Ennis, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 31, 2023; filed October 3, 2023. Ennis manufactures and sells commercial printing and related products, primarily through independent distributors, and reports one operating segment.
Financial performance
| Metric | Quarter ended Aug. 31, 2023 | Prior-year quarter | Six months ended Aug. 31, 2023 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $106.8 million | $111.2 million | $218.1 million | $218.9 million |
| Gross profit / margin | $33.1 million / 31.0% | $35.2 million / 31.7% | $67.1 million / 30.8% | $69.2 million / 31.6% |
| Operating income / margin | $14.7 million / 13.8% | $17.3 million / 15.5% | $30.4 million / 13.9% | $33.6 million / 15.3% |
| Net earnings | $10.9 million | $12.2 million | $22.5 million | $23.8 million |
| Diluted EPS | $0.42 | $0.47 | $0.87 | $0.92 |
| Operating cash flow | Not presented quarterly | $34.9 million | $21.8 million |
- Quarterly sales declined 4.0%; acquisitions contributed about $6.5 million, offset by a $10.9 million decline in legacy-business revenue. For the six-month period, acquisitions added about $10.6 million while legacy revenue fell $11.4 million.
- Management attributed lower legacy sales to slower sales by print partners and reduced outsourced work. Lower shipment volumes also reduced fixed-cost absorption, contributing to lower gross margins.
- Quarterly SG&A rose 2.2% to $18.3 million; six-month SG&A rose 3.1% to $36.7 million. Acquisitions contributed $0.9 million and $1.4 million, respectively.
- Other income was $0.6 million for the quarter and $1.0 million year to date, mainly reflecting higher interest income. Effective tax rates were 28.6% for the quarter and 28.3% year to date.
Financial position, liquidity and capital allocation
- Cash was $100.3 million at August 31, 2023, up $6.4 million from February 28, 2023. Working capital was $163.3 million; the current ratio was 5.6 to 1.
- Six-month operating cash flow was $34.9 million. Investing used $15.6 million, including $11.9 million for acquisitions and $3.7 million of capital expenditures. Financing used $12.9 million, principally dividends.
- The company reported no outstanding debt. It had $0.5 million outstanding under a standby letter-of-credit arrangement secured by cash collateral. Management said cash and operating cash flows should cover operating and capital needs for the next 12 months and beyond.
- Capital expenditures were expected to be within the historical annual range of $3 million to $6 million, excluding possible acquisitions. The company paid $0.50 per share in dividends during the six months and declared another $0.25 per share dividend payable November 3, 2023.
- An unfunded pension liability of approximately $0.7 million was recorded. Management estimated annual pension contributions of $1 million to $3 million assuming stable funding status, subject to investment returns and discount-rate changes.
Acquisitions, outlook and risks
- Ennis acquired Stylecraft Printing in May 2023 and UMC Print in June 2023 for approximately $5.0 million and $7.7 million, respectively, plus assumed trade payables. Purchase allocations were preliminary. The businesses added printing capacity and distributor-market capabilities.
- No specific earnings or sales guidance was provided. Management said delivery times had improved and inflation was lower than in fiscal 2023, but described weak industry volumes and continued margin pressure. It plans to monitor orders and input costs, manage costs and pursue acquisitions and product-market opportunities.
- Risks highlighted include declining demand for traditional printed products as digital alternatives expand; weak volumes and price competition; inflation and recovery of paper, freight, energy and labor costs; dependence on a limited number of suppliers; distributor consolidation; and the ability to integrate acquisitions. The company noted that some paper-supplier rebate programs require minimum purchase volumes.
- Cash concentration is notable: $99.3 million was above federal deposit-insurance limits at August 31, 2023. Management did not believe deposits presented significant risk but could not assure against losses.
- In an ordinary-course lawsuit, a subsidiary received an amended $5.85 million judgment in September 2023. The amount was not reflected in the August 31 financial statements and will be recorded when collected. Management stated that ordinary-course claims are not expected to materially affect the financial statements.
- Management reported disclosure controls were effective and no material changes to internal control over financial reporting during the six-month period. No material changes to the previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether legacy-volume weakness continues and whether acquired revenue can offset declines without further margin deterioration.
- Integration progress and final purchase-price allocations for Stylecraft and UMC; also the contingent earn-out tied to the School Photo Marketing acquisition.
- Cash deployment, including acquisition spending, dividends, capital expenditures and any future share repurchases; $23.9 million remained under the repurchase authorization, with no repurchases in the period.
- Collection and accounting treatment of the $5.85 million judgment, and the timing and amount of any related cash proceeds.
- The filing’s MD&A describes a quarterly disposal loss of approximately $0.5 million, while the income statement reports $52,000; investors should verify this apparent discrepancy.
- Ongoing liquidity exposures from uninsured bank deposits, pension funding requirements and supplier concentration.