Business Context and Reporting Period
Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2009
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 through independent dealers, distributors, and direct sales channels across North America.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 |
|---|---|---|
| Net Sales | $584.0 million | $610.6 million |
| Gross Profit | $143.5 million (24.6% margin) | $163.9 million (26.8% margin) |
| Operating Income (Loss) | ($10.1 million) | $75.8 million |
| Net Earnings (Loss) | ($32.8 million) | $44.6 million |
| Diluted EPS | ($1.27) | $1.72 |
| Working Capital | $138.4 million | $134.0 million |
| Cash and Equivalents | $9.3 million | $3.4 million |
| Long-Term Debt | $76.2 million | $90.7 million |
| Current Ratio | 4.15:1 | 3.59:1 |
Material Changes vs. Prior Period
- Revenue Decline: Net sales decreased 4.4% to $584.0 million, driven by a 5.2% drop in the Print Segment and a 3.2% drop in the Apparel Segment. The fourth quarter saw double-digit volume declines (Print down 15.8%, Apparel down 29.6%) due to the economic downturn.
- Profitability Collapse: The company reported a net loss of $32.8 million compared to net earnings of $44.6 million in the prior year. This reversal was primarily caused by a non-cash impairment charge of $67.9 million ($63.2 million goodwill and $4.7 million trademarks) recorded in the Apparel Segment.
- Margin Compression: Gross profit margin declined from 26.8% to 24.6%. Apparel margins fell from 26.4% to 22.6% due to rising raw material, freight, and energy costs, combined with pricing pressures from excess inventory in the retail channel.
- Debt Reduction: Long-term debt decreased by approximately $14.5 million as the company repaid $21.8 million in debt while borrowing only $5.0 million.
Outlook, Risks, and Unusual Items
- Impairment Charge: A significant non-cash impairment of $67.9 million was recorded in Q4 2009 due to adverse economic conditions and lower market valuation multiples. Excluding this charge and other unusual items (customer bankruptcy, inventory reserves), diluted EPS would have been $1.46.
- Economic Sensitivity: Management notes that results are heavily impacted by global economic conditions, specifically the financial crisis, which has reduced demand for business forms and activewear.
- Cost Pressures: The company faces significant headwinds from rising costs for cotton, paper, freight, and energy. While price increases were implemented, they did not fully offset cost increases.
- Liquidity and Capital: The company maintains a $150 million revolving credit facility with approximately $73 million available. It is currently in compliance with all covenants. A new manufacturing facility in Mexico is planned with estimated costs of $40–$45 million, expected to be operational in fiscal 2011.
- Customer Credit Risk: The company observed an increase in customer bankruptcies, particularly in the retail sector, leading to higher bad debt expenses.
Investor Verification Checklist
- Impairment Validity: Verify the assumptions used in the $67.9 million goodwill and trademark impairment test, specifically regarding future cash flow projections for the Apparel Segment.
- Inventory Valuation: Review the $3.5 million reserve for obsolete inventory and the specific $2.0 million charge related to junior and fleece products to assess potential future write-downs.
- Debt Covenants: Confirm continued compliance with the total funded debt to EBITDA ratio covenant, especially given the volatility in earnings.
- Raw Material Exposure: Assess the impact of cotton and paper price volatility, noting that over 75% of cotton yarn is sourced from a single supplier.
- Customer Concentration: While no single customer exceeds 5% of sales, verify the financial health of key retail and distributor customers given the noted increase in bankruptcies.