Ennis, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 28, 2015. The filing also reports the quarter ended February 28, 2015; it is not a standalone quarterly filing. Ennis manufactures and sells printed business products and activewear through its Print and Apparel segments.
Financial performance and position
- Revenue: Fiscal-year sales were $580.2 million, up 7.0% from $542.4 million. Print sales rose 11.9% to $380.4 million; Apparel sales fell 1.3% to $199.9 million.
- Profit and margins: Gross profit was $145.5 million, with gross margin of 25.1%, down from 26.5%. Operating loss was $37.7 million and net loss was $44.5 million, or $1.72 per diluted share. The results included a $93.3 million non-cash Apparel goodwill and trademark impairment. Excluding impairment charges, management reported non-GAAP net earnings of $34.6 million, or $1.34 per diluted share, versus $35.3 million, or $1.35, in fiscal 2014.
- Segment results: Print gross margin increased to 30.3% from 29.7%; Print segment earnings rose to $66.4 million from $57.4 million. Apparel gross margin declined to 15.2% from 21.1%; Apparel earnings before impairment were $3.7 million versus $14.7 million.
- Cash flow: Operating activities provided $65.3 million, compared with $32.8 million. Investing activities used $29.4 million, including $27.1 million for acquisitions and $2.5 million in capital expenditures. Financing activities used $24.3 million, including $18.2 million in dividends and $7.0 million in share repurchases. Cash at year-end was $15.3 million.
- Liquidity and debt: Working capital was $176.3 million and the current ratio was 5.38 to 1. Long-term debt was $106.5 million, drawn on a $150 million revolving facility maturing August 18, 2016. After $2.8 million in letters of credit, availability was approximately $40.7 million. The company reported covenant compliance at year-end and paid down a further $10 million through May 8, 2015.
- Other metrics: Dividends were $0.70 per share for the year. Backlog was approximately $25.5 million, up from $21.6 million.
Material changes and quarterly context
- Print sales growth was driven by acquisitions, which contributed approximately $58.3 million; other Print locations recorded a net sales decline of $17.8 million. Acquisitions included Sovereign and Kay Toledo in fiscal 2015, following the earlier acquisitions of the Custom Envelope Division and Folder Express.
- Apparel sales volume increased 0.5%, but average selling price declined 1.3%. Higher dye and chemical costs, lower selling prices, and weaker production efficiencies pressured Apparel margins.
- The $93.3 million Apparel impairment comprised $55.9 million of goodwill and $37.4 million of trademarks. Fiscal 2014 included a separate $24.2 million impairment.
- For the quarter ended February 28, 2015, sales were $140.2 million, gross profit was $35.4 million, and net earnings were $8.6 million. The comparable 2014 quarter had sales of $132.1 million and a net loss of $14.5 million, which included that year’s impairment charge.
Outlook, risks, and unusual items
- Management expects fiscal 2016 capital expenditures of $4 million to $5 million, excluding possible acquisitions, and pension contributions of $2 million to $3 million. It expects cash flows to cover normal operating and capital needs.
- Management expects lower cotton costs to benefit fiscal 2016 results, but cautions that competitive pricing could offset the benefit. It also plans to integrate recent acquisitions into its ERP system, targeting removal of redundant legacy costs.
- For Apparel, management introduced new sales programs and channels and is shifting some capacity toward custom, higher-quality and customer-branded products. Success and margin improvement are uncertain; management described the fiscal 2016 market as similarly challenging and warned of possible further impairment charges.
- Principal risks include ongoing substitution of printed documents by digital alternatives, intense price competition, commodity and freight cost volatility, reliance on limited suppliers (one supplier provided 43% of Apparel cotton and yarn requirements), foreign competition and trade-policy changes, customer credit risk, and potential disruptions to Mexican manufacturing or utilities.
- The pension liability increased to $9.9 million from $1.9 million. A lower discount rate and adoption of updated mortality assumptions increased the recorded obligation. A 10-basis-point discount-rate change affects the estimated liability by about $0.8 million.
- The credit facility is secured by substantially all domestic assets and includes financial and operating covenants. The company reported no off-balance-sheet arrangements and did not expect current litigation to materially affect its financial position or results.
Important facts for investors to verify
- Whether Apparel pricing, product-mix changes, new sales channels, and production efficiencies improve segment margins and reduce impairment risk.
- How much Print growth is sustainable apart from acquisitions, and whether acquired operations deliver expected integration savings.
- The company’s ability to refinance or repay the revolving facility before its August 2016 maturity, while maintaining covenant compliance and funding dividends and buybacks.
- Whether cotton, paper, and other input-cost changes can be passed through without further pressure on margins.
- The sensitivity of pension funding requirements to discount rates, mortality assumptions, and investment performance.