EnerSys Fiscal 2021 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
EnerSys manufactures and distributes stored-energy solutions, industrial batteries, chargers, power equipment, specialty batteries and related services in more than 100 countries. The filing covers the quarter and six months ended October 4, 2020, compared with September 29, 2019. Effective April 1, 2020, management changed segment reporting from geographic regions to lines of business: Energy Systems, Motive Power and Specialty; prior periods were recast.
Key Financial Metrics
| Metric | Q2 FY2021 | Q2 FY2020 | Six Months FY2021 | Six Months FY2020 |
|---|---|---|---|---|
| Net sales | $708.4 million | $762.1 million | $1,413.3 million | $1,542.4 million |
| Gross profit | $177.6 million | $197.3 million | $352.5 million | $398.8 million |
| Gross margin | 25.1% | 25.9% | 24.9% | 25.9% |
| Operating earnings | $55.4 million | $58.7 million | $108.6 million | $127.0 million |
| Operating margin | 7.8% | 7.7% | 7.7% | 8.2% |
| Net earnings attributable to EnerSys | $35.7 million | $62.7 million | $70.9 million | $111.3 million |
| Diluted EPS | $0.83 | $1.47 | $1.65 | $2.59 |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $217.3 million | $105.1 million |
Cash and cash equivalents were $414.2 million at October 4, 2020, compared with $327.0 million at March 31, 2020. Total debt, including short-term debt and long-term debt net of issuance costs, was approximately $1.071 billion. The company had approximately $765.8 million of available and undrawn credit lines and stated that it was in compliance with its debt covenants.
Six-month capital expenditures were $39.9 million. Six-month financing cash outflows were $105.8 million, including $116.5 million of revolver and term-loan repayments, $16.5 million of short-term debt repayments and $14.9 million of dividends, partially offset by $45.0 million of revolver borrowings.
Material Changes Versus the Prior Comparable Period
- Second-quarter sales declined 7.1%, and six-month sales declined 8.4%, primarily from an 11% organic volume decline associated with COVID-19 and approximately 1% lower pricing, partly offset by the NorthStar acquisition and favorable foreign-currency translation.
- Motive Power was the principal source of weakness: second-quarter sales fell 21.3% and six-month sales fell 22.5% because industrial customers experienced shutdowns and reduced production.
- Energy Systems sales were broadly stable, declining 0.6% in the quarter and 0.4% for six months. Specialty sales increased 23.8% in the quarter and 16.1% for six months, supported by NorthStar and stronger aftermarket demand.
- Gross margin declined 80 basis points in the quarter and 100 basis points for six months, reflecting unfavorable manufacturing variances from lower volumes.
- Operating expenses decreased 10.1% in the quarter and 9.0% for six months due to austerity measures, lower travel and reduced selling expenses. Restructuring and exit charges also declined versus the prior year.
- Net earnings and diluted EPS declined substantially, partly because the prior-year periods benefited from negative income tax expense, while the current-year effective tax rates were 13.9% for the quarter and 14.6% for six months.
- Operating cash flow more than doubled for the six-month period, primarily because primary working capital was reduced by approximately $78.1 million.
Outlook, Commentary, Risks and Unusual Items
- Management reported that order intake had returned close to pre-COVID-19 levels as countries relaxed restrictions, but noted that the duration and economic effects of the pandemic remained uncertain.
- Telecommunications and data-center demand supported Energy Systems, while broadband power-supply demand remained weak. Specialty benefited from recovering truck OEM demand, aftermarket distribution and steady defense activity.
- Management expected continued fiscal 2021 year-over-year benefits from lower commodity costs, accompanied by some reductions in selling prices. Approximately 30% of revenue was subject to lead-indexed pricing arrangements.
- EnerSys recorded $3.1 million of second-quarter restructuring and exit charges, including $1.5 million related to the planned closure of the Vijayawada, India facility. Approximately $5.5 million of additional restructuring costs were estimated to remain under existing plans through fiscal 2021.
- The Richmond, Kentucky plant-fire claim totaled approximately $45 million. Cumulative charges were $32.4 million and insurance advances were $30.1 million through October 4, 2020; an additional $2.0 million business-interruption settlement was expected in the following quarter.
- After quarter-end, the board approved substantial closure of the Hagen, Germany facility. The company estimated approximately $82 million of pretax charges, including approximately $20 million of non-cash inventory and equipment write-offs, with approximately 200 employees affected and substantial completion expected in fiscal 2022.
- Key risks include COVID-19 effects, cyclical industrial demand, lead and foreign-currency volatility, environmental and product-liability exposure, competition, execution of restructuring and acquisitions, potential goodwill impairment, debt and covenant requirements, litigation and regulatory investigations, and recovery of insurance claims.
- The filing provides no formal quantitative revenue or earnings guidance.
Important Facts for Investors to Verify
- Whether Motive Power demand and operating margins recover as industrial activity normalizes.
- The timing and total cost of the Hagen closure and Vijayawada exit, including cash versus non-cash charges.
- Completion and final settlement of the Richmond plant-fire insurance claims.
- Compliance with leverage covenants and refinancing requirements, particularly the $300 million 5.00% notes due 2023 and the credit facility maturing in 2022.
- The sustainability of the strong working-capital-driven operating cash flow and the impact of lower sales on manufacturing efficiency.
- Potential effects of lead prices, foreign-exchange movements and variable interest rates; management estimated that a 100-basis-point rate increase would raise annual interest expense by approximately $4.8 million.
- Pending European competition matters, environmental obligations, warranty liabilities and other contingencies, whose ultimate outcomes remain uncertain.