Ennis, Inc. — Q1 FY2014 Form 10-Q
Reporting period: Three months ended May 31, 2013; balance-sheet comparisons are with February 28, 2013. Ennis operates Print and Apparel segments. Amounts below are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Net sales | $138.5 | $142.5; down 2.8% |
| Gross profit / margin | $35.8 / 25.9% | $28.2 / 19.8% |
| Operating income / margin | $13.6 / 9.9% | $6.2 / 4.4% |
| Net earnings / diluted EPS | $8.5 / $0.33 | $3.9 / $0.15 |
| Operating cash flow | $21.6 | $14.8 |
| Capital expenditures | $0.7 | $0.1 |
| Cash at May 31 | $14.4 | $6.2 at February 28, 2013 |
| Long-term debt | $45.0 | $57.5 at February 28, 2013 |
Working capital was $150.3, slightly below $150.4 at February 28; the current ratio improved to 4.8 from 4.5. The $150 million revolving facility matures August 2016. After $4.1 million of letters of credit, approximately $100.9 million remained available. The company reported compliance with facility covenants. Debt is secured by substantially all domestic assets and specified subsidiary equity.
Operating cash flow included a $11.7 million inventory reduction and was partly offset by a $4.9 million increase in receivables. Financing cash use was $12.5 million, principally debt repayment. No dividends were paid in the quarter, versus $0.175 per share in the prior-year quarter; management said the prior year’s later-quarter dividends had been accelerated into the preceding fiscal year.
Material changes and segment results
- Print: Sales fell 6.8% to $81.4 million, while gross margin improved to 29.7% from 27.9%. Management cited traditional long-run product declines, fewer selling days, competitive pressure, and transition effects at acquired plants.
- Apparel: Sales rose 3.3% to $57.0 million. Gross margin increased to 20.3% from 7.0%, and the segment moved from a $2.8 million pretax loss to $4.4 million pretax income. Sales volume rose 10.6%, partly offset by a 7.3% decrease in average selling price.
- Consolidated gross profit increased despite lower sales, principally reflecting the Apparel margin recovery as lower-cost cotton worked through inventory, plus improved Print efficiencies. Net earnings more than doubled year over year.
- SG&A was $22.2 million, up 0.9%. Two apparel customer bankruptcies drove approximately $0.8 million of additional bad-debt impact; bad-debt expense was $1.1 million versus $0.3 million.
Outlook, risks and other items
- No formal consolidated earnings or revenue guidance was provided. Management expected continued Apparel margin improvement and materially higher production at its Agua Prieta facility, subject to demand, economic conditions, and utility stability.
- Management expected current-year capital expenditures to be below the historical $4–$5 million range and anticipated sufficient operating cash flow and credit availability for foreseeable needs.
- Although minimum pension contributions for the plan year ending February 2014 were zero under MAP-21, the company expected to contribute $2–$3 million during FY2014. The recorded unfunded pension liability was $9.9 million.
- Risks include structural decline in traditional printed forms and industry price competition; volatile paper, cotton and other input costs; economic and demand uncertainty; supplier concentration (47% of cotton and yarn from one supplier); foreign-exchange exposure; and customer credit risk. A 1 percentage-point interest-rate increase on variable-rate debt would raise annual interest expense by approximately $0.5 million.
- $12.4 million of cash was above FDIC-insured limits at May 31. The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements.
- Two apparel accounts entered bankruptcy during the quarter. No goodwill impairment was recorded. The quarter included $0.007 million gain from asset disposals and $0.150 million foreign-currency translation income.
Important facts for investors to verify
- Whether Apparel’s margin recovery, volume gains, and expected Agua Prieta utilization improvements continue, and how selling prices and cotton costs evolve.
- Whether Print sales declines persist and acquired-plant integration delivers expected cost savings without further customer or revenue losses.
- Recoverability of receivables following the two customer bankruptcies, and any further changes in bad-debt expense or the allowance.
- Cash generation, debt repayment, facility covenant compliance, and the planned $2–$3 million FY2014 pension contribution.
- Exposure to uninsured bank deposits, concentrated suppliers, and variable interest rates.