ENNIS, INC. — Form 10-Q Summary
Reporting period: Quarter and nine months ended November 30, 2015. Ennis manufactures business forms and other printed products (Print segment) and activewear (Apparel segment). Financial statements are unaudited; amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Nine months ended Nov. 30, 2015 | Comparable 2014 period |
|---|---|---|---|
| Net sales | $139.5 million | $440.8 million | $147.0 million quarter; $440.0 million nine months |
| Gross profit / margin | $40.6 million / 29.1% | $118.7 million / 26.9% | $36.5 million / 24.8%; $110.1 million / 25.0% |
| Operating income (loss) | $17.5 million | $49.6 million | $(80.6) million; $(50.6) million |
| Net earnings (loss) | $10.7 million; diluted EPS $0.41 | $30.9 million; diluted EPS $1.20 | $(71.2) million; $(53.1) million |
| Operating cash flow | Not separately reported for the quarter | $79.2 million | $46.4 million for nine months |
Quarterly sales declined 5.1% year over year, while nine-month sales rose 0.2%. For nine months, Print sales grew 3.8% to $294.7 million, including acquired-business sales; Apparel sales fell 6.5% to $146.0 million. Gross margin improved in both segments, with Apparel benefiting from lower input costs, manufacturing efficiencies, and maintained selling prices.
- Cash, liquidity and debt: Cash was $13.7 million at November 30, versus $15.3 million at February 28. Working capital was $140.5 million, down from $176.3 million; the current ratio was 4.5 versus 5.4. Revolving debt declined to $45.0 million from $106.5 million after $61.5 million of repayments. The $150 million facility had approximately $102.9 million available after borrowings and letters of credit; the company reported covenant compliance.
- Cash flows and investment: Nine-month investing cash outflow was $4.0 million, including $4.6 million of capital expenditures; financing cash outflow was $75.0 million, including debt repayments and $13.5 million of dividends. Management expected full-year capital expenditures of $4–5 million and said operating cash flow and facility capacity should cover foreseeable requirements.
- Other measures: Total assets were $407.1 million and shareholders’ equity $300.0 million. Pension liability was $11.5 million. Dividends were $0.175 per share quarterly; a further $0.175 dividend was declared for payment February 5, 2016.
Material changes and unusual items
- Year-ago results included a noncash $93.3 million impairment charge for Apparel goodwill and trademarks. No impairment was recorded in the current quarter or nine-month period; the annual impairment review was still underway, with completion expected in the fourth fiscal quarter and no impairment indicators identified as of November 30.
- Excluding the prior-year impairment, management reported prior-year operating income of $12.7 million for the quarter and $42.7 million for nine months, compared with $17.5 million and $49.6 million in 2015. These are company-presented non-GAAP comparisons.
- Print acquisitions contributed $7.6 million of quarterly sales and $20.4 million of nine-month sales. The July 2015 CMC Group asset acquisition was described as immaterial. Acquisition-related synergies supported Print margins.
- Apparel sales weakness reflected a soft lower-end retail market, competitive pricing, and international competition. Lower cotton and other input costs and improved production efficiency helped lift Apparel gross margin to 25.9% for the quarter and 19.0% for nine months.
Outlook, risks and contingencies
- No specific revenue or earnings guidance was provided. Management expected some Apparel cost benefits to continue in coming quarters, subject to competitive pricing, and said it was pursuing new sales programs and channels while prioritizing margin preservation.
- Key disclosed risks include structural decline in traditional print demand from digital alternatives; price competition, customer consolidation, and paper-cost volatility; Apparel demand and pricing pressure, foreign competition and trade-policy changes; cotton and other input-cost volatility; dependence on selected suppliers; and potential future impairment if forecasts or market conditions deteriorate.
- The credit facility was scheduled to mature August 2016; the company reported a binding commitment from its primary lender to extend maturity to August 2017 on the same terms. The facility is secured by substantially all domestic assets and includes financial and operating covenants.
- Management expected to contribute $2–3 million to the pension plan in fiscal 2016, although the stated minimum required contribution was zero. No material pending legal proceedings, material risk-factor changes, or off-balance-sheet arrangements were reported.
- Market-risk disclosures estimate that a one-percentage-point interest-rate change on outstanding variable-rate debt would affect annual results by about $0.5 million; a uniform 10% strengthening of the U.S. dollar would reduce fair value and results by about $0.3 million.
Important facts for investors to verify
- Outcome of the fiscal-year annual goodwill and trademark impairment review, particularly for Apparel.
- Whether the credit-facility maturity extension was completed and whether covenant headroom remains adequate.
- Durability of Apparel’s margin recovery amid falling sales, competitive pricing, and changing input costs.
- Underlying Print sales trends excluding acquisitions and the sustainability of acquisition synergies.
- Cash generation and working-capital trends, including inventory reductions and planned pension contributions.