Ennis, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2013. Financial statement amounts below are in U.S. dollars; dollar figures are in millions unless stated otherwise.
Business context
Ennis manufactures printed business products through its Print segment and activewear, primarily blank apparel, through its Apparel segment. The filing compares the quarter and six-month period with the corresponding 2012 periods.
Financial performance
| Metric | Three months ended Aug. 31, 2013 | Three months ended Aug. 31, 2012 | Six months ended Aug. 31, 2013 | Six months ended Aug. 31, 2012 |
|---|---|---|---|---|
| Net sales | $135.3 | $138.3 | $273.8 | $280.9 |
| Gross profit / margin | $36.7 / 27.1% | $33.9 / 24.5% | $72.5 / 26.5% | $62.2 / 22.1% |
| Operating income / margin | $15.8 / 11.7% | $12.6 / 9.1% | $29.4 / 10.8% | $18.9 / 6.7% |
| Net earnings | $9.8 | $7.6 | $18.3 | $11.5 |
| Diluted EPS | $0.38 | $0.29 | $0.70 | $0.44 |
| Operating cash flow | Not stated separately | Not stated separately | $40.1 | $29.4 |
- Quarterly sales fell 2.2%; six-month sales fell 2.5%. Print sales declined 8.1% for the quarter and 7.5% for the half-year. Apparel sales increased 7.6% and 5.5%, respectively.
- Margin improvement was concentrated in Apparel: its gross margin rose to 23.1% for the quarter and 21.7% for the half-year, from 14.4% and 10.6%. Print gross margin was 30.0% for the quarter, down from 30.7%, and 29.9% for the half-year, up from 29.3%.
- Cash from operations increased to $40.1 million, supported by higher earnings and favorable working-capital movements. Capital expenditures were $2.2 million. Investing activities used $1.2 million; financing activities used $27.0 million, including $22.5 million of debt repayment and $4.6 million of dividends. Cash ended at $17.7 million, versus $6.2 million at February 28, 2013.
- At August 31, long-term debt was $35.0 million, down from $57.5 million. Working capital was $147.8 million and the current ratio was 4.4:1. The company reported approximately $112 million of unused revolver availability, after $3 million in standby letters of credit.
- Income tax expense was $5.8 million for the quarter and $10.8 million for the half-year; the effective tax rate was 37.0%, compared with 36.5% in 2012.
Material changes and management commentary
- Management attributed stronger earnings chiefly to Apparel’s improved margins as higher-cost cotton inventory was worked through and production levels improved. Apparel volume rose, while average selling prices declined.
- Print results faced declining traditional long-run business, competition, fewer sales days, and transition-related customer losses at acquired businesses. Management said most transition losses were behind it; the industry also faces substitution by digital and electronic document solutions.
- SG&A was broadly flat for the half-year. Cost savings from integrating acquired plants were offset by higher bad-debt provisions, including approximately $1.0 million in the quarter related to projected losses on two Apparel accounts. Bad-debt expense was $2.2 million for the half-year, versus $0.3 million a year earlier.
- After quarter-end, Ennis acquired the Custom Envelope Division assets for $47.25 million in cash plus certain trade liabilities on September 27, and Folder Express assets for $15 million plus certain trade payables on September 30. The filing states CED annual sales exceeded $40 million but gives a period ending December 31, 2013, a date later than the filing; verify the stated period.
Outlook, risks and contingencies
- Management expected continued Apparel margin improvement as production increased, absent economic or market disruption. It expected fiscal 2014 capital expenditures of $4–$5 million, excluding acquisitions, and a $2–$3 million pension contribution despite no minimum contribution requirement for that plan year.
- The revolving facility provides $150 million of capacity, with a possible increase to $200 million in certain circumstances, and matures August 16, 2016. A September 2013 amendment reset the minimum tangible net worth covenant to $100 million, with step-ups equal to 25% of consolidated net income beginning with the quarter ending November 30, 2013. Ennis reported covenant compliance at August 31.
- Key risks include structural decline and intense price competition in Print; volatile paper, cotton, and yarn costs; dependence on limited suppliers (47% of Apparel cotton and yarn came from one supplier); customer credit losses; apparel demand and pricing volatility; foreign exchange; and possible impairment of goodwill and intangible assets. Variable-rate debt was $35 million; a one-percentage-point rate change would affect annual results by approximately $0.4 million.
- The company reported no material changes to its previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and no off-balance-sheet arrangements. Disclosure controls were deemed effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether Apparel’s large margin recovery is sustainable, particularly as production ramps and selling prices remain pressured.
- Extent and collectability of the two Apparel customer exposures and whether further bad-debt provisions are needed.
- Post-acquisition cash, debt, revolver availability, covenant headroom, and integration costs following the September purchases.
- The period attached to CED’s stated annual sales, which the filing gives as ending December 31, 2013 despite reporting the acquisition in September 2013.
- Print segment trends, including acquired-customer retention and the effect of ongoing migration from printed forms to digital alternatives.