Ennis, Inc. — Q3 FY2020 Form 10-Q
Reporting period: Three and nine months ended November 30, 2019; amounts below are unaudited. Ennis manufactures and sells commercial printing products, primarily through independent distributors in the United States.
Financial performance
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $114.9 million, up 6.3% | $331.7 million, up 10.5% |
| Gross profit / margin | $33.8 million / 29.5%, versus 31.2% | $99.0 million / 29.8%, versus 31.4% |
| Operating income / margin | $14.1 million / 12.3%, versus 12.9% | $39.9 million / 12.0%, versus 13.1% |
| Net earnings | $10.6 million, versus $10.4 million | $29.7 million, versus $29.2 million |
| Diluted EPS | $0.41, versus $0.40 | $1.14, unchanged |
| Cash dividends per share | $0.225, unchanged | $0.675, versus $0.650 |
- Cash flow, nine months: Operating cash flow was $44.4 million, compared with $36.7 million. Investing used $21.5 million; financing used $50.1 million, including $30.0 million of debt repayment, $17.6 million of dividends, and $2.5 million of share repurchases.
- Liquidity and debt: Cash was $61.3 million at November 30, down from $88.4 million at February 28, 2019. Working capital was $106.5 million; current ratio was 3.8, versus 5.3. No revolving debt was outstanding; approximately $99.3 million of borrowing capacity remained, after $0.7 million in letters of credit. The credit facility matures August 11, 2020, and the company reported covenant compliance.
- Balance sheet: Total assets were $367.1 million and shareholders’ equity was $300.4 million. Operating lease liabilities totaled $20.6 million.
Changes and key drivers
- Reported sales growth reflected acquisitions: Integrated Print & Graphics and The Flesh Company contributed approximately $12.2 million to Q3 sales and $45.7 million to nine-month sales. The acquisitions also diluted margins while Ennis integrates their operations and cost systems.
- Excluding the recent acquisitions, management said margins at other plants were approximately 31.3% for the quarter and above 31.5% for the nine-month period. Management expects acquired-plant margins to improve as integration and cost-system work progresses; no quantified timetable or target was provided.
- Higher raw-material costs and difficulty passing all increases on to customers also pressured year-to-date margins. Ennis said material prices had softened and expected prices to remain relatively stable until at least the second half of fiscal 2021, while noting uncertainty by paper grade and market conditions.
- Acquisition activity included Integrated, acquired in March 2019 for $8.9 million cash, and Flesh, acquired in July 2019 for approximately $9.9 million, including potential earn-out consideration of up to $0.5 million. Both purchase-price allocations were preliminary.
- Ennis adopted lease accounting (ASC 842) on March 1, 2019, recording $18.0 million of right-of-use assets and $18.2 million of lease liabilities at adoption. The company said adoption did not affect equity, earnings, or cash flows.
Outlook, risks, and other items
- No formal earnings or revenue guidance was provided. Management expected operating cash flow, with the credit facility available if needed, to fund foreseeable operating and capital requirements. Current-year capital expenditures were expected to be within the historical $3–$5 million range; $2.7 million had been spent by the filing date.
- Management cited industry contraction and product obsolescence, digital substitution, price competition, customer consolidation, increased imports, and dependence on a limited number of paper suppliers. It also noted risks from raw-material cost recovery, acquisition integration, economic conditions, and potential goodwill impairment.
- The minimum required pension contribution for the plan year ending February 29, 2020 was zero. Assuming stable funding, expected future contributions were $1.3–$1.5 million annually, subject to investment-return and discount-rate changes.
- At November 30, $59.6 million of cash was above FDIC-insured limits. Management did not believe this presented significant risk but gave no assurance against losses.
- The board declared a $0.225-per-share quarterly dividend on December 19, payable February 7, 2020. Ennis reported no material pending legal proceedings, no material changes to previously reported risk factors, and effective disclosure controls.
Important facts for investors to verify
- How much of reported sales growth is sustainable organically: pro forma sales assuming the acquisitions were in place from March 1, 2018 were lower year over year for both Q3 and the nine-month period.
- Whether acquired businesses achieve the margin improvement management anticipates, and how much integration costs or disruption remain.
- Whether Ennis can pass through raw-material costs and maintain margins amid imports, weak demand, and intense pricing competition.
- The credit facility’s August 2020 maturity and any refinancing or replacement arrangements; the filing gives no update on a completed extension.
- Cash deployment, including dividends and repurchases, relative to liquidity needs, acquisition plans, and the company’s substantial uninsured bank deposits.