EBF

Business Context and Reporting Period

Company: ENNIS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: August 31, 2009
Business Overview: Ennis operates two primary segments: the Print Segment (manufacturing business forms and printed products) and the Apparel Segment (Alstyle Apparel, manufacturing activewear). The company distributes products primarily through independent dealers and distributors in North America.

Key Financial Metrics

All figures in thousands, except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 14.5% year-over-year for the quarter and 17.2% for the six-month period, driven by the economic recession and contraction in traditional business forms.
• Margin Expansion: Despite lower sales, gross margins improved by 160 basis points for the quarter (26.0% vs. 24.4% prior year) due to successful cost reduction initiatives and lower manufacturing costs.
• Profitability: Net earnings increased slightly for the quarter ($9.5M vs. $9.3M) but declined for the six-month period ($16.2M vs. $20.3M). Operating income increased for the quarter ($15.9M vs. $15.7M) but decreased for the six-month period ($27.4M vs. $34.0M).
• Debt Reduction: The company repaid $24.1 million in debt during the six-month period, reducing total long-term debt from $76.2 million to $52.0 million.
• Inventory Management: Inventories decreased by $22.6 million ($101.2M to $78.5M), contributing significantly to positive operating cash flow.

Outlook, Risks, and Management Commentary

• Management Commentary: Management highlighted the ability to maintain earnings levels despite sales declines through cost controls. The Apparel Segment saw a profit increase of 34.8% for the quarter, while the Print Segment profit declined 11.8%.
• Capital Expenditures: The company is constructing a new manufacturing facility in Agua Prieta, Mexico, with estimated total costs of $40-$45 million, expected to be operational in fiscal year 2011. Funding is expected from internal cash flows and existing credit facilities.
• Liquidity: The company maintains a $150 million revolving credit facility (expandable to $200 million) with $97.2 million available as of August 31, 2009. The company is in compliance with all financial covenants.
• Risks:
  • Economic Conditions: Continued recession could further depress demand for business forms and activewear.
  • Raw Materials: Reliance on a limited number of suppliers for cotton yarn (70% from one supplier) and paper exposes the company to price volatility and supply disruptions.
  • Technology: Long-term risk of "paperless" business forms superseding traditional printed products.
  • Foreign Operations: Exposure to regulatory changes, tariffs, and political instability in Mexico and Central America where apparel manufacturing occurs.
• Unusual Items: The prior year included a non-recurring charge related to a large apparel customer bankruptcy, which impacted the comparative SG&A expense analysis.

Investor Verification Checklist

• Inventory Valuation: Verify the adequacy of inventory write-downs given the significant reduction in inventory levels and potential obsolescence in the Print Segment.
• Customer Concentration: Assess the impact of the bankruptcy of a large apparel customer mentioned in prior periods and current credit risk exposure to other distributors.
• Debt Covenants: Confirm continued compliance with the total funded debt to EBITDA ratio covenant under the amended credit facility.
• Capital Project Progress: Monitor the timeline and cost overruns for the new Mexico manufacturing facility, which requires significant future capital outlay.
• Raw Material Costs: Track cotton and paper price trends to evaluate future margin pressure, as the company does not currently hedge cotton prices.