ENNIS, INC. — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended August 31, 2021; comparisons are to the same periods in 2020 unless stated otherwise. Ennis manufactures and sells commercial printing products primarily through U.S. independent distributors and reports as one segment. Figures below are in U.S. dollars; financial statement amounts are rounded to millions.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $100.5m, up 16.0% | $197.4m, up 12.4% |
| Gross profit / margin | $28.9m / 28.8% (29.0% prior year) | $58.1m / 29.4% (27.9% prior year) |
| Operating income / margin | $10.8m / 10.8% (10.3% prior year) | $21.4m / 10.8% (8.4% prior year) |
| Net earnings | $7.5m, versus $6.4m | $14.8m, versus $10.6m |
| Diluted EPS | $0.29, versus $0.25 | $0.57, versus $0.41 |
- Quarterly SG&A was $18.1m, up 9.4%, but declined to 18.0% of sales from 19.1%. Six-month SG&A rose 6.8% to $37.0m and declined as a share of sales to 18.8% from 19.7%.
- Effective tax rate increased to 30% from 26% in both comparisons; management attributed the increase primarily to nondeductible expense related to probable distributions from a terminated deferred compensation plan.
- Cash dividends were $0.25 per share for the quarter and $0.475 per share for the six months, compared with $0.225 and $0.45, respectively, a year earlier.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $24.5m, down from $28.2m. Cash increased $6.9m to $82.1m. Investing used $5.2m, including $3.9m for AmeriPrint and $2.1m of capital expenditures; financing used $12.4m, principally dividends.
- Working capital was $121.4m, up $8.4m from February 28, 2021. Current ratio was 4.0 versus 4.2; quick ratio was 3.01 versus 3.29. Inventory rose to $40.2m from $32.9m.
- No revolving credit borrowings were outstanding. The $100m credit facility had $99.4m of available capacity after $0.6m of standby letters of credit. The company was covenant-compliant. The facility was due to expire November 11, 2021, and management was considering not renewing it or renewing with a smaller limit.
- Total liabilities were $67.9m, including $18.2m of operating lease liabilities. The balance sheet also included a $6.3m unfunded pension liability. No material change in contractual obligations was reported.
Material changes, outlook and risks
- Sales growth reflected improving customer demand and acquisitions. Infoseal and AmeriPrint contributed $6.7m of quarterly sales and $11.9m for the six months; management said the acquisitions added $0.02 and $0.04 to diluted EPS, respectively. AmeriPrint was acquired June 1, 2021 for approximately $3.9m.
- Management reported that prior cost reductions—including workforce reductions, facility exits and production consolidation—supported six-month margin improvement. Inflation in paper, freight, labor and other inputs pressured quarterly gross margin; management said additional pricing adjustments were anticipated and pricing in fiscal 2022’s second half was expected to increase.
- No specific earnings or revenue guidance was provided. Management expected current-year capital expenditures, excluding acquisitions, to be within the historical $3m–$5m range and said cash and operating flows should fund anticipated expenditures. It also noted that stable pension funding could require annual contributions of approximately $1m–$3m; the minimum required contribution for the pension year ending February 28, 2022 was zero.
- Management estimated future lump-sum pension payments would likely trigger an approximately $2.3m noncash settlement charge. Actual pension funding and settlement outcomes may vary with investment returns, discount rates and payments.
- COVID-19 effects remained uncertain, including possible Delta-variant impacts on demand, workforce and operations. Other cited risks include declining demand for traditional forms as digital alternatives expand, paper supply constraints and price increases, limited key suppliers, intense price competition, customer consolidation, and the company’s ability to recover higher costs. Approximately $81m of cash deposits exceeded FDIC insurance limits.
- There were no material pending legal proceedings beyond routine litigation, and no material changes to the risk factors previously reported in the annual filing. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the credit facility was renewed, replaced or allowed to expire, and the resulting borrowing capacity and terms.
- Whether announced pricing actions offset paper, freight, labor and other cost inflation without weakening demand or margins.
- How inventory growth and working-capital movements affect cash conversion in subsequent periods.
- Whether the anticipated pension settlement charge occurs and how pension funding needs change.
- How COVID-19 developments, traditional-form demand declines and customer or supplier concentration affect operating results.