EnerSys Form 10-Q Summary
Business context and reporting period
EnerSys is a global provider of stored-energy solutions for industrial applications, including reserve-power and motive-power batteries, chargers, 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 are generated outside the United States.
The filing covers the third quarter and first nine months of fiscal 2011, ended January 2, 2011. The comparable prior-year periods ended December 27, 2009. The company’s fiscal year ends March 31.
Key financial metrics
| Metric | Quarter ended Jan. 2, 2011 | Comparable quarter | Change |
|---|---|---|---|
| Net sales | $508.6 million | $421.3 million | +20.7% |
| Gross profit | $117.9 million | $98.3 million | +19.9% |
| Gross margin | 23.2% | 23.3% | Down 10 basis points |
| Operating earnings | $48.3 million | $38.6 million | +25.3% |
| Operating margin | 9.5% | 9.2% | Up 30 basis points |
| Net earnings | $33.8 million | $23.2 million | +45.8% |
| Diluted EPS | $0.67 | $0.47 | +$0.20 |
| Metric | Nine months ended Jan. 2, 2011 | Comparable period | Change |
|---|---|---|---|
| Net sales | $1,416.4 million | $1,128.8 million | +25.5% |
| Gross profit | $325.2 million | $264.4 million | +23.0% |
| Gross margin | 23.0% | 23.4% | Down 40 basis points |
| Operating earnings | $130.3 million | $83.3 million | +56.5% |
| Operating margin | 9.2% | 7.4% | Up 180 basis points |
| Net earnings | $83.3 million | $44.5 million | +87.4% |
| Diluted EPS | $1.67 | $0.91 | +$0.76 |
Cash flow, liquidity, debt, and balance sheet
- Cash provided by operating activities was $44.9 million for the first nine months, compared with $110.2 million in the prior-year period. The decline primarily reflected a $70.9 million increase in primary working capital as sales expanded.
- Capital expenditures were $41.2 million, compared with $30.7 million, including construction of a new manufacturing facility in Chongqing, China.
- Cash used in investing activities was $42.2 million, compared with $52.2 million, reflecting lower acquisition spending of $1.4 million versus $22.7 million.
- Cash provided by financing activities was $1.0 million, compared with $16.9 million used in the prior-year period. The company repaid $23.8 million of long-term debt and received $24.2 million from stock-option exercises and related tax benefits.
- Cash and cash equivalents were $205.8 million at January 2, 2011, compared with $201.0 million at March 31, 2010.
- The company reported approximately $131 million of undrawn committed credit lines and more than $92 million of uncommitted credit lines.
- Total debt and capital lease obligations were $331.0 million before current maturities, including $188.4 million under the Term A Loan and $172.5 million of convertible-note principal with a $140.3 million carrying value. The Euro Term Loan was repaid in full on September 30, 2010.
- The company was in compliance with all credit-facility covenants. The revolving credit facility was undrawn.
- Primary working capital was $511.5 million, or 25.1% of annualized quarterly revenue, compared with $439.7 million and 24.4% at March 31, 2010.
Material changes versus the prior comparable period
- Revenue growth reflected higher organic volume, acquisitions, and pricing, partly offset by weaker foreign currencies. For the quarter, organic volume contributed approximately 18%, acquisitions 3%, and pricing 3%, while currency reduced growth by 3%.
- Americas revenue rose 25.4% in the quarter and 31.9% year to date; Europe rose 12.8% and 18.5%, respectively; Asia rose 46.2% and 31.1%, respectively.
- Motive-power sales increased 22.9% in the quarter and 32.5% year to date, outpacing reserve-power sales growth of 18.6% and 19.1%.
- Lead costs increased approximately $18 million in the quarter and $107 million year to date. Pricing increases offset approximately $11 million and $57 million, respectively.
- Operating-expense leverage improved margins: operating expenses were 13.3% of sales in the quarter versus 14.6% previously and 13.4% year to date versus 15.6%.
- The effective tax rate declined to 21.6% from 26.4% in the quarter and to 25.6% from 28.8% year to date, primarily due to geographic earnings mix and a favorable foreign tax-audit settlement that released $2.5 million of tax liabilities.
- Asia operating margin declined to 6.6% from 15.1% in the quarter and to 7.0% from 16.1% year to date, due to higher manufacturing, freight, and business-development costs, lower pricing, and transition costs in China.
Guidance, outlook, commentary, risks, and unusual items
- Management reported continued improvement in global economic conditions and incoming order rates. It expects restructuring actions taken over the prior four years to provide approximately $40 million of annualized pretax earnings benefit, or $0.58 per share, when fully implemented by the end of fiscal 2012.
- Management expects approximately $800,000 of additional acquisition-related restructuring charges and $1.8 million of additional non-acquisition restructuring charges in fiscal 2011, primarily in Europe.
- Restructuring programs include facility consolidation, employee reductions, automation, and shifting capacity to lower-cost locations. The company completed the closure of two Oerlikon manufacturing facilities during the quarter, reducing headcount by 105 employees.
- Lead, foreign exchange, and interest-rate volatility remain significant exposures. A 10% increase in lead costs would increase cost of goods sold by approximately $12 million based on third-quarter revenue and costs.
- For the remaining fiscal year, management estimated that approximately 93% of lead costs were known through hedges, purchases under FIFO accounting, and the lead-tolling program.
- The company uses derivatives solely for hedging lead, foreign currency, and interest-rate exposures and does not use them for speculative trading.
- Environmental and safety risks relate particularly to lead and acid handling. Environmental reserves for the Sumter, South Carolina facility were $3.3 million at January 2, 2011; management believed the reserves were sufficient.
- Product warranty liabilities were $32.2 million at January 2, 2011. Management stated that litigation was not expected to materially affect financial condition, results of operations, or cash flow.
- The filing identifies risks involving cyclical customer industries, commodity availability and pricing, the ability to pass costs to customers, foreign operations and currencies, competition, acquisitions, restructuring execution, debt service, variable interest rates, customer credit, environmental matters, product quality, and labor relations.
- No material subsequent events requiring recognition or disclosure were identified through the financial-statement issuance date.
Most important facts for investors to verify
- Whether strong volume growth and pricing can offset continuing lead-cost inflation and preserve gross margins.
- Whether the weaker Asia profitability is temporary or reflects more persistent pricing, manufacturing, freight, and expansion pressures.
- The pace and realized benefits of European restructuring, including the remaining expected charges.
- Working-capital requirements and whether receivable and inventory growth continue to constrain operating cash flow.
- Debt amortization, convertible-note terms, covenant compliance, and sensitivity to variable interest rates.
- Exposure to foreign currency movements and the adequacy and duration of commodity and currency hedges.
- Progress, spending, and expected returns associated with the Chongqing facility and other expansion initiatives.
- Potential dilution or cash obligations related to the $172.5 million convertible notes and outstanding equity awards.