Ennis, Inc. — Form 10-Q Summary
Business context and reporting period
Quarterly report for the three and nine months ended November 30, 2011. Ennis manufactures business forms and printed products (Print segment) and activewear, principally blank t-shirts (Apparel segment). Unless otherwise noted, amounts are in U.S. dollars.
Financial results and liquidity
| Metric | Three months ended Nov. 30, 2011 | Three months ended Nov. 30, 2010 | Nine months ended Nov. 30, 2011 | Nine months ended Nov. 30, 2010 |
|---|---|---|---|---|
| Net sales | $121.8 million | $134.8 million | $395.5 million | $418.6 million |
| Gross profit / margin | $30.2 million / 24.8% | $36.5 million / 27.1% | $104.0 million / 26.3% | $118.4 million / 28.3% |
| Operating income / margin | $11.1 million / 9.1% | $15.5 million / 11.5% | $45.7 million / 11.6% | $55.9 million / 13.4% |
| Net earnings | $6.9 million | $9.6 million | $28.0 million | $34.8 million |
| Diluted EPS | $0.27 | $0.37 | $1.08 | $1.34 |
- Quarterly sales fell 9.6%; nine-month sales fell 5.5%. Net earnings declined 28.5% for the quarter and 19.5% for the nine-month period.
- Operating cash flow was $27.0 million for the nine months, down from $30.6 million. Investing used $11.1 million, including $6.0 million for a business acquisition; financing used $11.9 million, primarily dividends of $12.1 million. Cash ended at $16.8 million, up from $12.3 million at February 28, 2011.
- At November 30, total assets were $484.5 million and shareholders’ equity was $362.3 million. Inventory was $121.6 million, up from $100.4 million at February 28, primarily reflecting higher apparel input costs.
- Debt was $50.0 million under the revolving facility, classified as current because the facility matures August 18, 2012. The company reported $3.5 million of standby letters of credit and approximately $96.5 million of remaining facility availability. It was in compliance with covenants.
- Working capital was $103.5 million versus $135.3 million at February 28; the current ratio was 2.1 versus 3.9. Management attributed the decline mainly to reclassifying the revolver as current. Quarterly dividends remained $0.155 per share; the board declared another $0.155 dividend payable January 30, 2012.
Material changes and segment performance
- Apparel drove most of the deterioration: quarterly sales declined 19.4% to $52.6 million, and nine-month sales declined 10.5% to $189.9 million. Apparel gross margin was 20.8% for the quarter and 24.0% year to date, versus 26.3% and 27.8% in the comparable periods.
- Management cited high cotton costs and competitive pricing. Cotton cost flowing into quarterly operations was approximately 100% higher than a year earlier; market destocking and attempts by manufacturers to maintain capacity also pressured prices. Apparel segment profit was $4.1 million for the quarter versus $8.2 million, and $21.7 million for nine months versus $32.4 million.
- Print segment sales were broadly stable: $69.2 million for the quarter versus $69.5 million, and $205.5 million for nine months versus $206.5 million. Print gross margins were 27.8% for the quarter and 28.4% for nine months, with modest year-over-year declines attributed to product mix and raw-material costs.
- SG&A decreased 9.0% for the quarter and 6.6% for nine months, reflecting cost controls and lower bad-debt expense. Interest expense rose because construction-related interest was no longer capitalized after the Agua Prieta facility was substantially completed.
Outlook, commentary, and risks
- No quantified earnings or revenue guidance was provided. Management expected apparel margins to remain challenged in coming quarters while high-cost cotton inventory is sold through; the duration depends partly on inventory turnover and market conditions.
- The Agua Prieta manufacturing transition was complete and production was reported on target. Management estimated total negative start-up, ramp-up, and Anaheim shutdown effects of $7.5–$8.5 million, with $3.2–$3.9 million affecting the current fiscal year; impact in the current quarter was described as minimal. Operational efficiency improvements remained in progress.
- Management intended to renew or replace the credit facility and extend its maturity before expiration. The filing does not report a completed renewal. Liquidity depends on operating cash flow and the facility.
- Management expected a $2.0–$3.0 million cash pension contribution in the fourth quarter of fiscal 2012. The recorded unfunded pension liability was $3.3 million.
- Principal risks include secular substitution of printed documents by digital alternatives; weak economic demand and price competition; volatile paper and cotton costs and limited ability to pass them through; supplier concentration (one supplier provided about 67% of quarterly apparel cotton/yarn requirements); apparel inventory and facility-efficiency risks; foreign-operation and trade risks; and possible impairment of goodwill or other intangible assets. Goodwill was $117.3 million and other intangible assets approximately $74.5 million.
- The company reported no material pending legal proceedings beyond routine litigation, no off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Management concluded disclosure controls were effective and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the $50.0 million revolving facility was renewed or refinanced before its August 2012 maturity, and on what terms.
- Subsequent Apparel segment sales and margins, cotton-cost realization, inventory levels, and the pace of selling through higher-cost finished goods.
- Whether management’s expected pension contribution and remaining facility availability were sufficient to support liquidity and capital needs.
- Progress and realized costs/savings at the Agua Prieta facility, including the remaining efficiency improvements.
- Whether supplier concentration, economic softness, or continued print-market substitution affected demand, pricing, or asset impairment assessments.