Business Context and Reporting Period
Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2011
Business Overview: Ennis operates two primary segments: the Print Segment, which manufactures business forms and printed products for independent distributors, and the Apparel Segment (Alstyle Apparel), which produces activewear (primarily t-shirts) for the North American market. The company is transitioning its apparel manufacturing operations from Anaheim, California, to a new facility in Agua Prieta, Mexico.
Key Financial Metrics
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net Sales | $549.999 million | $517.738 million |
| Gross Profit | $154.498 million | $135.319 million |
| Gross Margin | 28.1% | 26.1% |
| Net Earnings | $44.631 million | $35.206 million |
| Diluted EPS | $1.72 | $1.36 |
| Operating Cash Flow | $32.766 million | $82.567 million |
| Long-Term Debt | $50.0 million | $41.8 million |
| Working Capital | $135.3 million | $116.6 million |
| Current Ratio | 3.87 to 1.0 | 3.34 to 1.0 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 6.2% to $550.0 million, driven primarily by a 17.8% surge in the Apparel Segment ($277.3 million), which offset a 3.4% decline in the Print Segment ($272.7 million).
- Profitability: Net earnings rose 26.8% to $44.6 million. Gross margin improved by 200 basis points to 28.1%, aided by operational efficiencies and price increases that offset rising raw material costs.
- Cash Flow: Operating cash flow decreased significantly by 60.3% to $32.8 million. This decline was primarily due to a $24.0 million cash outflow to build inventory levels in anticipation of the manufacturing transition to Mexico.
- Capital Expenditures: Investing cash outflows increased 77.8% to $36.0 million, largely due to construction of the new Agua Prieta facility.
- Debt: The company borrowed an additional $10.0 million against its revolving credit facility to fund inventory buildup, bringing total borrowings to $50.0 million.
Guidance, Outlook, and Risks
- Manufacturing Transition: The company is in the process of moving knit and dye operations from California to Mexico. Management estimates start-up and ramp-up costs will negatively impact fiscal 2012 results by approximately $4.0 million to $5.0 million. Full capacity (2.6–2.8 million pounds/week) is expected to yield annualized cost savings of $10.0 million to $15.0 million once complete.
- Raw Material Volatility: Cotton prices remain at historically high levels. While the company has passed some costs to customers, future margin pressure depends on the ability to pass through further increases in a competitive market.
- Print Segment Headwinds: The Print Segment faces continued erosion from digital technologies and economic uncertainty, requiring a shift toward custom and full-color products to maintain revenue.
- Outlook: Management anticipates continued revenue growth in the Apparel segment but warns that economic recovery pace and cotton pricing remain uncertain. Capital requirements for 2012 (excluding the Mexico facility completion) are expected to be $4.0 million to $5.0 million.
Investor Verification Checklist
- Inventory Levels: Verify the valuation of the $100.4 million inventory balance, which increased significantly to support the Mexico transition.
- Transition Costs: Monitor the actual start-up costs and timeline for the Agua Prieta facility against the $4.0–$5.0 million estimate for fiscal 2012.
- Cotton Pricing: Track spot cotton prices and the company's ability to pass these costs to customers without losing market share.
- Print Segment Decline: Assess the rate of revenue decline in the Print Segment and the success of new product introductions in offsetting digital obsolescence.
- Debt Covenants: Confirm continued compliance with the credit facility covenants, specifically the total funded debt to EBITDA ratio, given the increased debt load.