Business context and reporting period
Ennis, Inc. filed this unaudited Form 10-Q for the quarter and nine months ended November 30, 2016. The continuing business manufactures and sells business forms and other printed products, primarily through independent distributors. The Apparel Segment is reported as discontinued operations following its sale to Gildan Activewear on May 25, 2016. Comparative-period results were recast for discontinued-operations presentation.
Financial performance
| Metric | Three months ended Nov. 30, 2016 | Prior-year quarter | Nine months ended Nov. 30, 2016 | Prior-year nine months |
|---|---|---|---|---|
| Net sales, continuing operations | $88.7 million | $97.5 million | $270.3 million | $294.7 million |
| Gross profit / margin | $25.3 million / 28.5% | $29.7 million / 30.5% | $79.0 million / 29.2% | $91.0 million / 30.9% |
| Operating income | $9.2 million | $13.7 million | $30.8 million | $42.8 million |
| Continuing-operations earnings | $5.7 million; diluted EPS $0.22 | $8.6 million; diluted EPS $0.33 | $19.2 million; diluted EPS $0.74 | $27.0 million; diluted EPS $1.05 |
| Consolidated net earnings (loss) | $5.7 million | $10.7 million | $(4.4) million; diluted EPS $(0.17) | $30.9 million; diluted EPS $1.20 |
| Operating cash flow | Not presented separately for the quarter | Not presented separately for the quarter | $42.6 million | $78.6 million |
Dollar amounts are in U.S. dollars. Operating cash flow for the nine-month period includes cash flows associated with discontinued operations.
Liquidity, debt and capital
- At November 30, cash was $87.9 million, compared with $8.0 million at February 29, 2016. The increase primarily reflects proceeds from the Apparel Segment sale.
- Working capital was $132.9 million and the current ratio was 6.4:1, versus $138.6 million and 4.4:1 at February 29, 2016.
- Revolving-credit borrowings were $30.0 million; approximately $68.1 million of capacity remained after $1.9 million in standby letters of credit. The $100 million facility matures August 2020 and bears interest at 1.9% at quarter-end. The facility is secured by substantially all company assets other than real property.
- Nine-month investing cash flow was $104.9 million, including $107.4 million in sale proceeds. Financing cash outflow was $67.6 million, including $52.7 million of dividends, $10.0 million of debt repayment and $7.8 million of share repurchases.
- The company paid a special dividend of $1.50 per share in connection with the sale; nine-month dividends totaled $2.025 per share. A quarterly dividend of $0.175 per share was declared after quarter-end.
- Capital expenditures were $1.9 million through November 30; management expected full-year spending of $2 million to $4 million. The balance-sheet pension liability was $10.6 million; management expected fiscal 2017 contributions of $2 million to $3 million.
Material changes and unusual items
- Sales declined 9.0% in the quarter and 8.3% year to date. Management cited a soft market, intensified pricing pressure, lower-priced imported paper, normal industry attrition and the absence of material print acquisitions while the Apparel Segment sale was completed.
- The Apparel Segment was sold for $110 million cash, subject to working-capital adjustment. The reported nine-month after-tax loss on sale was $26.0 million, or $1.01 per share; the sale calculation also included a $16.1 million write-off of accumulated foreign-currency translation adjustments. The company stated it expects to treat the sale loss as an operating loss for tax purposes.
- Higher-than-historical medical claims increased expenses by $2.0 million in the quarter and $4.25 million year to date, reducing reported margins and earnings. Management is implementing health-plan changes and a cost-reimbursement program, but savings are uncertain.
- The Folder Express operations relocation from Nebraska to Kansas reduced nine-month sales by an estimated $5.5 million and operating results by an estimated $2.685 million; management said the operation was marginally profitable in the quarter and the move no longer adversely affected third-quarter results.
- Management’s non-GAAP adjustments for medical costs and relocation yielded adjusted gross margin of 30.1% for the quarter and 31.4% year to date, and adjusted diluted EPS of $0.27 and $0.91, respectively. These are company-defined supplemental measures, not GAAP results.
Outlook, commentary and risks
No specific revenue or earnings guidance was provided. Management said it expects adequate operating cash flow and credit availability for foreseeable requirements, plans to pursue acquisitions to offset industry declines and improve cost leverage, and expects transition services for Gildan to end in the fourth fiscal quarter. It expects medical-plan changes to move claim costs toward historical levels, while noting actual savings may differ. The company reported no material changes to previously disclosed risk factors and no material pending legal proceedings beyond routine litigation.
Key risks cited include continued contraction and digitization of traditional print markets, customer consolidation, intense price competition and foreign imports, dependence on a limited number of paper suppliers, input-cost recovery, technological change, execution of acquisitions and cost initiatives, customer credit risk, and possible goodwill impairment. The company also disclosed that $86.6 million of cash was above FDIC-insured limits at quarter-end.
Investor verification priorities
- Verify continuing-operations performance separately from discontinued Apparel results and the substantial sale-related loss.
- Assess whether medical-cost savings and the improved Folder Express performance persist, and distinguish reported GAAP results from management’s adjusted measures.
- Review the sale’s final working-capital adjustment, indemnification exposure and tax treatment.
- Monitor cash deployment, dividends and repurchases against credit-facility covenants, available borrowing capacity and operating needs.
- Evaluate ongoing sales and margin pressure, supplier concentration, pension funding needs and uninsured cash concentration.