Ennis, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended November 30, 2012; comparative periods ended November 30, 2011. Financial statement amounts below are in U.S. dollars. Ennis operates Print and Apparel segments. The Print business sells forms and other printed products primarily through independent distributors; Apparel principally sells activewear.
Financial performance
| Metric | Three months ended Nov. 30, 2012 | Three months ended Nov. 30, 2011 | Nine months ended Nov. 30, 2012 | Nine months ended Nov. 30, 2011 |
|---|---|---|---|---|
| Net sales | $129.0 million | $121.8 million | $409.9 million | $395.5 million |
| Gross profit / margin | $30.6 million / 23.7% | $30.2 million / 24.8% | $92.8 million / 22.6% | $104.0 million / 26.3% |
| Operating income / margin | $10.0 million / 7.8% | $11.1 million / 9.1% | $28.9 million / 7.0% | $45.7 million / 11.6% |
| Net earnings | $6.2 million | $6.9 million | $17.6 million | $28.0 million |
| Diluted EPS | $0.24 | $0.27 | $0.68 | $1.08 |
| Cash dividends per share | $0.175 | $0.155 | $0.525 | $0.465 |
- Quarterly sales rose 5.9%, but net earnings fell about 10.5%. Nine-month sales rose 3.6%, while net earnings declined about 37.1%.
- Print sales increased 17.8% in the quarter and 24.0% year to date, primarily reflecting the PrintXcel and Printegra acquisitions. Those acquisitions contributed $19.0 million of quarterly sales and $63.2 million of nine-month sales.
- Apparel sales fell 9.9% in the quarter and 18.4% year to date. Apparel gross margin declined to 15.2% for the quarter and 12.0% for the nine months, from 20.8% and 24.0%, respectively. Nine-month Apparel segment earnings were a $0.9 million loss, versus $21.7 million of earnings a year earlier.
- Print gross margin improved to 28.7% for the quarter and 29.1% year to date, versus 27.8% and 28.4%. Print segment earnings increased to $13.0 million for the quarter and $40.4 million year to date.
Cash flow, liquidity and debt
- Nine-month cash from operations was $40.6 million, up from $27.0 million. Lower inventory contributed materially to the increase; inventory fell from $132.6 million at February 29, 2012 to $109.5 million at November 30, 2012.
- Investing activities provided $2.0 million, including a $3.7 million acquisition-price adjustment; capital expenditures were $1.7 million. Financing activities used $43.7 million, including $30.0 million of debt repayment and $13.7 million of dividends. Cash ended the period at $9.2 million, down from $10.4 million at fiscal year-end.
- Working capital was $153.5 million, down from $169.0 million; the current ratio was 4.8:1, compared with 4.4:1.
- Revolving credit debt was $60.0 million, down from $90.0 million at February 29, 2012. The $150.0 million facility matures August 18, 2016; approximately $86.5 million remained available after $3.5 million of standby letters of credit. Ennis reported compliance with its covenants.
- Debt is floating-rate. A one-percentage-point rate change on the period-end balance would affect annual results by approximately $0.6 million. The prior $40.0 million interest-rate swap expired in July 2011.
Management commentary, outlook and risks
- Management attributed the deterioration in profitability mainly to Apparel’s lower sales and margins, including elevated cotton costs in inventory and competitive pricing. Cotton costs included in cost of sales were 14% higher year over year for the nine-month period, while selling price per unit was about 6% lower.
- Management said most of the higher-cost cotton had moved through finished goods and expected Apparel margins to improve over coming quarters, absent economic disruption. It also expected a better Apparel business environment in the latter part of fiscal 2013 and into fiscal 2014 as inventory and pricing conditions normalize. These are expectations, not quantified earnings guidance.
- Print faces secular demand pressure from electronic document alternatives, excess industry capacity and price competition. Management cited economic uncertainty and potentially volatile paper costs, while noting that cost pass-throughs can take several quarters.
- Apparel risks include cotton-price volatility, soft demand, competitor discounting and execution at the Agua Prieta, Mexico facility. Production had transitioned from Anaheim; management said output was on target with original estimates but efficiency depended on higher production levels and improved market conditions.
- Ennis expected a $2.0–$3.0 million pension contribution in fiscal 2013’s fourth quarter, despite a zero minimum contribution for the plan year under MAP-21. The balance sheet reported an unfunded pension liability of $9.1 million.
- On December 10, 2012, the board declared an accelerated $0.35-per-share dividend for the third and fourth fiscal quarters, paid December 28 to holders of record December 20. The board cited uncertainty about future tax rates.
- Management reported no significant changes in contractual obligations, no off-balance-sheet arrangements, no material pending legal proceedings beyond routine litigation, and no material changes to previously disclosed risk factors. Disclosure controls were deemed effective; no material change in internal control over financial reporting was identified.
Key facts investors should verify
- How much future Print growth is organic versus acquisition-related, and whether acquired operations deliver expected integration savings.
- Whether Apparel sales, unit volumes and margins recover as management expects, given competitive pricing and cotton-cost volatility.
- Whether operating cash generation remains strong after the inventory reduction and payment of the accelerated dividend.
- The sustainability of the dividend level and the company’s capital allocation priorities alongside debt repayment and potential repurchases.
- Facility covenant headroom and exposure to floating interest rates, as well as future pension funding needs.
- Potential effects of supplier concentration, impairment assumptions for goodwill and intangibles, and economic or technological changes on results.