EBF

Business Context and Reporting Period

Company: ENNIS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009
Business Overview: Ennis, Inc. operates in two primary segments: the Print Segment (manufacturing business forms and printed products) and the Apparel Segment (manufacturing activewear, primarily t-shirts and fleece, under the Alstyle brand). The company distributes products primarily through independent dealers in North America.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased by 19.8% ($32.4 million) year-over-year. The Print Segment sales fell 15.9% and the Apparel Segment sales fell 24.1%, driven by the economic recession, excess inventory in the marketplace, and competitive pricing pressures.
• Profitability: Net earnings decreased 39.3% to $6.6 million. Operating income dropped 37.1% to $11.5 million. Gross margins compressed by 110 basis points despite cost control initiatives.
• Liquidity and Debt Reclassification: Working capital decreased by 50.2% primarily due to the reclassification of the entire $76.4 million credit facility and related derivative instrument from long-term to current liabilities, as the facility matures on March 31, 2010. Excluding this reclassification, working capital would have increased.
• Cash Flow: Operating cash flow improved significantly by 51.1% to $25.2 million, largely due to a $13.6 million reduction in inventory levels.
• Segment Performance: The Apparel Segment profit declined 50.0% to $3.4 million, while the Print Segment profit declined 25.0% to $10.8 million.

Guidance, Outlook, and Risks

• Outlook: Management expects capital requirements for fiscal 2010 to be between $4.0 million and $8.0 million, funded by existing cash flows. A new manufacturing facility in Agua Prieta, Mexico, is planned with estimated costs of $40-$45 million, expected to be operational in fiscal 2011.
• Debt Renewal: The company is currently negotiating the renewal of its $150 million credit facility, which matures in March 2010. Management expects to complete the renewal prior to maturity.
• Risk Factors:
  • Economic Conditions: Continued recession and volatility in financial markets may further depress demand and margins.
  • Asset Impairment: The company recorded a $63.2 million goodwill impairment and $4.7 million trademark impairment in the prior fiscal year. Future declines in market conditions could trigger additional charges.
  • Commodity Prices: Exposure to fluctuations in cotton and paper prices, as well as freight costs, which impact margins.
  • Customer Credit: Increased bankruptcies among retail customers pose a risk to accounts receivable collectability.
• Unusual Items: No unusual items were reported for the quarter ended May 31, 2009, other than the standard reclassification of debt.

Investor Verification Checklist

• Credit Facility Renewal: Verify the status of the $150 million credit facility renewal negotiations given the March 2010 maturity date.
• Inventory Levels: Confirm that the $13.6 million inventory reduction is sustainable and not indicative of future demand weakness.
• Apparel Segment Margins: Monitor the Apparel Segment's gross margin (20.4%) and profit margin (5.7%) for further compression due to pricing pressures.
• Goodwill Valuation: Assess the risk of future impairment charges on the remaining $117.3 million in goodwill, particularly in the Apparel Segment.
• Customer Concentration: Review the allowance for doubtful accounts ($3.6 million) in light of reported customer bankruptcies in the retail sector.