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Text: For a list of factors which could affect our future results, including our earnings estimates.
In addition, we will also be presenting certain non-GAAP financial measures.
Our third quarter reflected strong demand for our products and services, with order trends accelerating during the period.
The strength of our business was even more impressive considering the ongoing headwinds created by the COVID-19 pandemic, which continued to disrupt economic activity around the world.
We've been able to maintain cohesion throughout the EnerSys workforce despite a number of positive, symptomatic and close contact cases among our employee base.
Those cases can lead to disruption in daily production schedules as workers are sent home in order to comply with COVID-19 protocols.
EnerSys continues to emphasize social distancing, hygiene, the use of masks and reminding our employees to follow the same guidelines in their personal activities, which has helped to mitigate the impact compared to many companies, but we have not been immune.
Despite the ongoing challenges caused by COVID-19, the demand for EnerSys products was clear during the period as we reported strong third quarter fiscal '21 adjusted earnings of $1.27 per diluted share, which included a $0.10 benefit from the settlement of our claim related to the September 29 fire in our Richmond, Kentucky facility less $0.03 per share in foreign currency losses.
Energy Systems benefited from telecom driven 5G growth in the Americas and our motive power business saw marked revenue and earnings improvement over the second fiscal quarter.
Our specialty segment continued its positive momentum in our third quarter, bolstered by our growing transportation backlog.
I'd now like to provide a little more color on some of our key markets.
But before I begin, I would like to comment on how many of our customers across all of our lines of business have signaled increasing demand and alerted us to be ready.
There seems to be pent-up demand which should accelerate near-term growth.
Our largest segment, Energy Systems, has struggled in recent quarters from slow broadband orders.
The MSOs had focused on increasing node capacity for their work-from-home demand.
Those MSOs have now resumed strong orders for our products, which increased their networks power capacity.
Even more encouraging, MSO participation in recent wireless spectrum auctions and their enunciation of their intention to carry their 5G and 4G traffic on their own networks validates the broadband growth assumptions of our Alpha acquisition strategy.
Telecom 5G growth is also accelerating in the Americas, confirming their commitment to invest in their networks to increase capacity and reliability.
Our 5G small cell powering project collaboration with Corning is progressing even better than we had hoped.
In this quarter, we believe the network investment in 5G has, for the first time, surpassed the existing 4G network spend.
It is also encouraging to see data center markets improving.
In addition to our traditional businesses, renewable energy markets continue to expand with incredible opportunities for storage applications.
The new administration has clearly focused on this emerging market.
We plan to respond by updating our product offering using the same modular approach from our other lines of business.
We will share more specifics with you on how we will participate in renewable energy storage and EV charging in coming calls.
When you consider forklifts, we are currently the leader in charging electric vehicles globally, and this technology is easily transferred.
Lastly, we are beginning to see the positive impact of the global alignment of the Energy Systems organization as we leverage regional expertise and key account development.
Our motive power business showed considerable improvement in the period compared to the second quarter, delivering higher sequential revenue and operating earnings.
Our order rates have surpassed the pre-COVID levels of a year ago despite sporadic pandemic-related restrictions, particularly in EMEA.
The Hagen, Germany restructuring is ahead of schedule and forecasted to beat its budget.
Although those restructuring benefits have not yet impacted our earnings, they will grow in magnitude throughout calendar year 2021, reaching nearly a $20 million annual run rate by the end of fiscal year 2022.
Another exciting development is the launch of our NexSys iON lithium motive power batteries.
Several OEMs continue to accelerate their adoption of this chemistry, and our sales team is focusing efforts for NexSys iON products on the portions of the market with the most demanding duty cycles.
The third segment of our business, Specialty, maintained its positive momentum with another strong quarter, which was slowed only by the ongoing impact of COVID on our capacity ramp, thereby delaying our ability to meet surging demand.
Our transportation backlog continued to grow as we added a significant number of customers to the ODYSSEY channels.
We currently are working with nearly every major player in the aftermarket distribution channel, along with many key truck OEMs and fleet operators.
TPPL gained further traction in the quarter.
The high-speed line is up and running, and we are adding a second shift to our Springfield plant and bringing on additional oxide and pasting capacity.
We're also encouraged by several new awards in our aerospace and defense business.
Before wrapping up, I'd like to take a minute to talk about some exciting advancements we've made on the technology front.
We mentioned our lithium launch for motive power.
