ENNIS, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2014. Amounts are in U.S. dollars; financial statement amounts are in thousands unless otherwise noted. Ennis manufactures printed business products and activewear through its Print and Apparel segments.
Financial results
| Metric | Three months 2014 | Three months 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net sales | $151.8 million | $135.3 million | $293.0 million | $273.8 million |
| Gross profit | $38.2 million | $36.7 million | $73.6 million | $72.5 million |
| Gross margin | 25.1% | 27.1% | 25.1% | 26.5% |
| Operating income | $16.4 million | $15.8 million | $30.0 million | $29.4 million |
| Net earnings | $10.0 million | $9.8 million | $18.0 million | $18.3 million |
| Diluted EPS | $0.39 | $0.38 | $0.69 | $0.70 |
- Quarterly sales rose 12.2%; six-month sales rose 7.0%. Growth was driven by print acquisitions, not broad-based organic growth.
- Print sales increased 23.9% for the quarter and 16.1% for six months, including $21.1 million and $35.0 million, respectively, from recent acquisitions. Sales at other print locations declined 2.8% for the quarter and 5.7% for six months.
- Apparel sales declined 4.1% for the quarter and 5.8% for six months. Apparel gross margin fell to 14.3% from 23.1% for the quarter and to 15.1% from 21.7% for six months, reflecting lower selling prices and higher input costs.
- Print margins improved: 31.1% versus 30.0% for the quarter and 30.8% versus 29.9% for six months, supported by acquisition integration and operating efficiencies.
- Six-month operating cash flow was $32.3 million, down from $40.1 million. Investing used $11.4 million, including $10.5 million for the Sovereign Business Forms acquisition; financing used $12.6 million.
Balance sheet, liquidity and capital
- At August 31, 2014, cash was $13.8 million, working capital $179.3 million, and the current ratio 5.1 to 1. Total assets were $546.0 million.
- Revolving credit debt was $104.0 million, down from $105.5 million at February 28, 2014. The $150 million facility matures August 18, 2016; $3.3 million of letters of credit left approximately $42.7 million available. The company reported covenant compliance.
- Six-month dividends were $0.35 per share, or $9.1 million in total. The board declared a further $0.175 quarterly dividend payable November 3, 2014. The company repurchased 138,551 shares during the six-month period for $2.1 million.
- Capital expenditures were $0.9 million through August 31; management expected full-year fiscal 2015 spending of $4–5 million, excluding possible acquisitions. Management expected operating cash flow and the credit facility to meet foreseeable requirements.
- Management expected a $2–3 million fiscal 2015 pension contribution, although minimum required contributions were zero under the applicable funding rules.
Changes, outlook and risks
- The June 2014 Sovereign Business Forms acquisition cost $10.5 million in cash, funded with credit-line borrowings, plus assumed trade liabilities; up to $1.0 million more may be payable under a four-year earn-out. It contributed $6.3 million in sales and $1.1 million in pretax earnings during the six-month period.
- Higher print earnings and lower SG&A, including lower bad-debt expense, were offset by sharply weaker Apparel results. Six-month interest expense increased to $1.0 million from $0.5 million due to acquisition-related borrowings.
- No earnings or revenue guidance was provided. Management described the Apparel market as weak and highly price competitive, and said new sales programs and channels might improve results; their success was uncertain. Management warned continued underperformance could require another Apparel impairment charge in fiscal 2015. No impairment was recorded in the six months ended August 31.
- Key exposures include secular substitution of printed forms by digital alternatives; paper, cotton, yarn and other input-cost volatility and limited suppliers; competitive pricing and weak retail demand; production and utility disruptions at the Mexico apparel facility; acquisition integration; and possible goodwill or intangible-asset impairment. Management planned its annual impairment analysis for the fiscal fourth quarter.
- A 100-basis-point change in interest rates on outstanding variable-rate debt would affect annual results by approximately $1.0 million. A uniform 10% strengthening of the U.S. dollar against the company’s currency exposures was estimated to reduce fair value and results by approximately $0.3 million.
- The company was evaluating the effect of the new revenue-recognition standard, ASU 2014-09. Management reported effective disclosure controls, no material changes to internal control, no material change in previously disclosed risk factors, and no material pending legal proceedings beyond routine matters.
Most important facts for investors to verify
- How much of future print growth is organic versus acquisition-driven, and whether acquired operations deliver expected efficiencies.
- Whether Apparel pricing, volume and margins stabilize, and whether further impairment becomes necessary.
- Debt, borrowing availability, covenant compliance and interest-cost sensitivity as acquisitions and shareholder distributions continue.
- Cash conversion and working-capital trends, including inventory, receivables and the planned pension contribution.
- Final purchase-price allocations and any earn-out obligation for Sovereign, and the outcome of the annual impairment review.