Ennis, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2021. Ennis manufactures and sells commercial printing and business products, primarily through independent distributors in the United States, and reports as one segment. Amounts below are in millions except per-share data and ratios.
Financial performance and condition
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Net sales | $103.0 | $92.4 | $300.3 | $268.1 |
| Gross profit / margin | $29.2 / 28.4% | $28.1 / 30.4% | $87.3 / 29.1% | $77.2 / 28.8% |
| Operating income / margin | $11.7 / 11.3% | $11.6 / 12.5% | $33.0 / 11.0% | $26.4 / 9.8% |
| Net earnings | $7.6 | $8.4 | $22.3 | $19.0 |
| Diluted EPS | $0.29 | $0.32 | $0.85 | $0.73 |
| Operating cash flow | Not provided for the quarter | $34.3 | $40.8 |
- Quarterly sales rose 11.5% year over year, including $7.8 million attributed to Infoseal and AmeriPrint. Net earnings fell about 9.6%; gross margin declined 2.0 percentage points.
- Nine-month sales increased 12.0% and net earnings increased about 17.7%. Gross margin improved 0.3 percentage points and operating margin improved 1.2 points.
- Quarterly cost of goods sold rose 14.6%, faster than sales, amid inflation and costs associated with consolidating underperforming facilities. SG&A rose 4.8% in the quarter and 6.2% year to date, partly reflecting acquisitions.
- Other expense included a $0.7 million noncash pension settlement charge during the quarter and nine-month period. The filing estimates approximately $1.2 million in total settlement charges will be probable as lump-sum payments continue.
- Effective tax rate was 30% for both the quarter and nine months, compared with 26% in the prior-year periods; management cited nondeductible expense related to probable deferred-compensation-plan distributions.
Liquidity, debt and capital allocation
- At November 30, cash was $81.0 million; working capital was $123.6 million, up $10.6 million from February 28. The current ratio was 4.2 and the quick ratio was 3.18.
- Cash increased $5.8 million over the nine months. Operating cash flow was $34.3 million; investing cash outflow was $7.7 million, including $4.3 million for acquisitions and $4.1 million in capital expenditures; financing cash outflow was $20.9 million, primarily dividends and share repurchases.
- No revolving-credit borrowings were outstanding. The credit agreement expired November 11, 2021 and was not renewed. The company had $0.6 million outstanding under standby letters of credit, secured by cash collateral.
- Nine-month dividends were $0.725 per share ($18.9 million total); the board subsequently declared a $0.25-per-share dividend payable February 3, 2022. The company repurchased 102,757 shares for $1.9 million during the nine months, with $7.9 million remaining under its authorization.
- The balance sheet included a $5.3 million unfunded pension liability. A $1.0 million pension contribution was made in November; management estimated future annual contributions of $1.0–$3.0 million assuming stable funding status.
Management outlook, risks and notable items
- Management said cash and operating cash flows should be sufficient for foreseeable operating and capital needs. Fiscal 2022 capital expenditures, excluding acquisitions, were expected within the historical range of $3–$5 million. No earnings or revenue guidance was provided.
- Management reported that sales and activity had improved as pandemic effects eased, but said it could not reliably forecast the pandemic’s ultimate impact. Labor availability, supply-chain disruptions, and COVID-19 variants remain uncertainties.
- Paper availability was tight and prices were rising: management cited uncoated paper prices up 20% and coated paper up 25% year over year, with further increases expected. It planned additional pricing adjustments to address paper, other supplier, and labor-cost inflation; recovery of costs in competitive markets is uncertain.
- Other risks include traditional forms being displaced by digital alternatives, customer and industry consolidation, dependence on a limited number of suppliers, price competition, acquisition integration, and potential goodwill impairment. Management said no material changes had occurred to the risk factors in its latest 10-K.
- Ennis acquired AmeriPrint in June 2021 for approximately $3.9 million and an Illinois digital operation in October for $0.4 million; the latter was deemed immaterial. The company also consolidated three facilities during the period. No material legal proceedings were reported, and management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether pricing actions offset continued paper, freight, labor, and other input-cost inflation without further reducing gross margins.
- Whether inventory growth and working-capital needs affect operating cash generation; inventories rose to $40.4 million from $32.9 million at February 28.
- Whether sales recovery persists and acquired businesses deliver the expected contribution, while demand for traditional forms continues to shift toward digital alternatives.
- The final pension settlement charge and future funding requirements, which depend on lump-sum payments, investment returns, and discount rates.
- The implications of the expired, nonrenewed credit agreement and the company’s cash-collateralized letters of credit arrangement.