Ennis, Inc. — Q1 FY2017 Form 10-Q
Reporting period: Three months ended May 31, 2016. Ennis manufactures and sells printed business products, primarily through independent distributors. Following the May 25 sale of its Apparel Segment to Gildan Activewear, current and prior-period Apparel results are reported as discontinued operations.
Key financial results
| Metric | Q1 FY2017 | Prior-year quarter |
|---|---|---|
| Net sales, continuing operations | $90.4 million | $96.8 million |
| Gross profit / margin | $26.7 million / 29.5% | $30.0 million / 31.0% |
| Operating income / margin | $10.6 million / 11.7% | $13.9 million / 14.4% |
| Continuing-operations earnings | $6.7 million; $0.26 per diluted share | $8.8 million; $0.34 per diluted share |
| Net earnings (loss) | $(16.9) million; $(0.65) per diluted share | $9.2 million; $0.36 per diluted share |
| Operating cash flow | $15.0 million | $30.0 million |
Cash was $122.4 million at May 31, versus $8.0 million at February 29. Working capital was $174.2 million and the current ratio was 7.9:1. Long-term debt was $35.0 million, down from $40.0 million. The $100 million revolving credit facility had approximately $62.9 million available, including the effect of $2.1 million in standby letters of credit; Ennis reported covenant compliance.
Investing cash flow was $106.0 million, primarily reflecting $107.4 million of proceeds from the Apparel sale. Financing cash flow was $(6.6) million, including $5.0 million of debt repayment and $4.5 million of dividends. Capital expenditures were $0.4 million.
Material changes and unusual items
- Continuing-operations sales declined 6.6% year over year. Management cited the absence of acquisitions, approximately $2.0 million of sales impact from relocating folder operations, $0.6 million from reduced sourcing-agreement sales, and $0.4 million from a competitor’s bankruptcy.
- Gross margin fell 1.5 percentage points. Management estimated folder-relocation inefficiencies reduced margin by approximately $1.6 million; it said the move was taking longer than expected, with some negative impact expected over the next several quarters, though recent improvement had occurred.
- Ennis sold the Apparel Segment for $110 million cash, subject to working-capital adjustment. The sale generated a reported after-tax loss of $26.0 million, including the write-off of foreign-currency translation amounts from accumulated other comprehensive income. The initial buyer’s agreement was terminated; its $3.0 million termination fee was funded by Gildan as part of the transaction.
- Before the sale loss, combined continuing and discontinued operating results were $0.36 per diluted share, matching the prior-year quarter. Discontinued operations contributed $2.5 million of after-tax income before the sale loss.
- Operating cash flow decreased by $15.0 million year over year. Management attributed the change principally to less favorable receivables collections, higher prepaid expenses—mainly income taxes—and lower payables and accruals.
Outlook, risks and contingencies
- No quantified revenue or earnings guidance was provided. Management expects to pursue acquisitions after completing the Apparel sale to better leverage SG&A, and anticipates further SG&A reductions after transition-service obligations to Gildan end.
- Management expects current-year capital spending of $2–$4 million, excluding possible acquisitions, and pension contributions of $2–$3 million in fiscal 2017. It expects operating cash flows and available credit to meet foreseeable requirements.
- On June 20, 2016, the Board declared a $1.50-per-share special dividend and a regular $0.175-per-share quarterly dividend, payable August 8 to holders of record July 11.
- The revolving facility’s stated maturity was August 18, 2016; the company reported a binding commitment from its primary lender to extend it to August 19, 2017. The facility is secured by substantially all company assets and includes financial and other covenants.
- Key stated risks include structural decline in traditional printed forms, digital substitution, price competition and excess industry capacity, volatile paper costs and limited suppliers, customer consolidation, foreign-exchange exposure, credit risk, and possible goodwill impairment. The company disclosed $121.9 million of cash above FDIC-insured limits.
- Ennis reported no material pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls. It reported no material change in contractual obligations and no off-balance-sheet arrangements.
Investor verification points
- Review the Gildan sale terms, final working-capital adjustment, indemnification provisions, and the reconciliation of the $110 million sale price to cash proceeds and the recognized loss.
- Assess the sustainability of continuing-operations sales and margins after the Apparel divestiture, especially the folder relocation’s remaining cost and the company’s acquisition strategy.
- Confirm completion and terms of the credit-facility extension, covenant headroom, and liquidity after payment of the special dividend.
- Track operating cash conversion, prepaid-tax balances, pension funding needs, and exposure to uninsured bank deposits.
- Distinguish recurring operating performance from the one-time sale loss and foreign-currency translation write-off when comparing earnings.