EBF

Business Context and Reporting Period

Company: Ennis, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2007
Business Overview: Ennis operates in two primary segments: the Print Segment (manufacturing business forms and printed products) and the Apparel Segment (Alstyle Apparel, manufacturing activewear). The company distributes products primarily through independent dealers and distributors in North America.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 4.3% ($6.5 million) for the quarter and 2.8% ($12.5 million) for the nine-month period compared to the prior year. The Print Segment drove nine-month growth (+5.1%), while Apparel sales were flat year-over-year for the nine-month period but grew 5.1% in the quarter.
• Margin Fluctuations: Consolidated gross margin decreased slightly to 24.8% (from 25.0%) for the quarter. The Print Segment margin improved to 26.8% (from 25.6%), while the Apparel Segment margin declined to 22.2% (from 24.2%) due to inventory build costs and competitive pricing pressures.
• Acquisitions: The company acquired B & D Litho, Inc. and Skyline Business Forms for $12.5 million in October 2007, and Trade Envelope, Inc. for $3.0 million in September 2007. These acquisitions contributed to the increase in SG&A expenses.
• Cash Flow: Net cash provided by operating activities decreased 52.5% to $17.6 million for the nine months ended Nov 30, 2007. This was primarily due to a reduction in factored receivables (shifting from 72.5% factored to 39.3% factored) and a $13.0 million increase in apparel inventory levels.

Guidance, Outlook, and Risks

• Outlook: Management expects the recent acquisitions (B & D and Trade) to be accretive to earnings in the first full year of operations. Capital expenditures for the fiscal year are expected to be between $5.0 million and $7.0 million, funded by existing cash flows.
• Liquidity: The company maintains a $150 million revolving credit facility. As of November 30, 2007, $97.0 million was borrowed, leaving approximately $48.8 million in availability. Management believes this is sufficient for foreseeable working capital needs.
• Risks:
  • Raw Materials: Significant exposure to cotton prices (approx. 40% of apparel product cost) and paper prices. The company relies on a limited number of suppliers, with one supplier providing 67% of yarn requirements.
  • Technology: Risk of "paperless" business forms superseding traditional printed forms.
  • Competition: Intense competition in the apparel sector from larger global competitors (e.g., Gildan, Delta) and office supply superstores in the print sector.
  • Foreign Operations: Apparel manufacturing relies on facilities in Mexico and sourcing from Central America/Asia, exposing the company to trade regulation changes (NAFTA/CAFTA) and political instability.
• Unusual Items: A gain of approximately $325,000 was recognized on the sale of a building during the quarter. The company adopted FIN 48 (Accounting for Uncertainty in Income Taxes) on March 1, 2007, resulting in a $240,000 reduction to retained earnings with no net impact on current earnings.

Investor Verification Checklist

• Inventory Levels: Verify the sustainability of the $13.0 million increase in apparel inventory and its impact on future cash flow and obsolescence risk.
• Factoring Transition: Confirm the timeline and cost implications of reducing the factoring of accounts receivable from 72.5% to 39.3%.
• Acquisition Integration: Monitor the accretion of earnings from the B & D Litho and Trade Envelope acquisitions as projected by management.
• Raw Material Costs: Track cotton and paper price trends and the company's ability to pass these costs to customers given competitive pressures.
• Debt Covenants: Review compliance with the $150 million credit facility covenants, specifically the total funded debt to EBITDA ratio.