Ennis, Inc. — FY2016 Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2016; the filing was signed May 11, 2016. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless stated otherwise.
Business context
Ennis manufactured and sold business forms and other printed products through its Print segment, and blank activewear through its Apparel segment (Alstyle). Print contributed 68% of FY2016 sales and Apparel 32%. The filing reports 2016 results before the subsequently announced sale of Apparel.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $569.0 million | $580.2 million |
| Gross profit / margin | $152.7 million / 26.8% | $145.5 million / 25.1% |
| Operating income (loss) | $56.3 million | $(37.7) million |
| Net earnings (loss) | $35.7 million | $(44.5) million |
| Diluted earnings (loss) per share | $1.39 | $(1.72) |
| Cash from operating activities | $87.2 million | $65.3 million |
- Print sales rose 1.4% to $385.9 million; acquisitions added $28.7 million, partly offset by a $23.2 million decline at other Print locations. Print gross margin was 30.1% versus 30.3%.
- Apparel sales fell 8.5% to $183.0 million amid weak lower-end retail demand and competition. Apparel gross margin improved to 19.9% from 15.2%, helped by lower cotton costs, improved efficiencies and relatively stable selling prices.
- FY2016 included a $4.1 million non-cash Apparel trademark impairment. FY2015 included $93.3 million of Apparel goodwill and trademark impairment. Excluding impairment, management reported FY2016 net earnings of $38.4 million, compared with $34.6 million in FY2015; this is a company-presented non-GAAP measure.
- Cash from operations increased by $21.9 million. Investing used $4.1 million, including $4.8 million of capital expenditures; financing used $84.6 million, including $66.5 million of debt repayment and $18.0 million of dividends.
- At year-end, cash was $10.4 million, working capital $138.6 million, and the current ratio 4.43:1. Long-term debt was $40.0 million, down from $106.5 million; shareholders’ equity was $298.5 million. Revolver availability was approximately $107.9 million after letters of credit.
- Annual dividends were $0.70 per share. No shares were repurchased during FY2016.
Material changes, outlook and risks
- Consolidated sales declined 1.9% year over year. Fourth-quarter FY2016 sales were $128.2 million and net earnings were $4.8 million; the quarter included the $4.1 million trademark impairment. Management also cited acquisition earn-out expense and costs and lost sales associated with moving a folder operation from Omaha to Columbus.
- After year-end, Ennis agreed to sell Apparel to Gildan for $110 million cash, subject to working-capital adjustment and closing conditions. The agreement replaced an earlier $88 million offer; Gildan funded the $3 million termination fee on that agreement. Closing was anticipated in the second fiscal quarter, subject to customary conditions and regulatory approvals. The transaction had not closed as of the filing. Management preliminarily estimated a pre-tax sale loss of $25–$35 million, assuming closing by the end of June 2016; the segment was not classified as held for sale or discontinued operations at February 29.
- Management expected FY2017 capital expenditures of $4–$5 million, funded from cash flows, and pension contributions of $2–$3 million. It stated that operating cash flows and available credit were expected to meet normal requirements. These expectations are subject to business and market risks.
- The credit facility’s stated maturity was August 2016; the company had received a binding lender commitment to extend it to August 2017. Ennis reported covenant compliance at year-end and paid down another $5 million through May 11, 2016.
- Key risks include structural decline in demand for printed documents, intense price competition, raw-material and freight cost volatility, reliance on limited suppliers (one supplier provided 43% of Apparel yarn), foreign competition and trade-policy changes, labor and customer-credit risks, and potential further impairments. The pension liability was $8.7 million; management estimated a 10-basis-point discount-rate change could affect the computed liability by about $0.9 million.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions on the financial statements and internal controls. Ordinary-course litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the Gildan sale closed, final proceeds after working-capital adjustments and other terms, and the realized sale loss and tax treatment.
- Post-sale revenue, earnings, cash flow and capital allocation, including whether the dividend is sustained after Apparel is divested.
- Print segment sales trends excluding acquired businesses, and recovery of costs and lost sales from the folder-plant relocation.
- Whether the Apparel segment’s improved gross margin was sustainable before divestiture, and whether any additional impairment or transaction costs arose.
- Debt-facility extension terms, covenant headroom, and cash generation after the substantial FY2016 debt repayment.