ENNIS, INC. — Q1 FY2024 Form 10-Q
Reporting period: Three months ended May 31, 2023, compared with the three months ended May 31, 2022. Ennis manufactures and distributes commercial printing products, primarily through independent distributors, and reports one operating segment. The company operated 55 plants in 20 states. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Net sales | $111.3 | $107.7 |
| Gross profit / margin | $34.0 / 30.6% | $34.0 / 31.6% |
| Operating income / margin | $15.7 / 14.1% | $16.3 / 15.2% |
| Other income (expense) | $0.5 | $(0.2) |
| Net earnings | $11.6 | $11.6 |
| Diluted EPS | $0.45 | $0.45 |
| Operating cash flow | $21.7 | $14.2 |
| Capital expenditures | $2.1 | $1.0 |
- Cash was $102.1 million at May 31, up $8.1 million from February 28. Working capital was $160.3 million; the current ratio was 5.2:1.
- Investing cash outflow was $7.1 million, including $5.0 million for the Stylecraft acquisition. Financing cash outflow was $6.5 million, principally the quarterly dividend.
- No long-term debt was outstanding. The company had $0.5 million outstanding under a standby letter-of-credit arrangement secured by cash collateral. Lease liabilities totaled $11.7 million.
- The quarterly dividend was $0.25 per share. The board declared another $0.25 dividend after quarter-end, payable August 7, 2023.
Material changes versus the prior-year quarter
- Sales rose 3.3%, including approximately $4.1 million from School Photo Marketing and Stylecraft. Excluding acquisition contributions, sales volume declined slightly as purchasing patterns normalized following the prior year’s tight paper market.
- Cost of goods sold rose 4.9%; gross margin decreased 1.0 percentage point year over year, although it improved 3.0 percentage points sequentially from the quarter ended February 28, 2023.
- SG&A increased 3.4% to $18.3 million; acquisitions contributed $0.7 million. Operating income declined $0.6 million, while net earnings and diluted EPS were essentially unchanged.
- Other income improved to $0.5 million, primarily from higher interest income. Operating cash flow increased, aided by a $7.3 million cash benefit from lower receivables, mainly reflecting improved collections.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expects operating cash flows to cover operating and capital requirements for the foreseeable future. Current-year capital spending, excluding acquisitions, was expected to be $3 million to $6 million; $2.1 million had been spent through May 31.
- Management cited industry consolidation, declining demand for some traditional printed products as digital alternatives expand, paper supply and pricing volatility, inflation and input-cost recovery, labor and supply-chain conditions, customer consolidation, and acquisition integration as risks.
- Paper is sourced from a limited number of suppliers. Approximately $101.1 million of cash was above FDIC insurance limits at May 31; management said it did not believe deposits posed significant risk but could not assure against losses.
- Stylecraft was acquired May 23 for approximately $5.0 million plus assumed trade payables; its purchase-price allocation was preliminary. Ennis acquired UMC Print on June 2 for approximately $7.7 million plus assumed trade payables. The filing reports potential School Photo Marketing earn-out consideration of up to $1.0 million; the recorded liability was $0.8 million at May 31.
- Management estimated annual pension contributions of $1 million to $3 million in MD&A; the financial statement note gives a range of $1.5 million to $3 million, assuming stable funding. Recorded unfunded pension liability was approximately $0.7 million.
- No material changes to previously disclosed risk factors or material pending legal proceedings were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Key facts for investors to verify
- How much of future sales and earnings growth comes from acquisitions versus underlying demand, given the slight volume decline excluding acquisition contributions.
- Whether margins can recover or remain pressured by product mix, paper and other input costs, and competitive pricing.
- The final Stylecraft purchase-price allocation, UMC Print’s contribution after closing, and any School Photo Marketing earn-out payments.
- Cash deployment plans, including acquisitions, dividends, share repurchases, capital spending, and pension funding; also note the filing’s differing pension contribution estimates.
- Exposure to uninsured bank deposits and dependence on a limited number of paper suppliers.