Ennis, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended May 31, 2018, Ennis’s first quarter of fiscal 2019, with comparisons to the three months ended May 31, 2017. Ennis manufactures and sells commercial printing and business products, primarily through independent distributors in the United States. It reported one revenue category: commercial printed products.
Key financial metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $93.4 million | $94.6 million |
| Gross profit / margin | $30.2 million / 32.3% | $30.0 million / 31.7% |
| Operating income / margin | $12.5 million / 13.3% | $12.7 million / 13.4% |
| Net earnings | $9.2 million | $7.8 million |
| Diluted earnings per share | $0.36 | $0.31 |
| Operating cash flow | $11.9 million | $12.3 million |
The effective tax rate was 25.0%, down from 37.0%, primarily reflecting the Tax Cuts and Jobs Act enacted in the prior fiscal year. Cash dividends were $0.20 per share in the quarter.
At May 31, 2018, cash was $96.4 million, working capital $137.3 million, and the current ratio 5.9:1. Long-term debt was $30.0 million. The revolving facility provided approximately $68.8 million of remaining borrowing capacity after $1.2 million of letters of credit; the company was in compliance with its covenants. The facility’s interest rate was 3.3%.
Material changes versus prior comparable period
- Sales declined $1.2 million, or 1.3%. Management cited a soft market and competitive pricing; the April acquisition of Allen-Bailey Tag & Label (ABTL) contributed $1.0 million of sales.
- Gross margin improved by 0.6 percentage points, which management attributed to increased absorption, plant consolidation, and product mix.
- SG&A increased 2.3% to $17.7 million, including ABTL costs and higher legal and performance-bonus accruals. Operating income edged down 1.6%, while net earnings rose 17.9%, mainly reflecting the lower tax rate.
- Operating cash flow decreased $0.5 million. Investing cash use rose to $5.9 million, including $4.7 million for ABTL and $1.2 million in capital expenditures. Cash ended the quarter up $0.2 million from February 28, 2018.
- Inventories increased $4.5 million from fiscal year-end to $31.0 million. The company repurchased 37,943 shares for $0.7 million during the quarter.
Outlook, commentary, risks and unusual items
- Management expects cash from operations, supplemented by the credit facility as needed, to cover operating and capital requirements for the foreseeable future. It expects fiscal 2019 capital expenditures of $3–$5 million, excluding possible acquisitions, and pension contributions of $2–$3 million despite no minimum required contribution for the plan year.
- Management described ongoing industry challenges: declining demand for traditional print, digital substitution, customer consolidation, intense price competition, and rising paper prices and potential supply allocations. It said cost control, passing through material increases where possible, product development, and acquisitions are important responses; successful pass-through is not assured.
- ABTL was acquired April 30 for $4.7 million cash plus assumed trade payables, subject to working-capital adjustment. Up to $0.5 million of contingent consideration may be payable if specified sales levels are maintained over three years. Management considers the acquisition immaterial.
- The company reported $95.2 million of cash above FDIC insurance limits at May 31. It also disclosed exposure to paper suppliers concentrated in a limited number of sources and a $0.7 million unfunded pension liability.
- On June 15, 2018, the board raised the quarterly dividend from $0.20 to $0.225 per share, payable August 3, 2018. Management reported no material changes to previously disclosed risk factors, no material pending legal proceedings beyond routine litigation, and no off-balance-sheet arrangements.
- Revenue-recognition guidance adopted March 1, 2018 did not have a significant reported or expected effect. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether paper cost increases and any supply constraints affect margins, availability, and the ability to pass costs to customers.
- ABTL’s subsequent sales and profitability, integration progress, working-capital adjustment, and any contingent payment obligations.
- Inventory levels and operating cash conversion, given the quarter’s inventory build and lower operating cash flow.
- Credit-facility covenant headroom, variable-rate exposure, and the company’s capacity to fund dividends, pension contributions, and repurchases.
- Potential effects of continued print-market contraction, customer consolidation, and impairment assumptions for goodwill and intangible assets.