Ennis, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended November 30, 2013; comparisons are with the periods ended November 30, 2012 unless otherwise noted. Ennis manufactures printed business products and activewear through its Print and Apparel segments. Figures below are in U.S. dollars; financial statement amounts are converted from thousands to millions.
Financial performance and position
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $136.6 million, up 5.9% | $410.3 million, up 0.1% |
| Gross profit / margin | $37.8 million / 27.7%, versus $30.6 million / 23.7% | $110.2 million / 26.9%, versus $92.8 million / 22.6% |
| Operating income / margin | $15.4 million / 11.3%, versus $10.0 million / 7.8% | $44.9 million / 11.0%, versus $28.9 million / 7.0% |
| Net earnings / diluted EPS | $9.3 million / $0.36, versus $6.2 million / $0.24 | $27.7 million / $1.06, versus $17.6 million / $0.68 |
- Cash flow: Nine-month operating cash flow was $38.6 million, compared with $40.6 million. Investing used $64.9 million, largely for acquisitions; financing provided $28.9 million, including $63.0 million of borrowings. Cash ended at $8.5 million.
- Liquidity and debt: Working capital was $159.8 million and the current ratio was 4.4:1 at November 30. Revolver debt was $95.5 million, up from $57.5 million at February 28. The $150 million facility had approximately $51.2 million available, after $3.3 million in standby letters of credit. Ennis reported covenant compliance.
- Other balance-sheet items: Total assets were $557.6 million, including $145.7 million of goodwill and $107.1 million of other intangible assets. The recorded pension liability was $10.9 million.
- Dividends: The company declared $0.35 per share for the nine months, versus $0.525 in the prior-year period. A $0.175 quarterly dividend was declared for payment January 31, 2014.
Material changes and segment results
- Two Print-segment acquisitions closed in September: WISCO/National Imprint for $47.25 million and Folder Express for approximately $14.6 million, plus assumed liabilities. The acquisitions were financed with revolver borrowings. For the quarter, management attributed $9.4 million of sales and approximately $0.04 of EPS to the acquisitions. Purchase accounting added $23.9 million of goodwill.
- Print: Quarterly sales rose 10.1% to $89.7 million, including acquisition contributions; nine-month sales fell 1.9% to $250.1 million. Print gross margin was 30.8% for the quarter and 30.2% for the nine months, benefiting from lower input costs and operating efficiencies. Management cited ongoing declines in traditional long-run business and competitive pressure.
- Apparel: Quarterly sales decreased 1.1% to $46.9 million, while nine-month sales increased 3.4% to $160.2 million. Volume rose, but lower selling prices offset some of the gains. Gross margin improved to 21.7% for both periods, from 15.2% and 12.0%, respectively; management cited lower raw-material costs and improved production levels.
- Consolidated nine-month sales were nearly flat despite segment shifts. Profitability improved substantially, particularly in Apparel, while selling, general and administrative expense rose, including acquisition costs and higher bad-debt expense.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected fiscal-year capital expenditures, excluding possible acquisitions, to be within its historical $4 million–$5 million range; approximately $4 million had been spent by the filing date. Management expected operating cash flow and the credit facility to cover foreseeable operating and capital needs.
- Management expected a $2 million–$3 million pension contribution in fiscal 2014, despite zero minimum required contribution for the plan year under the cited funding rules.
- Management described Apparel markets as soft and highly competitive, with recent competitor discounting pressuring prices and margins. Further Apparel margin improvement depends partly on increased production volumes. The duration of market softness and discounting was uncertain.
- Key risks include secular substitution of printed forms by electronic alternatives, intense price competition, volatile paper and cotton costs, reliance on limited suppliers, customer credit risk, acquisition integration, and possible impairment of goodwill or intangibles. Management planned its annual impairment analysis for the fiscal fourth quarter.
- Nine-month bad-debt expense was $2.8 million, versus $0.3 million a year earlier; management attributed a $2.5 million increase to bankruptcies of several Apparel accounts. Inventory increased to $121.8 million from $109.7 million at fiscal year-end, contributing to cash-flow pressure.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. It disclosed $4.5 million of cash deposits above FDIC-insured limits.
Important facts for investors to verify
- How much of Print growth and earnings reflects the acquisitions, and whether the acquired businesses meet expectations after integration.
- Whether Apparel pricing, competitor discounting, production volumes, and margins stabilize or deteriorate.
- Whether improved margins translate into stronger operating cash flow, particularly as inventory and debt have increased.
- Revolver availability, covenant headroom, and the effect of variable rates; the filing estimates a one-percentage-point rate increase would raise annual expense by about $1.0 million at the reported debt balance.
- Results of the planned impairment review and developments in bad debts, pension funding, and uninsured cash balances.