Ennis, Inc. — Q1 FY2016 Form 10-Q
Reporting period: Three months ended May 31, 2015, compared with the three months ended May 31, 2014. The interim financial statements are unaudited. Ennis manufactures printed business products and activewear through its Print and Apparel segments.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $150.6 million | $141.2 million |
| Gross profit | $37.5 million; 24.9% margin | $35.4 million; 25.1% margin |
| Operating income | $14.9 million; 9.9% of sales | $13.6 million; 9.7% of sales |
| Net earnings | $9.2 million | $8.0 million |
| Diluted EPS | $0.36 | $0.31 |
| Operating cash flow | $30.7 million | $13.3 million |
| Capital expenditures | $1.2 million | $0.3 million |
- Sales increased 6.7%; Print sales rose 9.5% to $96.8 million and Apparel sales rose 1.9% to $53.8 million.
- Print gross margin improved to 31.0% from 30.5%, with management citing operational improvements and acquisition integration. Apparel gross margin fell to 14.1% from 16.0%, reflecting input costs, lower production efficiencies, and start-up costs tied to new sales programs.
- SG&A was $22.7 million, or 15.0% of sales, versus $21.8 million, or 15.4%. The effective tax rate was 37% in both periods. Cash dividends were $0.175 per share in each period.
- Cash was $19.0 million at May 31, 2015, versus $15.3 million at February 28, 2015. Working capital was $163.4 million and the current ratio was 5.0:1. Long-term debt declined to $85.5 million from $106.5 million.
Changes and drivers
- Print growth included $12.4 million of sales from recent acquisitions; sales at other Print locations declined 4.5%, which management attributed to normal attrition and the economic environment.
- Kay Toledo and Sovereign each contributed $6.2 million in sales during the quarter. Kay Toledo also contributed $0.9 million and Sovereign $1.0 million of pretax earnings.
- Operating cash flow increased substantially, primarily because inventory provided $12.5 million of cash, compared with $0.6 million in the prior-year quarter, and prepaid expenses provided more cash. Ennis used $21.0 million to repay debt.
- Other income/expense improved, including a $0.2 million foreign-currency gain versus a $0.3 million loss in the prior-year quarter. Interest expense was approximately $0.5 million.
Liquidity, outlook, and risks
- The $150 million revolving facility matures August 18, 2016. At quarter-end, $85.5 million was drawn and $2.8 million was committed to standby letters of credit, leaving approximately $61.7 million available. Ennis reported compliance with its financial covenants.
- Management expects operating cash flow, supplemented by the credit facility as needed, to fund foreseeable operating and capital requirements. It forecasts current-year capital expenditures of $4–$5 million, with $1.2 million spent to date. A $2–$3 million pension contribution is expected in FY2016, although the stated minimum required contribution is zero.
- Management expects lower cotton costs to benefit Apparel margins in coming quarters, subject to competitive pricing. It also expects elevated comparable manufacturing costs during the transition to new products and sales programs. No specific revenue or earnings guidance was provided.
- Key risks include technology-driven declines in traditional printed forms, price competition and paper-cost volatility, apparel demand and pricing pressures, cotton and other input-cost changes, foreign competition and trade policy, reliance on limited suppliers, and possible future impairment charges. The filing reports a $55.9 million Apparel goodwill impairment in FY2015; no goodwill impairment was recorded in this quarter.
- Interest-rate sensitivity: a one-percentage-point change on the variable-rate debt outstanding at quarter-end would affect annual results by about $0.9 million. Management estimated a uniform 10% strengthening of the U.S. dollar would reduce fair value and results by about $0.3 million.
- The board declared a $0.175-per-share quarterly dividend payable August 7, 2015. No material pending legal proceedings, material risk-factor changes, or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much of Print sales growth and future earnings depends on acquired businesses, versus underlying performance at existing locations.
- Whether Apparel initiatives improve volumes and manufacturing efficiency enough to offset start-up costs, input costs, and competitive pricing.
- Whether the unusually strong operating cash flow is sustainable, given the substantial cash benefit from inventory reduction.
- Debt repayment plans, remaining revolver availability, covenant headroom, and the facility’s August 2016 maturity.
- Realization of expected cotton-cost benefits, pension funding needs, and the risk of additional impairment charges.