filing covers the first quarter of fiscal 2023, the 13-week period ended July 3, 2022, compared with the quarter ended July 4, 2021. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Net sales | $899.0 million | $814.9 million | Up 10.3% |
| Gross profit | $185.5 million | $193.2 million | Down 4.0% |
| Gross margin | 20.6% | 23.7% | Down 310 bps |
| Operating earnings | $50.1 million | $60.9 million | Down 17.7% |
| Operating margin | 5.6% | 7.5% | Down 190 bps |
| Earnings before taxes | $36.8 million | $52.3 million | Down 29.7% |
| Net earnings attributable to EnerSys | $31.0 million | $43.9 million | Down 29.5% |
| Diluted EPS | $0.75 | $1.01 | Down $0.26 |
| Operating cash flow | $(71.9) million | $(48.1) million | Greater use of cash |
| Capital expenditures | $23.0 million | $16.4 million | Up $6.6 million |
Revenue growth reflected approximately 8% pricing growth and 7% organic volume growth, partially offset by a 5% unfavorable foreign-currency translation impact. Service revenue was $99.8 million, compared with $82.5 million in the prior-year quarter.
Segment sales were $408.6 million for Energy Systems, $367.9 million for Motive Power, and $122.5 million for Specialty. Segment operating earnings were $7.7 million, $42.3 million, and $8.5 million, respectively, before segment-specific restructuring and exit charges.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $383.2 million at July 3, 2022, compared with $402.5 million at March 31, 2022.
- Inventories increased to $777.7 million from $715.7 million, while accounts receivable declined to $697.1 million from $719.4 million.
- Total debt was approximately $1.42 billion, consisting of $45.6 million of short-term debt and $1.38 billion of long-term debt, net of issuance costs. Long-term debt increased from $1.24 billion at March 31, 2022, primarily due to higher revolver borrowings.
- Debt included $600.0 million of Senior Notes and $783.5 million outstanding under the Second Amended Credit Facility. The $300.0 million 5.00% Senior Notes mature April 30, 2023; management expects to refinance them through the credit facility.
- Available and undrawn credit lines were approximately $353.1 million at quarter-end, subject to credit agreement covenants. The Company stated that it was in compliance with its debt covenants.
- Primary working capital increased to $1.13 billion, or 31.5% of annualized quarterly sales, from $1.04 billion, or 28.7%, at March 31, 2022, and $851.5 million, or 26.1%, at July 4, 2021.
- Financing activities provided $97.5 million, including $136.0 million of net Second Amended Revolver borrowings. The Company repurchased $22.9 million of common stock and paid $7.1 million of dividends.
Material changes versus the prior comparable period
- Sales increased, but profitability declined as higher freight, labor, energy, raw-material, and component costs exceeded pricing recovery and volume benefits.
- Motive Power operating margin declined 360 basis points, primarily because pricing recovery lagged increases in lead, steel, and other commodity costs.
- Specialty operating margin declined 330 basis points due primarily to higher manufacturing and operating costs. Energy Systems margin was broadly stable.
- Interest expense increased to $11.6 million from $9.1 million, reflecting higher average debt and short-term interest rates, partly offset by cross-currency interest-rate swaps.
- Other expense was $1.8 million versus other income of $0.5 million in the prior-year quarter. The current period included a $5.2 million loss from remeasurement of monetary assets associated with the exit from Russia.
- Foreign-currency translation produced a $52.2 million reduction in other comprehensive income, compared with a $15.3 million gain in the prior-year quarter.
- Operating cash use increased as inventories rose and accrued expenses declined. Management attributed the working-capital investment to supply-chain delays, strategic inventory purchases, new products, higher input costs, and a customer-order backlog.
Guidance, outlook, risks, and unusual items
The filing does not provide clear quantitative full-year revenue or earnings guidance. Management stated that overall market demand remained robust but identified slowing economic conditions, inflation, supply-chain disruptions, labor shortages, transportation challenges, and higher costs for commodities, energy, and electronic components.
- Customer pricing generally lags changes in lead and other costs by approximately six to nine months. Approximately 30% of revenue is subject to lead-indexed pricing arrangements.
- Management expects continued pressure from commodity, labor, and energy costs, with related selling-price increases. The Company is increasing its emphasis on energy systems and non-lead chemistries.
- On June 29, 2022, EnerSys approved closure of its Ooltewah, Tennessee facility, which produces flooded motive-power batteries. The Company recorded $7.3 million of fixed-asset write-offs in the quarter and estimates total closure charges of approximately $18.5 million, including approximately $9.2 million of cash costs. Approximately 165 employees are expected to be affected, with completion expected by calendar 2023.
- Restructuring and other exit charges totaled $8.3 million in the quarter. Approximately $0.7 million remained in the existing restructuring reserve at quarter-end.
- Key market risks include lead and other raw-material prices, foreign exchange, variable-rate debt, inflation, geopolitical conditions including the Russia-Ukraine conflict, COVID-19-related disruption, competition, environmental and product-liability matters, litigation, and potential impairment of goodwill or other assets.
- A 100-basis-point increase in interest rates would increase annual interest expense by approximately $8.3 million on variable-rate debt. A 10% increase in lead costs would have increased first-quarter cost of goods sold by approximately $23 million.
- European competition investigations and related customer claims remain unresolved; no reserve was recorded for these matters at July 3, 2022. The filing states that the ultimate scope, timing, and outcome remain uncertain.
Important facts for investors to verify
- Whether pricing actions catch up with commodity, freight, labor, energy, and supply-chain costs and restore gross and operating margins.
- The cash cost, timing, and operational impact of the Ooltewah closure and other restructuring programs.
- The refinancing plan and terms for the $300 million of Senior Notes maturing in April 2023.
- Whether elevated inventory and primary working capital convert into cash as supply constraints ease and customer backlog is fulfilled.
- Exposure to variable interest rates, foreign-currency movements, lead prices, and the effectiveness of the Company’s hedges.
- The development and potential financial impact of European competition investigations, environmental matters, litigation, and other contingencies.
- The sustainability of the $0.175 quarterly dividend and ongoing share repurchases given negative operating cash flow and increased debt.