Ennis, Inc. — FY2014 Form 10-K Summary
Business context and reporting period. Ennis manufactures business forms and other printed products (Print) and activewear, primarily T-shirts (Apparel). This annual report covers the fiscal year ended February 28, 2014; fiscal 2013 is the main comparable period. The fourth quarter ended February 28, 2014.
Financial results and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net sales | $542.4 million | $533.5 million |
| Gross profit / margin | $143.8 million / 26.5% | $124.2 million / 23.3% |
| Operating income / margin | $33.2 million / 6.1% | $40.4 million / 7.6% |
| Net earnings / diluted EPS | $13.2 million / $0.50 | $24.7 million / $0.95 |
| Operating cash flow | $32.8 million | $50.0 million |
| Cash at year-end | $5.3 million | $6.2 million |
| Long-term debt | $105.5 million | $57.5 million |
| Working capital / current ratio | $172.3 million / 5.11 | $150.4 million / 4.49 |
Amounts are in U.S. dollars. FY2014 reported results include a $24.2 million non-cash Apparel impairment charge: $18.6 million for goodwill and $5.6 million for trademarks. Excluding that charge, management reported pro forma net earnings of $35.3 million and diluted EPS of $1.35; these are non-GAAP measures, not reported GAAP results. The impairment also contributed to the 58.5% effective tax rate, compared with 36.0% in FY2013.
FY2014 net sales rose 1.7%. Print sales increased 1.6% to $339.9 million, with acquisitions contributing approximately $23.2 million; sales at other Print locations declined. Apparel sales increased 1.9% to $202.5 million: unit volume rose 7.5%, partly offset by a 5.6% decline in average selling price. Print gross margin was 29.7% versus 29.2%; Apparel gross margin recovered to 21.1% from 13.2%. Apparel segment earnings were a loss of $9.5 million including impairment, or $14.7 million positive before impairment. Print segment earnings were $57.4 million.
For the fourth quarter, sales were $132.1 million versus $123.6 million a year earlier; gross profit was $33.6 million versus $31.3 million. The quarter recorded a net loss of $14.5 million, primarily reflecting the impairment charge.
Operating cash flow decreased $17.2 million, driven chiefly by inventory investment and pension-related cash use. Investing activities used $65.5 million, including $61.9 million for acquisitions and $4.6 million in capital expenditures. Financing activities provided $32.5 million, including net revolving-credit borrowings of $48.0 million. Inventories increased to $130.1 million from $109.7 million.
The $150 million revolving facility matures August 18, 2016. At year-end, $105.5 million was borrowed and $3.3 million was outstanding under letters of credit, leaving approximately $41.2 million available. The company reported covenant compliance. Debt is variable-rate and secured by substantially all domestic assets and specified subsidiary equity. Dividends declared were $0.53 per share; the company repurchased 119,902 shares during FY2014.
Material changes, outlook, and risks
- Ennis acquired the Custom Envelope Division, including Wisco and National Imprint, for $47.25 million, and Folder Express for approximately $14.6 million. Cash consideration was funded with credit-facility borrowings. The acquisitions expanded envelopes and folders; results are included from their acquisition dates.
- Management cited severe winter weather and a soft retail environment as factors behind weaker-than-expected fourth-quarter demand in both segments. It said whether affected sales would be delayed or lost was uncertain.
- Management expected FY2015 capital expenditures, excluding potential acquisitions, to be $4–5 million and pension contributions to be $2–3 million. It expected operating cash flow to cover ordinary needs and planned to integrate the new acquisitions into its ERP system during FY2015, with potential reduction of redundant costs. The filing gives no specific revenue or earnings guidance.
- Management said further Apparel margin improvement would depend on production volumes and/or selling prices. It described intense pricing competition, cotton and paper cost volatility, and uncertainty about demand and market conditions. Digital substitution continues to pressure traditional printed forms.
- Other key exposures include reliance on a major yarn supplier (51% of Apparel yarn purchases), customer credit risk (FY2014 bad-debt expense rose to $3.0 million from $0.7 million, including bankrupt apparel customers), labor and utility disruptions at Mexican operations, trade-policy changes, and pension sensitivity to interest rates and asset values. A 10-basis-point discount-rate change was estimated to affect the pension liability by about $0.8 million; a one-point interest-rate change on year-end variable debt by about $1.1 million.
- Management stated that ordinary-course litigation was not expected to have a material adverse effect and reported no off-balance-sheet arrangements. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether Apparel demand, pricing, and margins improved after the FY2014 impairment, and whether further impairment indicators emerged.
- Actual acquired-business sales, integration progress, and realized cost savings relative to management’s expectations.
- Inventory levels and operating cash conversion, given the FY2014 inventory increase and lower operating cash flow.
- Debt, borrowing availability, interest costs, covenant compliance, and capacity to fund dividends, pension contributions, and planned capital expenditures.
- Whether weather-related sales weakness was recovered, and how cotton, paper, freight, and labor costs affected subsequent-period margins.