Business Context and Reporting Period
Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2007
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, under the Alstyle brand). The company distributes products primarily through independent dealers in the United States and Canada. During the fiscal year, the company pursued a growth strategy through acquisitions, purchasing Block Graphics, Inc., Specialized Printed Forms, Inc., and Tennessee Business Forms, Inc.
Key Financial Metrics
| Metric | Fiscal 2007 | Fiscal 2006 |
|---|---|---|
| Net Sales | $584.7 million | $559.4 million |
| Gross Profit | $145.9 million | $142.1 million |
| Gross Margin | 25.0% | 25.4% |
| Net Earnings | $41.6 million | $40.5 million |
| Diluted EPS | $1.62 | $1.58 |
| Operating Cash Flow | $49.5 million | $47.4 million |
| Long-Term Debt | $89.0 million | $102.9 million |
| Working Capital | $102.3 million | $94.5 million |
| Current Ratio | 3.08 to 1.0 | 2.48 to 1.0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 4.5% to $584.7 million. The Apparel Segment drove this growth with an 8.8% increase ($21.0 million), while the Print Segment grew modestly by 1.3% ($4.3 million).
- Profitability: Net earnings rose 2.6% to $41.6 million. However, gross margins compressed slightly from 25.4% to 25.0% due to raw material cost increases and market penetration pricing strategies in the Apparel Segment.
- Debt Reduction: Long-term debt decreased by approximately $13.9 million as the company repaid $29.0 million on its revolver and $11.6 million on other debt, including a $10.0 million payment on former Alstyle shareholder notes.
- Acquisitions: The company spent $17.6 million on acquisitions (Block, SPF, TBF), which added approximately $32.0 million in potential print sales, partially offset by the loss of two large customers totaling $19.6 million in revenue.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects capital requirements for 2008 to be between $5.0 million and $7.0 million, funded by existing cash flows.
- Pension Obligations: The company adopted FAS 158, recognizing a net pension liability of $2.7 million on the balance sheet. Expected contributions for the next fiscal year are estimated between $2.0 million and $3.0 million.
- Key Risks:
- Raw Material Costs: 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 over 70% of yarn requirements.
- Technology Obsolescence: Risk of "paperless" business forms reducing demand for the Print Segment.
- Goodwill Impairment: Goodwill and intangible assets total approximately $261.6 million. Future impairment charges could negatively impact financial results.
- Foreign Operations: Apparel manufacturing relies heavily on facilities in Mexico under the "maquiladora" duty-free program; changes in trade agreements (NAFTA) or regulations could impact costs.
Investor Verification Checklist
- Verify the sustainability of the Apparel Segment's growth given the compression in gross margins due to raw material costs and pricing strategies.
- Monitor the company's ability to pass on raw material cost increases (cotton and paper) to customers without losing market share.
- Review the integration progress of recent acquisitions (Block, SPF, TBF) and the impact of losing the two large customers mentioned in the Print Segment.
- Assess the impact of the new FAS 158 pension accounting standard on future balance sheet liabilities and cash flow requirements.
- Confirm the stability of the credit facility ($150 million revolver) and the company's compliance with financial covenants (total funded debt to EBITDA ratio).