EnerSys Form 10-Q Summary
Business Context and Reporting Period
EnerSys is a global manufacturer and distributor of stored-energy solutions for industrial applications, including reserve-power and motive-power batteries, chargers, power equipment, accessories and related services. It serves more than 10,000 customers in over 100 countries through the Americas, Europe and Asia segments. The filing covers the quarter and six months ended October 3, 2010, the second quarter of fiscal 2011, compared with September 27, 2009.
Key Financial Metrics
| Metric | Quarter Ended October 3, 2010 | Prior Comparable Quarter | Six Months Ended October 3, 2010 | Prior Comparable Six Months |
|---|---|---|---|---|
| Net sales | $472.8 million | $367.3 million | $907.8 million | $707.6 million |
| Gross profit | $110.7 million | $88.6 million | $207.3 million | $166.1 million |
| Gross margin | 23.4% | 24.1% | 22.8% | 23.5% |
| Operating earnings | $44.5 million | $25.1 million | $82.0 million | $44.7 million |
| Operating margin | 9.4% | 6.8% | 9.0% | 6.3% |
| Net earnings | $26.5 million | $12.9 million | $49.6 million | $21.3 million |
| Diluted EPS | $0.53 | $0.26 | $1.00 | $0.44 |
Six-month operating cash flow was $7.1 million, compared with $81.4 million in the prior-year period. Capital expenditures were $24.3 million versus $19.8 million, and cash used for investing activities was $25.7 million versus $22.8 million. Financing activities used $11.8 million, primarily for $19.6 million of long-term debt repayments.
Cash and cash equivalents declined to $173.0 million at October 3, 2010 from $201.0 million at March 31, 2010. Primary working capital increased to $514.0 million, or 27.2% of annualized quarterly revenue, from $439.7 million, or 24.4%, at March 31, 2010. Management reported approximately $131 million of undrawn committed credit lines and more than $93 million of uncommitted credit lines.
Total long-term debt and capital lease obligations were $314.8 million, excluding the current portion, compared with $323.7 million at March 31, 2010. The $350 million senior secured credit facility included $192.7 million outstanding under the Term A Loan and no revolver borrowings. The $172.5 million principal amount of convertible notes remained outstanding. The company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Quarterly sales increased 28.7%; six-month sales increased 28.3%. Management attributed the quarterly increase to 18% organic volume growth, 5% from acquisitions and 7% from pricing, partly offset by weaker foreign currencies.
- Quarterly sales increased in Europe by 23.4%, the Americas by 34.4% and Asia by 27.5%. Six-month increases were 22.1%, 35.6% and 24.0%, respectively.
- Motive-power sales grew faster than reserve-power sales: 33.2% versus 24.9% in the quarter and 38.6% versus 19.5% for the six months.
- Operating earnings increased 76.9% in the quarter and 83.5% for the six months, benefiting from higher volume, price realization, cost reductions and lower restructuring charges.
- Gross margin declined 70 basis points in both comparison periods because of product mix and higher commodity costs. Management estimated that higher lead costs increased cost of sales by approximately $43 million in the quarter and $91 million for the six months; pricing offset approximately $24 million and $46 million, respectively.
- Asia operating performance weakened. Asia operating margin fell to 8.7% in the quarter from 13.5% and to 7.3% for the six months from 16.6%, primarily because of higher commodity and freight costs and more difficult pricing conditions.
- The effective tax rate declined to 29.0% from 31.0% for the quarter and to 28.1% from 31.2% for the six months, primarily because of the geographic mix of earnings.
- Operating cash flow deteriorated substantially because the increase in receivables and inventory used $66.2 million of primary working capital, compared with a $46.5 million working-capital benefit in the prior-year period.
- The Euro Term Loan was repaid in full on September 30, 2010, reducing non-U.S. borrowings by approximately $11.2 million from March 31, 2010.
Guidance, Outlook, Commentary and Risks
Management described the global economic recovery as continuing, with improving incoming order rates and higher global activity. It expects pricing actions, product-mix improvements and cost-reduction initiatives to help offset commodity inflation. Management estimates that restructuring actions taken over the prior four years could produce approximately $40 million of annualized pretax earnings benefit, or $0.58 per share, when fully implemented by the end of fiscal 2012.
Restructuring continued in Europe. The company expects approximately $1.3 million of additional acquisition-related restructuring charges and approximately $2.4 million of additional non-acquisition-related restructuring charges in fiscal 2011. The company also expects the closure of two Oerlikon manufacturing facilities to reduce approximately 90 employees and a further European restructuring to reduce approximately 55 employees.
Lead remains the primary commodity risk. Management estimated that a 10% increase in lead costs would increase cost of goods sold by approximately $13 million, based on second-quarter revenue and costs. Approximately 58% of the cost of lead requirements for the remaining two fiscal quarters was estimated to be known through hedges, inventory and the lead tolling program.
Other significant risks include foreign-currency volatility, variable-rate debt, cyclical customer industries, pricing pressure, competition, customer credit risk, environmental and occupational-safety liabilities related to lead and acid, product-quality issues, litigation, restructuring and acquisition execution. A 100-basis-point increase in interest rates was estimated to increase interest expense by approximately $0.2 million on unhedged variable-rate debt.
The company held lead, foreign-currency and interest-rate hedges but does not use derivatives for speculative trading. Environmental reserves related to the Sumter, South Carolina facility were $3.3 million at October 3, 2010. Management stated that reserves were sufficient based on information then available. Litigation was not expected to have a material adverse effect. Disclosure controls were deemed effective, and no material subsequent events requiring disclosure were identified.
Important Facts for Investors to Verify
- Whether volume growth and improving orders continue after the reported economic recovery, particularly in the Americas and Europe.
- Whether pricing increases and restructuring savings can offset lead, freight and other commodity-cost inflation without further gross-margin erosion.
- The sustainability of Asia’s lower operating margins and the effect of commodity costs, pricing and foreign exchange.
- Whether working-capital investment converts into cash flow and whether operating cash flow improves from the six-month level of $7.1 million.
- Debt repayment requirements, convertible-note obligations, interest-rate exposure and continued compliance with credit-facility covenants.
- The remaining cost, timing and execution of European and Oerlikon restructuring programs.
- Potential changes in environmental reserves, warranty liabilities and other contingencies associated with lead-acid battery operations.