Our customers have begun to order our new NexSys iON products, and initial customer feedback is very positive.
We have also achieved our first OEM approval and continue to work with other material handling manufacturers.
The demand for fully integrated products has significantly increased for our Energy Systems group.
To ensure necessary product development keeps up with the market's pace of change, we are aggressively hiring engineers.
Our emphasis is on telecom, home and industrial energy storage.
Moreover, we are accelerating the development of high-voltage electric vehicle fast-charging stations using batteries to speed the process.
A considerable number of the building blocks have already been developed for our material handling program, allowing extension into these new markets with substantial growth potential.
Our ability to stay on the cutting-edge of new technology development, while continuing to leverage core lead acid products, will further enhance our competitive edge in the quarters and years ahead.
In conclusion, I continue to be humbled by our employees' ability deliver in the face of the ongoing global pandemic, quickly adapting to unforeseen challenges by remaining focused on delivering the products and services our customers have come to expect.
Our overall strategy remains unchanged: one, to accelerate higher-margin maintenance-free motive power sales with NexSys iON and NexSys PURE; two, to grow the portfolio of products in our Energy Systems business, particularly in telecom, with fully integrated DC power systems and small cell site powering solutions which will accelerate our growth from 5G; three, to increase transportation market share in our Specialty business; and finally, to reduce waste through the continued rollout of our EnerSys operating system.
As we continue to execute on each of these initiatives, the strength of the EnerSys platform and our position as the global leader in stored energy solutions will drive additional long-term value for our shareholders for years to come.
With that, I'll now ask Mike to provide further information on our third quarter results and fourth quarter guidance.
I am starting with slide eight.
Our third quarter net sales decreased 2% over the prior year to $751 million due to a 3% decrease from volume, net of a 1% increase from currency.
On a line of business basis, our third quarter net sales in the motive power were down 4% to $304 million, while Energy Systems net sales were down 2% at $337 million, while specialty increased 7% in the third quarter to $109 million.
Motive power suffered a 5% decline in volume due to the pandemic, net of a 1% increase in FX.
Energy Systems had a 4% decrease from volume, net of a 2% improvement from currency.
Specialty added 6% in volume improvements and 1% increase from currency.
There were no notable changes in pricing, and we had no impact from acquisitions.
On a geographical basis, net sales for the Americas were down 1% year-over-year to $499 million, with a 1-point decrease from currency.
EMEA was down 4% to $194 million on a 9% volume decline, net of a 5% improvement in currency, while Asia was flat at $58 million.
Please now refer to slide nine.
On a sequential basis, third quarter net sales were up 6% compared to the second quarter, driven by volume improvements.
On a line of business basis, Specialty increased 5%, with NorthStar continuing to contribute its capacity for transportation sales.
And motive power was up 15% as it rebounds from the pandemic, while Energy Systems was down 1%.
On a geographical basis, Americas was up 4%, EMEA was up 13% and Asia was up 4%.
Now a few comments about our adjusted consolidated earnings performance.
As you know, we utilize certain non-GAAP measures in analyzing our company's operating performance, specifically excluding the highlighted items.
Accordingly, my following comments concerning operating earnings and my later comments concerning diluted earnings per share exclude all highlighted items.
On a year-over-year basis, adjusted consolidated operating earnings in the third quarter increased approximately $15 million to $78 million, with the operating margin up 210 basis points.
On a sequential basis, our third quarter operating earnings improved $12 million or 110 basis points to 10.4%.
We settled our claim for the Richmond fire, which was -- which resulted in a $6 million benefit in the quarter.
$4 million was a gain on the replacement of equipment reflected in operating expenses from the property policy, while $2 million was a final recovery on the business interruption policy and is credited to cost of sales.
Operating expenses when excluding highlighted items were at 14.8% of sales for the third quarter compared to $16.4 million in the prior year as we reduced our spending by $15 million year-over-year and by 100 basis points sequentially.
Excluded from operating expenses recorded on a GAAP basis in Q3, our pre-tax charges of $22 million, primarily related to $6 million in Alpha and NorthStar amortization and $12 million in restructuring charges for the previously announced closure of our flooded motive power manufacturing site in Hagen, Germany.
Excluding those charges, our motive power business achieved operating earnings of 13.3% or 330 basis points higher than the 10% in the third quarter of last year, due primarily to the insurance claim recovery of $6 million described earlier.
