Ennis, Inc. — Form 10-Q summary
Business context and period: The unaudited report covers the three months ended May 31, 2017, Ennis’s first quarter of fiscal 2018, compared with the quarter ended May 31, 2016. Ennis manufactures and sells business forms and other printed products, primarily through independent distributors. Results are for continuing operations; the former Apparel Segment is presented as discontinued operations.
Key financial results
Unless noted otherwise, figures are in millions of dollars.
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $94.6 | $90.4 |
| Gross profit / margin | $29.9 / 31.6% | $26.7 / 29.5% |
| Income from operations / margin | $12.5 / 13.2% | $10.6 / 11.7% |
| Continuing-operations earnings | $7.8 | $6.7 |
| Diluted EPS from continuing operations | $0.31 | $0.26 |
| Net earnings (loss) | $7.8 | ($16.9) |
| Operating cash flow | $12.3 | $15.0 |
- Sales grew 4.6%. Independent Printing, acquired in January 2017, contributed $9.7 million of sales and approximately $1.2 million of income in the quarter.
- Gross margin increased 2.1 percentage points. SG&A rose 8.1% to $17.4 million and increased to 18.4% of sales from 17.8%.
- Prior-year net loss included a $23.6 million after-tax loss from discontinued operations, primarily related to the sale of the Apparel Segment. The current quarter had no discontinued-operations results.
- Cash provided by operating activities was $12.3 million. Capital expenditures were $0.7 million; cash used in investing activities was $0.7 million. Cash used in financing activities was $7.8 million, including $4.5 million of dividends and $3.3 million of share repurchases.
Liquidity, debt and capital
- At May 31, 2017, cash was $84.3 million, working capital was $122.9 million and the current ratio was 5.2:1.
- Long-term debt under the revolving facility was $30.0 million, unchanged from February 28, 2017. The $100 million facility matures in August 2020; approximately $68.8 million remained available after $1.2 million of standby letters of credit. The borrowing rate was 2.2%, and the company reported compliance with its covenants.
- The company paid a $0.175-per-share quarterly dividend and repurchased 191,033 shares at an average $17.33 per share. $18.4 million remained authorized for repurchases at quarter-end.
Changes, outlook and risks
- Management attributed the sales increase partly to Independent, while noting a soft market and intensified pricing pressure from lower-cost imported paper. Independent contributed $2.4 million of SG&A expense; management said it would seek to bring the acquired business’s SG&A rate closer to Ennis’s historical level.
- Management said the prior-year comparison was affected by approximately $1.3 million of costs associated with relocating folder operations; that operation had returned to margins more in line with historical levels by the second half of fiscal 2017.
- Beginning March 1, 2017, Ennis began amortizing previously indefinite-lived trademarks and trade names over estimated remaining lives of approximately 17–19 years. The change added about $0.2 million of SG&A in the quarter; the company expected approximately $0.83 million of expense in fiscal 2018.
- No specific revenue or earnings guidance was provided. Management expected fiscal 2018 capital expenditures of $3–$5 million and pension contributions of $2–$3 million, and said operating cash flow and available credit should cover foreseeable requirements. It cautioned that early indications from changes to its health plan were positive but savings could vary.
- Key stated risks include secular declines in traditional print demand, digital substitution, price competition and cheaper imports, customer consolidation, dependence on a limited number of paper suppliers, acquisition integration, customer credit risk, variable interest rates, pension funding and potential goodwill impairment. A one-percentage-point rate change on quarter-end variable-rate borrowings would affect annual results by approximately $0.3 million.
- The company reported no material changes to its previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and no off-balance-sheet arrangements. Disclosure controls were reported effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- How much of reported sales and earnings growth is attributable to Independent, and whether its operating costs improve with integration.
- Whether gross-margin improvement is sustainable amid print-industry contraction, import competition and pricing pressure.
- Actual fiscal 2018 pension contributions, capital spending and health-plan savings compared with management’s expectations.
- Cash deployment among dividends, repurchases, acquisitions and debt reduction, including compliance with credit-facility covenants.
- The effect of ongoing trademark amortization and any future impairment assessments on reported earnings.