Ennis, Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2015, the three months ended May 31, 2014; comparative period is the three months ended May 31, 2013. Ennis manufactures business forms and other printed products (Print) and activewear (Apparel).
Financial performance and position
- Sales: $141.2 million, up 1.9% year over year. Print sales rose 8.6% to $88.4 million; Apparel sales fell 7.4% to $52.8 million.
- Profitability: Gross profit was $35.4 million, down 1.1%; gross margin contracted to 25.1% from 25.9%. Operating income was essentially unchanged at $13.6 million, while net earnings declined to $8.0 million from $8.5 million. Diluted EPS was $0.31 versus $0.33.
- Segment trends: Print gross margin improved to 30.5% from 29.7%, and segment earnings before tax increased to $15.5 million from $13.4 million. Apparel gross margin fell to 16.0% from 20.3%; segment earnings before tax declined to $1.2 million from $4.4 million.
- Cash flow: Operating cash flow was $13.3 million, down from $21.6 million. Capital expenditures were $0.3 million; cash dividends and treasury-stock purchases were $4.6 million and $0.9 million, respectively. Cash increased to $13.3 million from $5.3 million at February 28.
- Liquidity and debt: Working capital was $179.8 million and the current ratio was 5.2:1. Revolver borrowings were $105.5 million, unchanged from February 28; approximately $41.2 million remained available after $3.3 million of letters of credit. The company reported compliance with debt covenants. Total assets were $541.9 million.
- Capital returns: The company declared a $0.175 per-share dividend and repurchased 58,051 shares at an average $14.96 per share during the quarter.
Material changes and management commentary
- Print’s sales growth reflected approximately $13.9 million from recent acquisitions, partly offset by an 8.5% decline at other Print locations. Management attributed weakness in both segments partly to severe winter weather.
- Print profitability benefited from acquisition integration and improved operating efficiencies. Apparel was pressured by lower sales volume and selling prices, higher input costs, and continued market softness and price competition.
- Interest expense rose to $0.5 million from $0.3 million, principally reflecting debt used to fund acquisitions. Selling, general and administrative expense declined to $21.8 million from $22.2 million, including lower bad-debt expense and integration savings.
- On June 16, 2014, after quarter-end, Ennis acquired Sovereign Business Forms and related businesses for $10.5 million plus assumed trade liabilities, with up to $1.0 million of additional earn-out consideration. The acquired businesses had approximately $27.1 million of 2013 sales; purchase-price allocation was not yet complete.
Outlook, risks and contingencies
- Management expected current-year capital expenditures, excluding acquisitions, to be $4–$5 million and expected to fund them from operating cash flow. It anticipated sufficient operating cash flow and revolver capacity for foreseeable needs.
- Management expected a $2–$3 million pension contribution in fiscal 2015, although the statutory minimum contribution was zero. The recorded unfunded pension liability was $2.2 million.
- Management noted that the continuation of recent Apparel market improvement was uncertain. Key risks include secular decline in traditional printed forms, technological substitution, intense price competition, volatile paper and cotton costs, foreign competition, supplier concentration, acquisition integration, and potential impairment of goodwill or intangibles.
- The company had $105.5 million of variable-rate debt; a one-percentage-point rate increase would have an estimated annual earnings impact of approximately $1.1 million. A 10% strengthening of the U.S. dollar against relevant currencies was estimated to reduce fair value and results by approximately $0.3 million.
- Management reported no material change in previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether Print acquisition-related growth and integration efficiencies can offset declines in legacy Print operations.
- Whether Apparel sales, pricing, and gross margins recover, and how cotton and other input costs affect profitability.
- Debt availability, covenant headroom, variable-rate exposure, and financing needs after the June 2014 acquisition.
- Expected pension contributions, capital spending, dividends, and share repurchases against operating cash generation.
- Acquisition purchase accounting and earn-out terms, and the assumptions underlying annual goodwill and intangible-asset impairment testing.