Ennis, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2019. Ennis manufactures and distributes commercial printing products, primarily through independent distributors in the United States. Results are unaudited.
Financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net sales | $108.8m | $98.6m | $216.8m | $192.0m |
| Gross profit | $32.5m | $30.3m | $65.2m | $60.5m |
| Gross margin | 29.8% | 30.8% | 30.0% | 31.5% |
| Operating income | $12.8m | $12.8m | $25.8m | $25.2m |
| Net earnings | $9.5m | $9.6m | $19.2m | $18.8m |
| Diluted EPS | $0.37 | $0.37 | $0.74 | $0.74 |
- Q2 sales increased 10.3%; six-month sales increased 12.9%. Acquisitions contributed approximately $16.6m and $35.4m, respectively, exceeding the reported sales increases in both periods.
- Margins declined year over year, primarily from acquired businesses and, for the six-month period, prior raw-material price increases. Management said organic-plant margins remained above 31.5% and expected acquired-plant margins to improve as integration and cost-system work progresses.
- Operating income was nearly flat in Q2 and rose modestly for the six months; net earnings fell 1.0% in Q2 but increased about $0.4m for the six months. Management cited higher medical expenses and settlement-related interest expense as reducing current-period earnings by approximately $1.35m, or $0.05 per diluted share.
Cash flow, liquidity and capital
- Six-month operating cash flow was $27.7m, versus $24.3m a year earlier. Investing used $20.3m, including $18.7m for acquisitions and $1.5m for capital expenditures. Financing used $43.4m, including $30.0m of debt repayment, $11.8m of dividends and $1.6m of share repurchases.
- Cash declined to $52.5m from $88.4m at February 28, 2019. Working capital was $98.7m, down from $134.5m; the current ratio was 3.6, versus 5.3. Management attributed the working-capital decline chiefly to debt repayment, higher accounts payable and lease-accounting adoption.
- Long-term debt was zero at August 31, after repayment of $30.0m. The $100m revolving facility matures August 11, 2020; approximately $99.3m was available after $0.7m of standby letters of credit. The company reported covenant compliance.
- Quarterly dividends were $0.225 per share. The board declared another $0.225 dividend for payment November 8, 2019. The repurchase program had $11.9m remaining.
- Adoption of lease accounting added $20.8m of operating lease right-of-use assets and $20.5m of lease liabilities at August 31; adoption did not affect equity, earnings or cash flows.
Business developments, outlook and risks
- Ennis acquired Integrated Print & Graphics in March 2019 for approximately $8.9m and The Flesh Company and subsidiary in July for approximately $9.9m, plus assumption of trade payables and potential earn-out consideration. Management said these acquisitions broaden product and service capabilities. Results are included from their respective acquisition dates.
- Management expects operating cash flows, supplemented by the credit facility if needed, to cover foreseeable operating and capital requirements. Current-year capital expenditures, excluding possible acquisitions, were expected to be within the historical $3m–$5m range; approximately $1.5m had been spent. The company expected pension contributions of $1.3m–$1.5m in fiscal 2020, although the minimum required contribution for the plan year was zero.
- Management described a challenging market, citing electronic substitution and declining traditional forms demand, customer and industry consolidation, foreign imports, price competition, and volatile paper supply and costs. It noted that a stronger U.S. dollar was encouraging imports and that pricing had begun to normalize in some areas, but said historical pricing patterns may not recur.
- Key risks include dependence on a limited number of suppliers, inability to pass through cost increases, acquisition integration, declining volumes, customer credit risk, technology shifts, and potential goodwill impairment. Approximately $50.2m of cash was above federal deposit-insurance limits at August 31.
- The company reported no material pending legal proceedings, no material change in previously disclosed risk factors, and no off-balance-sheet arrangements. A settlement relating to the former apparel operations affected SG&A through approximately $325,000 of interest expense during Q2.
Investor verification points
- Track organic sales and margins separately from acquired-business contributions, and assess whether acquired operations achieve management’s expected margin improvement.
- Review acquisition integration, purchase-accounting estimates, contingent earn-outs and the contribution of acquired businesses to earnings and cash flow.
- Monitor paper pricing, import competition, customer consolidation and whether cost increases can be passed through.
- Assess cash deployment, dividend and repurchase sustainability, and the August 2020 credit-facility maturity and refinancing plans.
- Verify pension funding assumptions and the implications of uninsured cash balances and goodwill valuation.