Ennis, Inc. — Form 10-Q Summary
Business context and reporting period. This filing covers the quarter and six months ended August 31, 2011. Ennis manufactures business forms and other printed products through its Print segment and activewear through its Apparel segment. Financial figures below are in millions of dollars unless stated otherwise; interim results are unaudited.
Financial performance
| Metric | Three months ended Aug. 31, 2011 | Prior-year quarter | Six months ended Aug. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $130.4 | $143.0 | $273.6 | $283.8 |
| Gross profit / margin | $34.1 / 26.1% | $39.7 / 27.8% | $73.8 / 27.0% | $81.9 / 28.9% |
| Operating income / margin | $15.8 / 12.1% | $19.4 / 13.6% | $34.6 / 12.7% | $40.4 / 14.2% |
| Net earnings | $9.7 | $12.1 | $21.1 | $25.2 |
| Diluted EPS | $0.37 | $0.47 | $0.81 | $0.97 |
- For the quarter, sales fell 8.8% and net earnings fell 19.9% year over year. For the six-month period, sales decreased 3.6% and net earnings decreased 16.0%.
- Quarterly interest expense was $0.7 million versus $0.3 million; six-month interest expense was $1.5 million versus $0.8 million. The prior-year comparisons included interest capitalized for construction of the Agua Prieta facility; none was capitalized in 2011.
- Cash from operations was $12.7 million for the six months, down from $27.5 million. Investing activities used $4.0 million, mainly capital expenditures of $4.2 million; financing activities used $7.9 million, principally dividends of $8.1 million. Cash ended at $14.3 million, up from $12.3 million at fiscal year-end.
- At August 31, cash was $14.3 million, working capital was $102.9 million, and the current ratio was 2.1. Working capital was down from $135.3 million at February 28, partly because $50.0 million of revolver borrowings was reclassified as current debt.
- Total debt was $50.0 million, all classified as current. The $150 million revolving facility matures August 18, 2012; $3.2 million of letters of credit left approximately $96.8 million available. The company reported compliance with facility covenants.
- The quarterly dividend remained $0.155 per share; the board declared the same amount for payment November 1, 2011. Six-month dividends were $8.1 million.
Material changes and segment results
- Print: Quarterly sales were essentially flat at $69.2 million versus $69.1 million; six-month sales declined 0.4% to $136.3 million. Quarterly segment earnings before tax were $11.9 million, roughly level year over year; six-month earnings fell to $22.9 million from $24.4 million. Print margins faced higher paper costs and product-mix pressure, partly offset by cost control.
- Apparel: Quarterly sales fell 17.2% to $61.2 million; six-month sales fell 6.5% to $137.3 million. Quarterly segment earnings before tax declined to $6.7 million from $11.6 million; six-month earnings declined to $17.6 million from $24.1 million. Lower volume, higher cotton costs and Agua Prieta start-up inefficiencies pressured results.
- Consolidated SG&A declined 9.4% in the quarter and 5.3% year to date, supported by cost initiatives and lower bad-debt expense. A $0.125 million gain from disposal of unused equipment was recorded in 2011.
- Inventories rose to $120.8 million from $100.4 million at February 28, mainly reflecting higher input costs; finished goods increased to $96.9 million from $75.7 million.
Outlook, risks and unusual items
- No formal earnings or revenue guidance is provided. Management expects elevated working-capital needs in coming quarters as higher-cost inventory moves through the business, but expects cash from operations and the credit facility to cover foreseeable operating and capital needs.
- Management expects fiscal 2012 capital expenditures, excluding possible acquisitions and final facility construction, to be within its historical $4–$5 million range. The Agua Prieta facility is fully operational and production has shifted from Anaheim; approximately $53.5 million has been spent on its property and equipment. Management estimates cumulative start-up/ramp-up and Anaheim shutdown effects at $8.2 million, including $1.4 million in the current quarter, and anticipates manufacturing benefits at production of 2.6–2.8 million pounds per week.
- Management said cotton cost flowing into current-quarter results was 50% above the comparable period. Cotton and paper price volatility, intense competition and limited ability to pass costs on could further pressure margins. Apparel demand had softened during the quarter, and the duration of that weakness was uncertain.
- The credit facility expires in August 2012. Ennis said it intends to renew or replace the facility before maturity; renewal had not been completed as of the filing. The entire $50 million revolver balance was exposed to variable LIBOR rates after a $40 million interest-rate swap expired July 22, 2011. A one-percentage-point rate change was estimated to affect annual results by approximately $0.5 million.
- The company expected to contribute $2–$3 million in cash to its pension plan in the second half of fiscal 2012; its recorded unfunded pension liability was $2.9 million. Approximately 80% of Apparel’s cotton and yarn was sourced from one supplier. Management also cited risks from digital substitution in Print, economic uncertainty, customer credit, foreign operations, and facility ramp-up.
- No material pending legal proceedings, material changes to previously disclosed risk factors, or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective; no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether Ennis renews or replaces its revolving credit facility before the August 2012 maturity, and on what terms.
- Whether Apparel sales stabilize and whether cotton and other input-cost increases can be passed through to customers.
- Whether Agua Prieta achieves targeted production and efficiency levels, and whether the projected manufacturing benefits materialize.
- Whether inventory growth converts to sales and cash without additional margin pressure or write-downs.
- Whether operating cash flow recovers from the year-over-year decline while the company funds dividends and the expected pension contribution.