Ennis, Inc. — Q3 FY2024 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2023. Financial statements are unaudited. Ennis manufactures and sells business forms and other printed products, primarily through independent U.S. distributors, and reports as one segment.
Financial performance
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $104.6 million, down 5.1% year over year | $322.7 million, down 2.0% |
| Gross profit / margin | $30.5 million / 29.2%, versus $33.5 million / 30.4% | $97.7 million / 30.3%, versus $102.7 million / 31.2% |
| Operating income / margin | $13.1 million / 12.5%, versus $16.2 million / 14.7% | $43.5 million / 13.5%, versus $49.8 million / 15.1% |
| Net earnings | $9.9 million, versus $11.3 million | $32.5 million, versus $35.1 million |
| Diluted EPS | $0.38, versus $0.44 | $1.25, versus $1.36 |
| Operating cash flow | Not separately presented for the quarter | $52.5 million, versus $34.0 million |
Quarterly SG&A was $17.4 million, up 0.6%; nine-month SG&A was $54.1 million, up 2.2%. Interest income increased to $1.0 million for the quarter and $2.7 million for nine months, supporting other income. The effective tax rate was 28.3% for nine months, versus 28.0%.
Liquidity, debt and capital allocation
- At November 30, cash was $83.9 million and short-term U.S. Treasury investments were $18.5 million. Working capital was $165.0 million and the current ratio was 5.8:1.
- Cash declined $10.1 million from February 28. Nine-month investing outflow was $43.2 million, including $19.9 million for acquisitions, $4.9 million of capital expenditures and $18.4 million for Treasury bills. Financing outflow was $19.4 million, principally dividends.
- The company reported no outstanding long-term debt; $0.3 million was outstanding under a standby letter-of-credit arrangement secured by cash collateral. Management said cash and operating cash flows should cover operating and capital needs for the next 12 months and beyond.
- Dividends paid were $0.75 per share for the nine-month period. A subsequent quarterly dividend of $0.25 per share was declared, payable February 1, 2024. No shares were repurchased during the period; $23.9 million remained under the repurchase authorization.
Changes, acquisitions and management commentary
- Management attributed sales declines to weaker demand, customer inventory rebalancing, and print partners reducing outsourced work. These factors reduced sales by about $11.6 million in the quarter and $23.2 million year to date; recent acquisitions contributed about $6.0 million and $16.7 million, respectively.
- Acquisitions of Stylecraft Printing, UMC Print, and Eagle Graphics/Diamond Graphics were completed during the current fiscal year. Management said acquisitions diluted quarterly gross margin by about 40 basis points and added $0.9 million of quarterly and $2.4 million of nine-month SG&A. It expects acquired-business margins to improve after cost-structure analysis and ERP implementation. Purchase price allocations remain preliminary for certain acquisitions.
- Management described paper-market demand as stabilizing as the destocking cycle eases, but said weak volumes continue to pressure margins. It is monitoring orders and input costs and focusing on cost control and integration.
- No formal earnings or revenue guidance was provided. Expected capital requirements for the current fiscal year, excluding acquisitions, were stated at $3.0 million to $6.0 million; $4.9 million had been spent through November 30.
Risks, contingencies and unusual items
- Key risks include declining demand for traditional printed products due to digital alternatives, price competition, inflation and input costs, supplier concentration, customer consolidation, supply-chain conditions, customer credit risk, cybersecurity, and acquisition integration. Management reported no material change to the risk factors in its latest Form 10-K.
- The company has an unfunded pension liability of about $0.6 million and anticipated a required contribution of approximately $1.2 million before fiscal year-end. Future funding may vary with investment returns and discount rates.
- Ennis subsidiary Crabar/GBF received an amended $5.85 million judgment, including attorney fees, in litigation against Wright Printing and related parties. The judgment was not recognized in the financial statements as of November 30, 2023; the company said it would be reflected when collected. Management stated ordinary-course claims are not expected to have a material adverse effect.
- About $82.8 million of cash was above FDIC insurance limits at November 30, 2023. The company also relies on a limited number of paper suppliers.
Important facts for investors to verify
- Whether sales volumes and legacy-customer demand recover, and whether the reported stabilization in paper demand translates into improved margins.
- Acquisition integration progress, final purchase price allocations, and whether acquired businesses achieve expected margins and cost savings.
- Collection and accounting treatment of the $5.85 million litigation judgment.
- Cash deployment for acquisitions, dividends, capital spending and any future share repurchases; also monitor pension contributions and uninsured cash exposure.