Business Context and Reporting Period
Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 29, 2008
Business Overview: Ennis operates in two primary segments: the Print Segment (manufacturing business forms and products, ~57% of sales) and the Apparel Segment (Alstyle Apparel, manufacturing activewear, ~43% of sales). The company distributes primarily through independent dealers and distributors in North America.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 | Change |
|---|---|---|---|
| Net Sales | $610.6 million | $584.7 million | +4.4% |
| Gross Profit | $152.6 million | $145.9 million | +4.6% |
| Gross Margin | 25.0% | 25.0% | 0.0% |
| Net Earnings | $44.6 million | $41.6 million | +7.2% |
| Diluted EPS | $1.72 | $1.62 | +6.2% |
| Operating Cash Flow | $30.4 million | $49.5 million | -38.5% |
| Working Capital | $134.0 million | $102.3 million | +31.0% |
| Long-Term Debt | $90.7 million | $89.0 million | +1.9% |
| Total Assets | $513.1 million | $478.2 million | +7.3% |
Material Changes vs. Prior Period
- Acquisitions: The company acquired assets of B & D Litho, Inc. and Skyline Business Forms in October 2007 ($12.5 million) and Trade Envelope, Inc. in September 2007 ($2.7 million). These acquisitions contributed significantly to the Print Segment's sales growth of 5.9%.
- Segment Performance:
- Print Segment: Sales increased $19.3 million to $345.0 million. Gross margin improved from 25.2% to 27.2% due to operational efficiencies and the attrition of low-margin sales.
- Apparel Segment: Sales increased $6.6 million to $265.6 million. However, gross margin declined from 24.7% to 22.2% due to higher cotton prices, increased inventory build costs (overtime and temporary labor), and competitive pricing pressures.
- Cash Flow: Operating cash flow decreased significantly ($19.1 million) primarily due to the phase-out of Alstyle's factoring arrangement (requiring $25.0 million in cash to fund receivables) and a strategic $12.0 million increase in apparel inventory levels.
- Backlog: Firm order backlog increased to approximately $27.1 million from $18.7 million in the prior year.
Guidance, Outlook, and Risks
- Capital Expenditures: Management expects 2009 capital requirements (excluding acquisitions) to be between $4.0 million and $8.0 million, funded by existing cash flows.
- Debt and Liquidity: The company maintains a $150 million revolving credit facility. As of February 29, 2008, $90.5 million was borrowed, leaving approximately $55.0 million in availability. Management believes this is sufficient for foreseeable working capital needs.
- Key Risks:
- Raw Materials: Significant exposure to cotton price volatility (approx. 40% of apparel product cost) and paper costs. The company relies on a limited number of suppliers, with one supplier providing over 70% of yarn requirements.
- Technology: Risk of obsolescence in the print segment due to "paperless" business forms and electronic transaction systems.
- Goodwill: The company holds $178.4 million in goodwill and $88.2 million in other intangibles, which are subject to impairment testing.
- Foreign Operations: Apparel manufacturing relies on facilities in Mexico and sourcing from Central/South America, exposing the company to regulatory changes, tariffs, and political instability.
Investor Verification Checklist
- Inventory Valuation: Verify the realizability of the increased apparel inventory levels ($12.0 million build) given the decline in apparel gross margins.
- Factoring Transition: Confirm the completion of the phase-out of Alstyle's factoring arrangement and its impact on future working capital requirements.
- Raw Material Costs: Monitor cotton and paper price trends and the company's ability to pass these costs to customers without losing market share.
- Acquisition Integration: Assess the performance of the B & D Litho, Skyline, and Trade Envelope acquisitions against pro forma expectations.
- Goodwill Impairment: Review the annual impairment testing results for the significant goodwill balance ($178.4 million) in light of industry contraction in traditional print forms.