EBF

Business Context and Reporting Period

Company: ENNIS, INC.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: November 30, 2006
Business Overview: Ennis, Inc. operates in 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

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 15.2% ($20.0 million) for the quarter and 4.6% ($19.7 million) for the nine-month period compared to the prior year. The Apparel Segment drove significant growth with a 22.6% increase in quarterly sales, while the Print Segment grew 10.1%.
• Margin Compression: Gross margins declined slightly. The Print Segment margin dropped from 26.8% to 25.6% (quarterly), and the Apparel Segment margin fell from 27.5% to 24.2% (quarterly). Management attributed this to material cost increases, product mix shifts to lower-margin items (e.g., fleece, envelopes), and strategic price reductions to gain market share.
• Profitability: Despite margin pressure, Net Earnings increased 7.2% for the quarter and 8.2% for the nine-month period, driven by volume growth and lower interest expenses.
• Acquisitions: The company completed three acquisitions totaling approximately $20.6 million in cash: Block Graphics ($14.8M), Specialized Printed Forms ($4.6M), and Tennessee Business Forms ($1.2M). These acquisitions contributed to revenue growth in the Print Segment.
• Liquidity: Cash and cash equivalents decreased 45.3% to $7.6 million, primarily due to acquisition costs and debt repayments. However, working capital increased 14.3% to $108.0 million.

Guidance, Outlook, and Risks

• Capital Expenditures: Management expects capital requirements for the fiscal year to remain between $5.0 million and $7.0 million, funded by existing cash flows.
• Pension Contributions: The company anticipates contributing between $2.0 million and $3.0 million to its defined benefit pension plan in the fourth quarter of fiscal 2007.
• Debt Facility: The company has a $150 million revolving credit facility. As of November 30, 2006, $95.0 million was borrowed, with approximately $45.5 million remaining available.
• Risk Factors:
  • Raw Material Costs: Significant exposure to cotton yarn prices (approx. 40% of Apparel product cost) and paper prices. Over 50% of yarn is sourced from a single supplier.
  • Technological Obsolescence: Risk of "paperless" business forms reducing demand for the Print Segment.
  • Competition: Intense competition in the apparel market from larger global competitors (e.g., Gildan, Hanes) and office supply superstores in the print market.
  • Foreign Operations: Apparel manufacturing relies on facilities in Mexico and sourcing from Central/South America, exposing the company to trade regulation changes (NAFTA/CAFTA) and political instability.

Investor Verification Checklist

• Acquisition Integration: Verify the realization of synergies and revenue contributions from the Block Graphics, SPF, and TBF acquisitions.
• Margin Recovery: Monitor whether strategic price reductions and product mix changes in the Apparel Segment stabilize or improve gross margins in future quarters.
• Debt Covenants: Confirm continued compliance with the total funded debt to EBITDA ratio covenants under the $150 million credit facility.
• Raw Material Hedging: Assess the company's strategy for managing cotton and paper price volatility, given the lack of derivative usage mentioned in the filing.
• Customer Concentration: While no single customer exceeds 10% of sales, verify the impact of losing the two large promotional customers mentioned in the Print Segment discussion.