EnerSys Fiscal 2023 Third-Quarter 10-Q Summary
Business context and reporting period
EnerSys designs and manufactures stored-energy solutions, industrial batteries, chargers, power equipment, specialty batteries and related services. Reportable segments are Energy Systems, Motive Power and Specialty. The filing covers the 13-week quarter and nine months ended January 1, 2023, compared with January 2, 2022. Fiscal year-end is March 31, 2023.
Financial performance and liquidity
| Metric | Quarter ended Jan. 1, 2023 | Quarter ended Jan. 2, 2022 | Change |
|---|
| Net sales | $920.2 million | $844.0 million | +9.0% |
| Gross profit | $213.6 million | $184.3 million | +15.9% |
| Gross margin | 23.2% | 21.8% | +140 bps |
| Operating earnings | $78.5 million | $51.2 million | +53.5% |
| Operating margin | 8.5% | 6.1% | +240 bps |
| Net earnings attributable to EnerSys | $44.4 million | $36.3 million | +22.5% |
| Diluted EPS | $1.08 | $0.85 | +$0.23 |
| Metric | Nine months ended Jan. 1, 2023 | Nine months ended Jan. 2, 2022 | Change |
|---|
| Net sales | $2.719 billion | $2.450 billion | +11.0% |
| Gross profit | $594.1 million | $555.4 million | +7.0% |
| Gross margin | 21.9% | 22.7% | -80 bps |
| Operating earnings | $182.9 million | $161.8 million | +13.1% |
| Operating margin | 6.7% | 6.6% | +10 bps |
| Net earnings attributable to EnerSys | $109.9 million | $115.8 million | -5.1% |
| Diluted EPS | $2.66 | $2.69 | -$0.03 |
- Operating cash flow was $135.8 million, compared with cash used of $78.0 million in the prior-year nine-month period. Inventory used $135.9 million of cash, while accounts receivable provided $123.4 million, primarily reflecting the receivables sale program.
- Capital expenditures were $57.5 million. Investing activities used $13.7 million after $43.4 million of proceeds from terminating net investment hedges.
- Cash and cash equivalents were $298.1 million at January 1, 2023, down from $402.5 million at March 31, 2022.
- Total debt consisted of $32.0 million of short-term debt and $1.105 billion of long-term debt, net of issuance costs. Available and undrawn credit lines totaled approximately $931.3 million, including approximately $843 million of committed availability.
- Primary operating capital was $1.072 billion, or 29.1% of annualized trailing three-month sales, versus 28.7% at March 31, 2022 and 29.3% a year earlier.
- The quarterly dividend was $0.175 per share. Nine-month dividends paid were $21.4 million, and share repurchases totaled $22.9 million for 358,365 shares.
Material changes versus the prior comparable period
- Quarterly sales growth reflected an 8% pricing increase and 5% organic growth, partly offset by a 4% unfavorable foreign-currency translation effect. Nine-month growth reflected 8% pricing growth and 8% organic-volume growth, partly offset by a 5% currency headwind.
- Quarterly margin expansion reflected improved pricing and product mix that more than offset inflation, freight, labor, utility and component costs. Nine-month gross margin remained below the prior year because cost inflation and supply-chain pressures exceeded pricing recovery on a year-to-date basis.
- Quarterly Energy Systems sales increased 12.7% and operating earnings improved to $20.5 million from $3.5 million. Motive Power sales increased 6.6% and operating earnings increased 20.3%. Specialty sales increased 4.1%, while operating earnings declined 1.7%.
- Nine-month Energy Systems operating earnings increased materially to $38.8 million from $11.8 million. Motive Power operating earnings declined modestly to $128.9 million from $130.7 million, and Specialty operating earnings declined to $28.2 million from $33.4 million.
- Interest expense increased to $17.5 million for the quarter and $44.6 million for nine months, primarily because of higher borrowing levels, higher variable rates and costs related to the amended credit facility.
- The effective tax rate increased to 23.2% for the quarter and 18.5% for nine months, from 15.3% and 14.2%, respectively, primarily because of changes in the indefinite reinvestment position and earnings mix across jurisdictions.
Guidance, outlook, risks and unusual items
- Management stated that overall market demand remained robust but expects continued headwinds from commodity, labor and energy costs, with pricing increases continuing to lag cost movements by approximately six to nine months. Approximately 30% of revenue is subject to market-based lead-price adjustments.
- Management expects to refinance the $300 million of 5.00% Senior Notes due April 30, 2023 using the delayed-draw term loan under the amended credit facility. The term loan could provide up to $300 million through March 15, 2023 and matures September 30, 2026 once drawn.
- The Company committed to close its Ooltewah, Tennessee facility, which produces traditional flooded motive-power batteries. Total estimated charges are approximately $18.5 million, including $9.2 million of cash charges and $9.3 million of noncash charges; approximately 165 employees are expected to be affected, with completion expected in calendar 2023.
- Nine-month results included $12.4 million of restructuring and exit charges and a $1.6 million inventory write-off recorded in cost of goods sold. The Ooltewah closure also resulted in a $7.3 million fixed-asset write-off.
- The Company indefinitely suspended Russian operations following sanctions related to the Russia-Ukraine conflict. It continues to face risks from geopolitical developments, supply-chain disruptions, inflation, lead and other commodity volatility, foreign exchange, interest rates, labor availability, environmental liabilities, product warranty claims, litigation and competition investigations in Europe.
- The Company sold $150 million of receivables for approximately $149.7 million of net proceeds under a receivables purchase agreement maturing in December 2025. Certain receivables held by the bankruptcy-remote financing entity may not be available to other creditors until obligations under the program are satisfied.
- The Company reported compliance with its debt covenants and stated that disclosure controls and procedures were effective as of January 1, 2023.
Most important facts for investors to verify
- Whether pricing actions continue to offset inflation, freight, labor, energy and component costs, particularly after the six-to-nine-month pricing lag.
- Completion timing and final cash and noncash costs of the Ooltewah closure and remaining restructuring programs.
- Execution of the refinancing for the $300 million notes maturing April 30, 2023, including resulting interest expense and leverage.
- Inventory normalization, operating-cash-flow conversion and the sustainability of cash generation after the receivables sale.
- Exposure to variable interest rates, lead prices, foreign-currency movements and the effect of related hedges.
- Potential liabilities or developments from European competition investigations, environmental matters, warranties and other litigation.
