Business context and reporting period
Ennis, Inc. manufactures and sells business forms and other printed products, primarily through independent distributors in the United States. It operates as one reportable segment. This is the annual Form 10-K for the fiscal year ended February 28, 2021—not a standalone quarterly filing. Management attributed weaker annual results largely to COVID-19-related economic disruption and lower sales volume. The company acquired pressure-seal products business Infoseal on December 31, 2020.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $358.0 million | $438.4 million |
| Gross profit / margin | $103.8 million / 29.0% | $128.9 million / 29.4% |
| Operating income / margin | $35.9 million / 10.0% | $50.8 million / 11.6% |
| Net earnings | $24.1 million | $38.3 million |
| Diluted EPS | $0.93 | $1.47 |
| Cash from operating activities | $52.8 million | $57.2 million |
| Cash and working capital at year-end | $75.2 million; $113.0 million | $68.3 million; $111.9 million |
Cash used in investing activities was $21.2 million, including $19.2 million for acquisitions and $3.7 million of capital expenditures. Cash used in financing was $24.7 million, including $23.5 million of dividends and $1.2 million of share repurchases. The quarterly dividend was $0.225 per share, or $0.90 for the year.
There was no outstanding debt at year-end. The revolving facility provided $99.4 million of available capacity after standby letters of credit; it matured November 11, 2021. The current ratio was 4.22. The pension plan was 90.5% funded on a projected-benefit-obligation basis.
Material changes versus the prior comparable period
- Sales fell 18.3% year over year. Acquisitions contributed approximately $12.5 million to FY2021 sales, partially offsetting underlying declines.
- Gross margin declined 0.4 percentage points and operating margin declined 1.6 points for the full year. Lower volumes reduced plant utilization and efficiency, particularly in the first half; management cited cost actions and acquisition integration as supporting a fourth-quarter recovery. Fourth-quarter gross margin was 29.6% versus 28.1% a year earlier, and operating margin was 10.6% versus 10.3%.
- Net earnings decreased by $14.2 million. Other expense included a $1.6 million pension settlement charge following lump-sum distributions; total pension expense rose to $3.9 million from $1.2 million.
- Operating cash flow declined $4.4 million. Year-end cash increased $6.9 million, while working capital rose $1.1 million.
- Backlog of firm orders increased to $23.6 million from $21.8 million.
Outlook, risks, contingencies and unusual items
Management did not provide numerical revenue or earnings guidance and said the ultimate FY2022 effects of COVID-19 could not be estimated. It expected FY2022 capital expenditures of $3 million to $5 million, generally funded from operating cash flow, and anticipated pension contributions of approximately $1 million to $3 million, depending on funding status. The company expected to continue share repurchases if the Board considered them in shareholders’ best interests.
- Key risks include continued pandemic-related demand weakness, secular migration from printed documents to digital alternatives, price competition, and rising or unavailable paper, freight, labor and benefit costs.
- Supplier concentration is material: one vendor supplied 43% of materials in FY2021. Management said paper supply was not then a major concern but acknowledged potential disruption and pricing pressure.
- The credit facility was due for renewal in November 2021. Covenants restrict leverage, fixed-charge coverage, acquisitions and certain shareholder distributions.
- Pension results are sensitive to market returns and discount rates; management estimated each 10-basis-point discount-rate change affects the pension liability by about $0.8 million. The expected return assumption was reduced to 6.5%.
- Infoseal’s acquisition accounting involved estimates of acquired equipment and customer-relationship fair values; the auditor identified this as a critical audit matter. No goodwill impairment was recorded in FY2021.
- Ordinary-course litigation was not expected by management to materially affect financial position or results. The independent auditor issued unqualified opinions on the financial statements and internal control; management also reported effective controls, excluding Infoseal from its assessment.
Important facts for investors to verify
- Whether sales and margins recover as pandemic effects ease, and how much of the decline reflects structural print attrition versus temporary weakness.
- Renewal terms and availability of the credit facility after its November 2021 maturity, notwithstanding the company’s year-end cash and zero debt.
- Paper availability, pricing and pass-through capability given the 43% supplier concentration.
- Actual pension contributions, funded status and the effect of lump-sum distributions and actuarial assumptions.
- Infoseal integration, realized acquisition contribution, and the assumptions supporting acquired asset valuations and goodwill.
- Ability to maintain dividends and repurchases while funding operations, acquisitions and pension obligations.