Ennis, Inc. — Q1 FY2020 Form 10-Q
Business context and period: Unaudited results for the three months ended May 31, 2019, compared with the three months ended May 31, 2018. Ennis manufactures and sells business forms and other printed products, primarily through independent distributors in the United States. Revenue growth includes recent acquisitions.
Key financial results
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Net sales | $108.0 million | $93.4 million | +15.6% |
| Gross profit / margin | $32.7 million / 30.3% | $30.2 million / 32.3% | Margin down 2.0 percentage points |
| Operating income / margin | $13.0 million / 12.0% | $12.5 million / 13.3% | Income +4.3%; margin down 1.3 points |
| Net earnings | $9.6 million | $9.2 million | +4.3% |
| Diluted EPS | $0.37 | $0.36 | +$0.01 |
| Operating cash flow | $15.7 million | $11.9 million | +$3.8 million |
Cost of goods sold rose 19.1%, faster than sales, and SG&A increased 11.3% to $19.7 million. Acquisitions contributed approximately $19.3 million of Q1 sales; the filing does not provide organic sales growth separately. The acquired businesses contributed approximately $1.5 million of operating income in aggregate.
Financial position and capital allocation
- At May 31, 2019, cash was $87.4 million, long-term debt was $30.0 million, working capital was $129.1 million, and the current ratio was 4.4 to 1. Cash was down $1.1 million from February 28, 2019.
- The revolving facility provides up to $100 million; $30.0 million was drawn and approximately $69.3 million remained available, net of standby letters of credit. The facility matures August 11, 2020. Ennis reported covenant compliance.
- Cash used in investing was $9.7 million, including $8.9 million for the Integrated Print & Graphics acquisition; capital expenditures were $0.8 million. Cash used in financing was $7.1 million, including $5.9 million in dividends and $1.2 million in share repurchases.
- The quarterly dividend was $0.225 per share, versus $0.200 a year earlier. Ennis repurchased 62,038 shares at an average $19.54 and had $12.4 million remaining under its repurchase authorization.
Material developments, outlook, and risks
- Ennis acquired Integrated Print & Graphics on March 16, 2019, for $8.9 million in cash plus assumed trade payables. The acquisition added high-color commercial printing capabilities. The filing identifies raw-material price increases and acquisition-related margin dilution as pressures on profitability; management expects acquired-business margins to improve as it analyzes costs and implements its cost systems.
- Effective March 1, 2019, Ennis adopted ASC 842 for leases. It recorded approximately $18.0 million of right-of-use assets and $18.2 million of lease liabilities; adoption did not affect equity, earnings, or cash flows. Comparative periods were not restated.
- Management expects operating cash flow, supplemented by the credit facility as needed, to cover operating and capital needs for the foreseeable future. Fiscal-year capital expenditures, excluding acquisitions, were expected to be $3 million to $5 million. Expected fiscal 2020 pension contributions were $1.0 million to $1.5 million; the minimum required contribution was zero.
- Management cited secular decline and technology substitution in traditional forms, intense price competition, raw-material cost and supply volatility, increased imports, dependence on a limited number of paper suppliers, and customer consolidation. These factors could constrain volumes and margins. The filing also notes goodwill impairment risk if business performance declines.
- Cash balances included $85.3 million above FDIC-insured limits. Ennis said it did not believe deposits presented significant risk, but could not assure against loss. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much reported sales growth came from acquisitions versus underlying business performance; acquired businesses contributed $19.3 million in sales.
- Whether pricing and cost actions can offset raw-material inflation and restore gross margins, which fell to 30.3% from 32.3%.
- Acquired-business integration progress and whether management’s expected margin improvement is realized.
- Liquidity and covenant headroom, given $30 million of variable-rate debt, the August 2020 facility maturity, and capital returns.
- Exposure to concentrated paper suppliers and uninsured cash deposits, and developments affecting pension funding or goodwill valuations.