Ennis, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended November 30, 2014; comparative periods ended November 30, 2013. Amounts below are in millions of dollars unless otherwise noted.
Business context and results
Ennis operates Print and Apparel segments. Print makes business forms and other printed products, primarily for distributors; Apparel, operating as Alstyle, makes activewear. Consolidated sales growth was supported by acquisitions, while management described weak market conditions and pricing pressure, particularly in Apparel.
| Metric | Quarter 2014 | Quarter 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net sales | $147.0 | $136.6 | $440.0 | $410.3 |
| Gross profit | $36.5 | $37.8 | $110.1 | $110.2 |
| Gross margin | 24.8% | 27.7% | 25.0% | 26.9% |
| Operating income (loss) | $(80.6) | $15.4 | $(50.6) | $44.9 |
| Net income (loss) | $(71.2) | $9.3 | $(53.1) | $27.7 |
| Diluted EPS | $(2.76) | $0.36 | $(2.05) | $1.06 |
The reported losses include a $93.3 million non-cash impairment charge for Apparel goodwill and trademarks. Excluding that charge, Ennis reported operating income of $12.7 million and net income of approximately $7.9 million for the quarter; for nine months, operating income of $42.7 million and net income of approximately $26.0 million. These are company-presented non-GAAP figures, not replacements for reported results.
Segment performance and changes
- Print: Sales rose 8.9% for the quarter and 13.5% for nine months, to $97.7 million and $283.9 million. Acquisitions contributed $12.3 million in quarterly sales and $47.3 million for nine months; other Print locations’ sales declined 4.8% and 5.4%, respectively. Nine-month Print gross margin improved to 30.6% from 30.2%; quarterly margin was 30.2% versus 30.8%.
- Apparel: Sales rose 5.1% for the quarter to $49.3 million but fell 2.6% for nine months to $156.1 million. Gross margin fell to 14.2% for the quarter and 14.8% for nine months, from 21.7% in both comparable periods, reflecting input costs, lower selling prices and weaker manufacturing efficiency. Pre-impairment segment profit was $0.1 million for the quarter and $2.2 million for nine months.
- The $93.3 million impairment comprised $55.9 million of Apparel goodwill and $37.4 million of trademarks. Management said the analysis was substantially complete but would be finalized in the fourth quarter; the Print impairment review was also still to be completed.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $46.4 million, versus $38.6 million a year earlier. Investing used $12.4 million, compared with $64.9 million, largely because prior-year acquisition spending was higher. Financing used $24.2 million, versus $28.9 million provided in the prior period.
- Cash was $14.7 million at November 30, up from $5.3 million at February 28, 2014. Working capital was $178.7 million; the current ratio was 5.3 to 1.
- Revolving debt was $101.5 million, down from $105.5 million at February 28. The $150 million facility had approximately $45.7 million available after borrowings and standby letters of credit. The facility matures August 2016; Ennis reported covenant compliance at November 30. Debt is variable-rate and secured by substantially all domestic assets and specified subsidiary equity.
- Capital expenditures were $1.6 million for nine months. Management expected fiscal-year capital expenditures of $4–5 million, excluding acquisitions. It expected operating cash flow and available credit to cover foreseeable operating and capital needs.
- Ennis expected to contribute $2–3 million to its pension plan in fiscal 2015, despite no minimum required contribution for that plan year; the recorded unfunded pension liability was $2.7 million.
Outlook, risks and other notable items
- No quantified earnings or sales guidance was provided. Management expected challenging Apparel conditions to continue through the rest of the fiscal year and into the next, while pursuing new sales programs and channels. Their success was uncertain.
- Management cited structural decline in traditional printed forms from digital alternatives, industry overcapacity and price competition, volatile paper costs, and difficulty passing through cost increases. Apparel risks include weak retail demand, international competition, cotton and other input-cost volatility, and production inefficiencies at the Mexico facility.
- Further impairment charges remain possible if performance or assumptions about future cash flows deteriorate. Management said the current impairment estimate could change when finalized.
- On December 19, 2014, the board declared a $0.175-per-share quarterly dividend and authorized an additional $10 million for repurchases. On December 31, Ennis completed the $16 million Kay Toledo acquisition, funded through its credit line; up to $1 million more may be earned under an earn-out.
- Management reported effective disclosure controls and no material change in internal control over financial reporting. No material pending legal proceedings or material changes to previously disclosed risk factors were reported. The company had no off-balance-sheet arrangements.
Most important facts for investors to verify
- Final impairment valuation, including any adjustment to the $93.3 million charge and the outcome of the Print Segment review.
- Whether Apparel margins and operating performance improve, and whether new sales initiatives offset weak demand and price pressure.
- Underlying Print growth and profitability after separating acquisition contributions from declines at existing locations.
- Credit-facility availability, covenant headroom and debt impact after the subsequent Kay Toledo purchase.
- Operating cash generation, planned pension contributions, dividends and share repurchases amid reported losses.