Business Context and Reporting Period
Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2006
Overview: Ennis, Inc. operates in two primary segments: the Print Segment (57% of sales), which manufactures business forms and promotional products, and the Apparel Segment (43% of sales), which produces activewear under the Alstyle brand. The company distributes products primarily through independent dealers and sales representatives across North America.
Key Financial Metrics
| Metric | Fiscal 2006 | Fiscal 2005 |
|---|---|---|
| Net Sales | $559.4 million | $365.4 million |
| Gross Profit | $142.1 million | $90.8 million |
| Gross Margin | 25.4% | 24.8% |
| Net Earnings | $40.5 million | $23.0 million |
| Earnings Per Share (Diluted) | $1.58 | $1.19 |
| Operating Cash Flow | $47.4 million | $20.0 million |
| Working Capital | $94.5 million | $70.2 million |
| Long-Term Debt | $102.9 million | $112.3 million |
| Total Assets | $494.4 million | $497.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 53.1% to $559.4 million. Approximately 94% of this increase ($181.9 million) is attributable to the full-year inclusion of the Alstyle Apparel acquisition completed in late 2005. The remaining growth came from Print Segment acquisitions (Royal and Crabar/GBF).
- Profitability: Net earnings rose 76.1% to $40.5 million. Gross profit margin improved to 25.4% from 24.8%, driven by cost-saving programs in the Apparel Segment and economies of scale.
- Segment Performance:
- Apparel Segment: Sales grew to $238.0 million (from $56.0 million in 2005, which was a partial year). Segment profit increased to $30.1 million with a margin of 12.6%.
- Print Segment: Sales increased modestly by 3.9% to $321.4 million. Segment profit decreased slightly by 2.0% to $43.4 million, impacted by operational issues at the Adams McClure facility.
- Debt Reduction: Long-term debt decreased by approximately $9.4 million as the company utilized strong operating cash flows to pay down obligations.
Guidance, Outlook, and Risks
- Capital Resources: The company entered into an amended credit facility in March 2006 providing $150 million in revolving credit, maturing in 2010, with reduced interest rates and eased covenants. Management expects operating cash flows to cover future capital requirements.
- Acquisitions: On January 3, 2006, the company acquired Tennessee Business Forms, Inc. (TBF) for $1.2 million to expand short-run print products.
- Key Risks:
- Technological Obsolescence: Risk of printed forms being superseded by "paperless" alternatives.
- Raw Material Costs: Significant exposure to cotton yarn prices (approx. 40% of apparel product cost) and paper prices. The company relies on a limited number of suppliers.
- Goodwill Impairment: The company holds $178.3 million in goodwill. Future write-downs could negatively impact financial results.
- Foreign Operations: Apparel manufacturing relies on facilities in Mexico and sourcing from various countries, exposing the company to trade regulation changes (NAFTA, WTO) and political instability.
Investor Verification Checklist
- Acquisition Integration: Verify the sustained profitability of the Alstyle Apparel segment beyond the initial post-acquisition year.
- Raw Material Hedging: Confirm strategies for managing cotton and paper price volatility, given the lack of derivative usage mentioned in the filing.
- Goodwill Valuation: Monitor the annual impairment testing of the $178.3 million goodwill balance, particularly regarding the Print Segment's operational challenges.
- Customer Concentration: Review the dependency on major customers within the Financial Solutions Group (two customers accounted for ~20% of that group's sales).
- Debt Covenants: Ensure continued compliance with the amended credit facility covenants, specifically the funded debt to EBITDA ratio.