Ennis, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and nine months ended November 30, 2018; comparisons are with the periods ended November 30, 2017. The financial statements are unaudited. Ennis manufactures and distributes printed business products, primarily through independent distributors in the United States.
Financial performance
| Metric | Three months ended Nov. 30, 2018 | Prior-year quarter | Nine months ended Nov. 30, 2018 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $108.1 million | $93.6 million | $300.1 million | $283.1 million |
| Gross profit / margin | $33.8 million / 31.2% | $30.0 million / 32.0% | $94.3 million / 31.4% | $90.8 million / 32.1% |
| Operating income / margin | $14.0 million / 13.0% | $13.3 million / 14.2% | $39.2 million / 13.1% | $39.8 million / 14.0% |
| Net earnings | $10.4 million | $8.3 million | $29.2 million | $24.6 million |
| Diluted EPS | $0.40 | $0.33 | $1.14 | $0.97 |
Quarterly sales rose 15.5% and nine-month sales rose 6.0%. Net earnings increased 25.3% for the quarter and 18.7% for the nine months. The lower effective tax rate—25% versus 37% in both comparable periods—reflects the Tax Cuts and Jobs Act enacted in the prior fiscal year.
- Cash flow: Nine-month operating cash flow was $36.7 million, up from $33.8 million. Investing used $30.9 million, principally reflecting acquisitions; financing used $21.2 million, including $16.7 million of dividends and $4.6 million of share repurchases. Cash declined $15.4 million to $80.8 million.
- Liquidity and debt: Working capital was $132.3 million and the current ratio was 5.3:1 at November 30. Revolving debt was $30.0 million; approximately $69.3 million of borrowing capacity remained, including the effect of $0.7 million in standby letters of credit. Ennis reported compliance with its credit-facility covenants.
- Balance sheet: Total assets were $362.3 million, total liabilities $74.6 million, and shareholders’ equity $287.7 million. Goodwill was $81.4 million and net intangible assets were $63.1 million.
- Shareholder returns: Dividends were $0.225 per share for the quarter and $0.65 per share for the nine months. The board declared another $0.225-per-share quarterly dividend, payable February 8, 2019. The company repurchased 234,823 shares during the nine months for $4.6 million.
Material changes and business developments
- Growth included acquisitions. Wright Business Graphics, acquired July 31, 2018, contributed $15.4 million of quarterly sales and $20.3 million for the nine months; Allen-Bailey Tag & Label, acquired April 30, contributed $3.0 million and $7.1 million, respectively. Management did not quantify organic sales growth.
- Wright’s purchase price was approximately $38.9 million, consisting of $16.2 million in Ennis shares and $22.7 million in cash, including amounts used to repay Wright debt. Wright generated approximately $58 million in sales for its fiscal year ended March 31, 2018. The purchase-price allocation included $10.8 million of goodwill, which is not tax deductible.
- Reported gross margin declined year over year, as raw-material and freight cost increases were not passed through to customers quickly enough; the acquired businesses also diluted margins. SG&A rose with the acquisitions. Management said acquired-business margins improved during the quarter and expects further improvement as cost structures are analyzed and systems implemented.
- For context on acquisition impact, pro forma results assuming Wright had been owned from March 1, 2017 showed nine-month sales of $323.2 million versus $326.0 million, and earnings of $30.2 million versus $27.0 million. The filing cautions that pro forma results are not necessarily indicative.
Outlook, risks, and notable items
- Management expects operating cash flow, supplemented by the credit facility if needed, to cover operating and capital requirements for the foreseeable future. Fiscal 2019 capital expenditures are expected to be within the historical $3 million–$5 million range; $3.8 million had been spent by November 30.
- Management expects to contribute $2 million–$3 million to the pension plan in fiscal 2019, despite a zero minimum required contribution for the plan year. The recorded unfunded pension liability was $0.7 million.
- Management described a soft, price-competitive market and an industry facing print-volume attrition, customer consolidation, and digital substitution. Tight paper supply and repeated input-cost increases are pressuring margins; management expects the pressure to persist in the short term and says recovery depends on passing costs through to customers.
- Other risks include reliance on a limited number of paper suppliers, technology and foreign competition, customer credit risk, acquisition integration, and potential goodwill impairment. The filing reports $79.0 million of cash above FDIC-insured limits at November 30.
- The company expects lease-accounting adoption beginning March 1, 2019 to materially increase balance-sheet assets and liabilities, with no material income-statement impact expected. Revenue-standard adoption had no significant reported impact. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
Important facts for investors to verify
- How much sales growth was organic versus attributable to Wright and ABTL, and whether their margins improve as management expects.
- Whether Ennis can pass through paper, freight, and other cost increases without losing volume or customers.
- The final Wright working-capital adjustment and purchase accounting, plus the integration and performance of both acquisitions.
- Cash-flow and dividend capacity after acquisition spending, planned pension contributions, and continued repurchases; confirm covenant compliance and available credit.
- Exposure from uninsured cash balances, paper-supplier concentration, and assumptions supporting goodwill and intangible-asset carrying values.