On a sequential basis, motive power's third quarter OE also increased 420 basis points from the 9.2% posted in the second quarter, due primarily to sequential increases of nearly $5 million in recovery of the business interruption and other proceeds from the Richmond fire.
OE dollars for motive power increased nearly $9 million from the prior year despite lower volume due to its lower operating expenses and $6 million in insurance recovery, while OE increased $16 million from the prior quarter on higher volume and $5 million for more in insurance recovery.
The Richmond fire damage which has since been repaired or replaced and now a more capable, safer facility is in operation.
Please see our 10-Q for more specifics on cash received and the related accounting.
Meanwhile, Energy Systems operating earnings percentage of 7.4% was up from last year's 6.3%, but down from last quarter's 8.8%.
OE dollars increased $3 million from the prior year, primarily from lower operating expenses, but decreased $5 million from the prior quarter on lower volume and higher operating expenses.
Specialty operating earnings percentage of 11.9% was up from last year's 10.1% and up from last quarter's 11.4%.
OE dollars increased nearly $3 million from the prior year on higher volume and lower operating expenses while increasing $1 million from the prior quarter on higher volume.
Please move to slide 11.
As previously reflected on slide 10, our third quarter adjusted consolidated operating earnings of $78 million was an increase of $15 million or 23% from the prior year.
Our adjusted consolidated net earnings of $55 million was nearly $11 million higher than the prior year.
Improvements in the adjusted net earnings reflect the rise in operating earnings, net $3 million in foreign currency losses, primarily on unfavorable rate changes on intercompany borrowings.
Our adjusted effective tax rate of 17% for the third quarter was slightly higher than the prior year's rate of 16%, but in line with the prior quarter's rate of 17%.
Discrete tax items caused most of these variations.
Fiscal 2019's full year rate was 17%, while our fiscal 2020 rate was 18%, which is consistent with our current expectations for fiscal 2021.
EPS increased 22% to $1.27 on higher net earnings.
We expect our final quarter of fiscal 2021 to increase slightly -- the outstanding shares to it increased slightly from the third quarter as higher share prices increased dilution from employee stock programs.
As a reminder, we still have nearly $50 million of share buybacks authorized, but have no immediate plans to execute any repurchases with perhaps the exception of the modest annual repurchase made to offset employee stock plan dilution.
Our recently announced dividend remains unchanged.
We have also included our year-to-date results on slides 12 and 13 for your information, but I do not intend to cover these in detail.
Our balance sheet remains strong, and we are well-positioned for us to navigate the current economic environment.
We now have nearly $489 million of cash on hand, and our credit agreement leverage ratio is below 2.0 times, which allows over $600 million in committed additional borrowing capacity.
We expect our leverage ratio to remain below 2.0 times for the balance of fiscal 2021.
We generated over $218 million in free cash flow through three quarters of fiscal 2021.
Our Q3 free cash flow generation was very strong at $41 million despite the drag of rising working capital from increased revenue.
Capital expenditures year-to-date of $54 million were at our expectations.
Our capital expectation for fiscal 2021 of $75 million has expanded again slightly as the economic outlook improved.
Our major investment programs, those being: the lithium battery development; continued expansion of our TPPL capacity, including the NorthStar integration; the integration of our high-speed line and the transition in NorthStar products for European markets to our French factory are all progressing as planned.
Our high-speed line has completed its commissioning and is expanding to a second shift this month.
Even with these investments, we have also retained the agility to flex our manufacturing footprint as needed.
Our closure announced last November of our Hagan, Germany facility has progressed better than our expectations in terms of speed and cost.
So we believe we will begin enjoying about half of the expected $20 million per year of savings next fiscal year, with the full benefit thereafter.
We anticipate our gross profit rate to remain near 25% in Q4 of fiscal 2021 as lower utilization in some of our factories over the holidays and from enhanced COVID restrictions will impact our P&L in Q4.
We have initiated price increases in our fourth quarter to mitigate the rising costs of many of our non-led inputs, which should maintain our margins.
As David has described, we believe motive power markets are recovering, while our Energy Systems and Specialty markets continue to have bright prospects.
With some of the uncertainty from our election and the pandemic behind us, we currently feel we have enough visibility to provide guidance in the range of $1.25 to $1.31 in our fourth fiscal quarter.

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qtrly adjusted earnings per share $1.27.

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