ENNIS, INC. — Form 10-Q Summary
Reporting period: Three and six months ended August 31, 2016. Ennis manufactures and distributes printed business forms and related products, primarily through independent distributors. The Apparel Segment was sold on May 25, 2016 and is reported as discontinued operations; comparative information reflects that classification.
Financial performance
| Metric | Three months ended Aug. 31, 2016 | Three months ended Aug. 31, 2015 | Six months ended Aug. 31, 2016 | Six months ended Aug. 31, 2015 |
|---|---|---|---|---|
| Net sales | $91.2 million | $100.5 million | $181.7 million | $197.2 million |
| Gross margin | $27.0 million; 29.6% | $31.4 million; 31.2% | $53.7 million; 29.6% | $61.3 million; 31.1% |
| Income from operations | $11.0 million | $15.3 million | $21.6 million | $29.2 million |
| Continuing-operations earnings | $6.8 million; $0.26/share | $9.6 million; $0.37/share | $13.5 million; $0.52/share | $18.4 million; $0.72/share |
| Net earnings (loss) | $6.8 million | $11.0 million | $(10.1) million; $(0.39)/share | $20.2 million; $0.79/share |
- Quarterly sales declined about 9.3%; six-month sales declined 7.9%. Continuing-operations income and earnings per share also fell in both comparisons.
- The six-month net loss includes a $26.0 million after-tax loss on the Apparel Segment sale, including a $16.1 million write-off of accumulated foreign-currency translation adjustments. Excluding that sale loss, six-month earnings from continuing and discontinued operations were $0.62 per diluted share.
- Management’s non-GAAP adjustments for the folder relocation and elevated medical costs produced adjusted continuing-operations earnings of $9.0 million, or $0.35 per diluted share, for the quarter and $16.6 million, or $0.64 per diluted share, for six months. These are company-presented non-GAAP figures, not reported GAAP results.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $29.1 million, versus $60.2 million a year earlier. Investing cash flow was $105.3 million, mainly reflecting $107.4 million of proceeds from the Apparel sale. Financing cash flow was $(57.1) million, including $48.2 million of dividends and $10.0 million of debt repayment.
- At August 31, cash was $85.2 million, up from $8.0 million at fiscal year-end. Working capital was $133.9 million and the current ratio was 6.0, compared with 4.4 at February 29, 2016.
- Long-term debt was $30.0 million, down from $40.0 million. The amended revolving facility matures August 11, 2020; approximately $67.9 million remained available after borrowings and letters of credit. The facility has leverage and fixed-charge covenants and limits dividends based on leverage and default status.
- The company paid $1.85 per share in dividends during the six-month period, including a $1.50 special dividend associated with the Apparel sale. A quarterly dividend of $0.175 per share was declared after quarter-end. It also repurchased 103,705 shares for approximately $1.8 million; $8.3 million remained under the repurchase authorization.
- The recorded pension liability was $10.0 million. Although the minimum required contribution for the pension year was zero, management expected to contribute $2–3 million in fiscal 2017. Capital expenditures were $0.9 million to date; the company expected full-year spending of $2–4 million, excluding acquisitions.
Material changes, outlook and risks
- The Apparel Segment was sold to Gildan for $110 million in cash, subject to a working-capital adjustment and customary indemnification terms. Ennis paid a $3 million termination fee under its prior sale agreement; Gildan funded that payment as part of the transaction. The company continues to provide transition services and subleases some Anaheim property from Gildan.
- Management attributed weaker print sales partly to the lack of meaningful acquisitions while focused on the Apparel sale. The Folder Express operation relocation from Omaha to Columbus reduced sales by an estimated $2.4 million in the quarter and $4.5 million for six months. Relocation inefficiencies were estimated to reduce gross margin by $1.3 million and $2.9 million, respectively. Management expected the negative impact to end soon.
- Higher-than-trend medical claims led to an additional $2.3 million reserve charge in the quarter. Management was evaluating cost-reduction alternatives but did not expect any chosen alternative to affect claims costs until the next fiscal year; further unusual charges remained possible.
- Management expected transition-service obligations to Gildan to end and reduce SG&A, and anticipated sufficient operating cash flow and credit availability for foreseeable operating and capital needs. No numerical earnings or sales guidance was provided.
- Risks include structural decline and digitization of traditional print, intense price competition and excess capacity, customer consolidation, cheaper imports and currency movements, reliance on limited suppliers, and acquisition execution. At August 31, $84.6 million of cash was above FDIC-insured limits. A one-percentage-point interest-rate change on variable-rate debt would affect annual results by approximately $0.3 million.
- The filing reported no material pending legal proceedings beyond routine litigation, no material change in previously disclosed risk factors, and effective disclosure controls. Management was evaluating the effects of several forthcoming accounting standards, including lease and revenue-recognition rules.
Key facts for investors to verify
- Final working-capital adjustments, indemnification exposure and remaining transition obligations related to the Apparel sale.
- Whether the folder relocation’s expected recovery occurs, and whether elevated medical claims require additional reserves.
- Underlying sales and margins in the continuing print business, including the effects of industry attrition and future acquisitions.
- Cash deployment, dividend sustainability, credit-facility covenant headroom and pension contributions.
- Exposure and safeguards for the substantial cash balance held above FDIC-insured limits.