EBF

Business Context and Reporting Period

Company: Ennis, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2010
Business Overview: Ennis operates two primary segments: the Print Segment (manufacturing business forms and printed products) and the Apparel Segment (manufacturing activewear, primarily t-shirts, under the Alstyle brand). The company distributes products primarily through independent dealers in North America.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 7.6% year-over-year, driven primarily by a 23.5% surge in the Apparel Segment ($73.0M vs. $59.1M). Conversely, the Print Segment declined 5.4% ($67.8M vs. $71.7M) due to economic conditions and digital substitution.
• Margin Expansion: Gross profit margin improved significantly by 630 basis points to 30.0%, attributed to lower cotton costs (locked in from prior contracts), operational efficiencies, and favorable product mix in the Apparel segment.
• Profitability: Net earnings nearly doubled to $13.0 million, with Apparel segment profit increasing 267.6% to $12.5 million.
• Cash Flow: Operating cash flow decreased 61.7% to $9.7 million. This decline was due to increased inventory levels in the Apparel segment to support sales growth and reduced payables to capture vendor discounts, contrasting with the prior year's inventory drawdown.
• Capital Expenditures: Investing cash outflows increased dramatically to $13.2 million (from $0.6M prior year) due to construction of a new manufacturing facility in Agua Prieta, Mexico.

Guidance, Outlook, and Risks

• Apparel Segment Outlook: Management expects cotton prices to remain high due to supply shortages. While current contracts mitigate immediate impact, the company faces uncertainty regarding the ability to pass these costs to customers. The new Mexico facility is expected to begin production in Q3 FY2011, with estimated start-up costs of $6M-$8M offset by future annualized savings of $10M-$15M.
• Print Segment Outlook: The segment faces continued headwinds from digital technology adoption and economic uncertainty. Management is focusing on product transformation and new market niches (e.g., healthcare wristbands, secure documents) to offset declines in traditional forms.
• Liquidity: The company maintains a $150 million revolving credit facility with approximately $107.5 million available. It is currently in compliance with all financial covenants.
• Key Risks:
  • Commodity Prices: Volatility in cotton (40% of apparel costs) and paper prices.
  • Construction Risk: Delays or cost overruns in the new Mexico facility could impact returns.
  • Technology Disruption: Continued erosion of demand for printed business forms.
  • Concentration: Reliance on a limited number of suppliers for raw materials (e.g., 70% of cotton from one supplier).

Investor Verification Checklist

• Cotton Cost Pass-Through: Verify if the company can successfully raise prices to offset rising spot cotton prices in upcoming quarters.
• Facility Ramp-Up: Monitor the timeline and cost efficiency of the Agua Prieta, Mexico facility construction and start-up.
• Print Segment Decline: Assess the rate of decline in the Print Segment and the success of new product introductions in mitigating digital substitution.
• Inventory Levels: Review inventory turnover ratios to ensure increased inventory levels in the Apparel segment convert to sales without becoming obsolete.
• Debt Covenants: Confirm continued compliance with the total funded debt to EBITDA ratio covenant under the credit facility.