EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys manufactures and distributes industrial batteries, chargers, power equipment, accessories, enclosures and related services across the Americas, EMEA and Asia. The filing covers the quarter ended June 30, 2019, the first quarter of fiscal 2020, compared with the quarter ended July 1, 2018. The quarter is not necessarily indicative of full-year results.
The December 2018 acquisition of Alpha Technologies contributed materially to results, particularly in the Americas and reserve-power businesses. Alpha generated $151.1 million of first-quarter sales and had $930.1 million of assets at June 30, 2019.
Key financial metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $780.2 million | $670.9 million | Up 16.3% |
| Gross profit | $201.5 million | $165.3 million | Up 21.9% |
| Gross margin | 25.8% | 24.6% | Up 120 basis points |
| Operating earnings | $68.3 million | $64.2 million | Up 6.5% |
| Operating margin | 8.8% | 9.5% | Down 70 basis points |
| Net earnings attributable to EnerSys | $48.6 million | $45.9 million | Up 6.1% |
| Diluted EPS | $1.13 | $1.08 | Up 4.6% |
| Operating cash flow | $30.4 million | $25.6 million | Up $4.8 million |
| Capital expenditures | $17.3 million | $15.5 million | Up $1.8 million |
Interest expense increased to $10.9 million from $6.5 million, primarily because of higher average debt following the Alpha acquisition and higher interest rates. The effective tax rate declined to 17.0% from 19.7%, mainly because of changes in the geographic mix of earnings.
Cash and equivalents were $262.1 million at June 30, 2019, down from $299.2 million at March 31, 2019. The company reported approximately $567.9 million of available and undrawn credit lines. Total debt, including short-term debt and debt net of issuance costs, was approximately $1.01 billion.
Material changes versus the prior comparable period
- Sales growth was driven by a 22% contribution from Alpha, partly offset by a 3% decline in organic volume, a 2% foreign-currency headwind and a 1% pricing decline.
- Americas sales increased 31.7% to $517.1 million, while EMEA sales declined 3.5% to $203.2 million and Asia sales declined 11.7% to $59.9 million.
- Reserve-power sales increased 34.5% to $435.8 million, largely reflecting Alpha. Motive-power sales declined 0.7% to $344.4 million.
- Gross margin improved because of commodity-cost benefits relative to pricing and Alpha’s higher margins, but operating margin declined because operating expenses rose faster than sales.
- Americas operating performance was affected by ERP execution issues at the Richmond, Kentucky facility, causing missed sales opportunities and higher manufacturing costs. Alpha contributed approximately $17 million of operating earnings at an 11.4% margin.
- Financing cash flow changed from a $8.5 million inflow to a $51.7 million outflow, reflecting debt repayments, $23.0 million of treasury-stock purchases, dividends and taxes on equity awards.
- Cash-flow comparison benefited from a $1.5 million foreign-exchange impact in the current quarter versus a $28.2 million negative impact in the prior-year quarter.
Outlook, risks, contingencies and unusual items
The filing does not provide a clear numerical revenue or earnings guidance target. Management described North American economic activity as moderate, EMEA growth as slow and Asia as the fastest-growing region. Management expects declining commodity prices to provide year-over-year benefits, with related reductions in selling prices, but commodity and currency volatility remain significant.
- Restructuring and exit charges totaled $2.4 million in the quarter. The company continues programs in the Americas, EMEA and Asia, including the planned closure of the Targovishte, Bulgaria facility.
- Remaining restructuring commitments include approximately $2.0 million related to an earlier EMEA program; other programs are expected to be completed in fiscal 2020 or fiscal 2021.
- The company has $249.0 million outstanding on its revolving facility and $434.8 million outstanding on its term loan, in addition to $300.0 million of 5% senior notes due 2023. Variable-rate debt creates interest-rate exposure; a 100-basis-point increase would raise annualized interest expense by approximately $7.3 million.
- Lead remains the largest raw-material exposure. Management estimates that a 10% increase in lead costs would have increased quarterly cost of goods sold by approximately $17 million. Approximately 45% of lead requirements for the remaining three fiscal quarters were considered known at June 30, 2019.
- Legal and regulatory matters include European competition investigations and environmental obligations. A $7.3 million German competition-authority payment was made in April 2019; management states that the related reserve was zero at June 30, 2019.
- Warranty liabilities were $56.2 million at June 30, 2019, compared with $49.7 million a year earlier.
- The company adopted the new lease standard on April 1, 2019, recording approximately $84.9 million of operating lease right-of-use assets and $87.2 million of lease liabilities, with no material impact on earnings or cash flows.
- The company is assessing the future impact of the expected-loss credit impairment standard. The filing does not provide a quantified impact.
- Management concluded that disclosure controls were effective, but the internal-control assessment excluded the recently acquired Alpha business under applicable SEC guidance.
Most important facts for investors to verify
- Whether ERP issues at Richmond are resolved and whether Americas margins recover.
- Organic volume trends after separating Alpha’s acquisition contribution from reported growth.
- Alpha integration progress, achievable synergies and the risk of goodwill or intangible-asset impairment.
- Debt reduction, variable-rate interest exposure and compliance with credit-facility covenants.
- Lead prices, pricing pass-through, currency movements and the effectiveness of hedging activities.
- Execution and remaining costs of restructuring and facility-exit programs.
- Potential outcomes of competition, environmental, warranty and other legal contingencies.
- Cash conversion, inventory growth and primary working capital, which rose to $838.6 million, or 26.9% of annualized quarterly sales.
- The company’s ability to maintain its quarterly dividend, which was $0.175 per share, and continue share repurchases while carrying elevated post-acquisition debt.