ENNIS, INC. annual report, FY2019

Business context and reporting period

Ennis, Inc. filed this Form 10-K for the fiscal year ended February 28, 2019, including the fourth quarter (three months ended February 28, 2019). The company manufactures and sells business forms and other printed products, primarily through independent distributors, and reports one operating segment. The filing describes a business facing declining demand for traditional forms and ongoing print-industry consolidation.

Financial performance and position

FY2019 investing cash outflow was $31.8 million, including $27.4 million for business acquisitions and $4.8 million of capital expenditures. Financing cash outflow was $27.4 million, including $22.6 million of dividends and $4.8 million of share repurchases. The annual dividend was $0.875 per share.

In the fourth quarter, sales were $100.7 million versus $87.1 million a year earlier; net earnings were $8.2 million versus $8.2 million, and diluted EPS was $0.32 in both periods. Gross profit was $29.1 million versus $26.4 million; gross margin was approximately 28.9% versus 30.3%.

Material changes versus the prior comparable period

• Full-year sales rose 8.3%, with Wright Business Graphics and Allen-Bailey Tag & Label contributing more than $44.7 million of FY2019 sales. Wright was acquired in July 2018; ABTL was acquired in April 2018.
• Gross margin declined from 31.7% to 30.8%, primarily because repeated raw-material price increases and freight costs could not be passed through promptly; the acquired businesses also diluted reported margins. Management expected acquired-business margins to improve as systems and cost controls were integrated.
• Operating income increased 4.7%, but operating margin fell from 12.9% to 12.4%. Net earnings rose 13.6%, supported in part by a lower effective tax rate: 25.0% versus 30.2%.
• Operating cash flow increased by $6.0 million. Cash declined by $7.8 million during the year, reflecting acquisition spending, dividends and repurchases.
• Wright consideration was approximately $38.9 million, comprising $16.2 million in stock and cash consideration. The filing reports differing amounts for debt payoff in separate sections; see verification items below.

Outlook, commentary, risks and unusual items

• No specific revenue or earnings guidance is provided. Management expected FY2020 capital expenditures of $3–$5 million, funded from operating cash flow, and pension contributions of $1.0–$1.5 million, absent a significant adverse event. It expected to continue share repurchases when considered appropriate.
• Management cited paper-supply constraints and multiple cost increases during FY2019. Increased imports and weaker domestic demand could ease supply and pricing pressure, but changes in ownership of major paper mills make the future pricing pattern uncertain.
• Key risks include continued digital substitution for printed documents, competitive pricing, inability to pass through paper, freight, labor and benefit costs, dependence on a limited number of paper suppliers, customer consolidation and credit risk, acquisition integration and goodwill impairment, labor disruptions, cyber or IT incidents, and pension funding sensitivity.
• The revolving facility had $30.0 million drawn and approximately $69.3 million of borrowing capacity remaining, including the effect of outstanding letters of credit. It bore interest at 3.6% at year-end, matures August 11, 2020, and includes leverage and fixed-charge coverage covenants. The company reported covenant compliance.
• The pension plan was 101.0% funded on a projected-benefit-obligation basis; a 10-basis-point discount-rate change affects the estimated pension liability by about $0.9 million.
• The Tax Act reduced the FY2018 fourth-quarter tax expense by $3.6 million through remeasurement of deferred taxes. FY2019 results had no comparable special tax benefit disclosed. The prior-year fourth quarter also included a one-time $0.10-per-share special dividend.
• The company adopted the new revenue standard using the modified retrospective method, with no significant reported effect. It expected lease-standard adoption from March 1, 2019 to add approximately $18.2 million of right-of-use assets and lease liabilities, without a material income-statement impact.
• Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting. The auditor’s internal-control opinion excluded Wright, acquired during the year; management also excluded Wright from its control assessment.

Important facts for investors to verify

• Reconcile the reported Wright debt payoff: the business overview says $2.6 million, while the acquisition note says $3.0 million; confirm the final acquisition accounting and consideration.
• Assess how much of the 8.3% sales increase came from acquisitions versus underlying business, and whether acquired margins and integration benefits developed as management expected.
• Track paper, freight and labor costs, pricing pass-through, and subsequent gross-margin trends amid ongoing industry attrition.
• Review cash use for acquisitions, dividends and repurchases, and the status of the credit facility approaching its August 2020 maturity.
• Monitor the pension plan’s funding, discount-rate and asset-return assumptions, and the expected lease liabilities recognized after adoption.
• Consider that $86.0 million of year-end cash was above FDIC insurance limits at individual accounts, as disclosed in the filing.