Ennis, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 31, 2022; comparisons are with the corresponding 2021 periods. Financial amounts are in U.S. dollars; millions unless noted.
Business context
Ennis manufactures and sells business forms and other printed products, including labels, tags, envelopes and folders. It operates 55 U.S. manufacturing plants in 20 states as one reportable segment, primarily selling through independent distributors. Management describes strong demand, alongside ongoing industry consolidation, digital substitution and supply-chain and labor challenges.
Financial performance
| Metric | Three months ended Aug. 31, 2022 | Year-over-year change | Six months ended Aug. 31, 2022 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $111.2 million | Up 10.6% | $218.9 million | Up 10.9% |
| Gross profit / margin | $35.2 million / 31.7% | Margin up from 28.8% | $69.2 million / 31.6% | Margin up from 29.4% |
| Operating income / margin | $17.3 million / 15.5% | Up from $10.8 million / 10.8% | $33.6 million / 15.3% | Up from $21.4 million / 10.8% |
| Net earnings | $12.2 million | Up from $7.5 million | $23.8 million | Up from $14.8 million |
| Diluted EPS | $0.47 | Up from $0.29 | $0.92 | Up from $0.57 |
For the six-month period, management attributed approximately 40% of sales growth to additional volume and 60% to price increases; the AmeriPrint acquisition contributed approximately $1.9 million of year-over-year sales. Pricing actions to address inflation and improved operating efficiencies supported higher gross margins. SG&A declined 3.8% for the six months to $35.6 million, and fell from 18.8% to 16.3% of sales.
- Cash flow: Operating cash flow was $21.8 million versus $24.5 million a year earlier. Higher earnings were offset in part by cash use from receivables ($5.3 million) and inventory ($9.9 million). Investing cash use was $1.8 million, primarily capital expenditures; financing cash use was $14.0 million, including $12.9 million of dividends and $1.1 million of share repurchases. Cash rose $5.9 million to $91.5 million.
- Liquidity and debt: Working capital was $146.4 million, up from $127.8 million at February 28, 2022; the current ratio was 4.7 to 1.0. The company reported no outstanding revolving-credit debt; its credit agreement expired in November 2021 and was not renewed. It had $0.6 million outstanding under standby letters of credit, secured by cash collateral.
- Capital returns: Dividends were $0.25 per share for the quarter and $0.50 per share for the six months. The board declared another $0.25 quarterly dividend, payable November 4, 2022. Ennis repurchased 64,082 shares at an average $17.46 during the six months; $23.9 million remained available under the program.
Material changes and notable items
Year-over-year profitability improved substantially, with operating margin increasing 4.7 percentage points for both the quarter and six-month period. Revenue growth reflected demand and inflation-related pricing, while SG&A savings reflected efficiency improvements and prior-year facility consolidation. Operating cash flow nevertheless declined year over year, mainly due to working-capital investment. The prior-year six-month period included the $3.9 million AmeriPrint acquisition and proceeds from a facility sale; neither occurred in the current period.
At August 31, inventories were $48.4 million, up from $38.5 million at February 28. The company recorded an unfunded pension liability of $5.7 million and made a $2.0 million pension contribution in September 2022 to avoid a PBGC variable premium. The filing gives differing estimates of expected annual pension contributions: $1.5–$3.0 million in the note and $1.0–$3.0 million in MD&A; minimum required contributions for the plan year ending February 28, 2023 were stated as zero.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided. Management expects operating cash flows to cover operating and capital needs for the foreseeable future and estimates current-fiscal-year capital expenditures of $3–$5 million, excluding potential acquisitions; $1.8 million had been spent in the first six months. Management said it would monitor orders and input costs and adjust pricing and costs as appropriate.
Risks highlighted include inflation and the ability to recover rising paper, energy, freight, labor and benefit costs; supplier concentration and possible supply constraints; price competition; customer consolidation and credit risk; digital substitution and declining demand for some traditional products; labor and broader economic conditions; COVID-19 and supply-chain uncertainty; and acquisition integration and goodwill impairment. Cash included $90.5 million above FDIC insurance limits, which management said it did not believe presented significant risk. No material changes to previously disclosed risk factors or material pending legal proceedings were reported. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether sales growth and margin gains persist, and how much reflects pricing versus underlying volume and product mix.
- Whether receivables and inventory growth converts to cash, given lower operating cash flow despite higher earnings.
- Paper and other input-cost trends, supplier availability, and the company’s ability to sustain pricing and operational efficiencies.
- The pension plan’s funding position, actual future contributions and the differing annual contribution estimates in the filing.
- Capital allocation, including dividends, share repurchases, the cash balance and the effect of large uninsured bank deposits.