Ennis, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 31, 2017. Ennis manufactures and sells business forms and other printed business products, primarily through independent distributors. The figures below are unaudited; dollar amounts are in millions unless noted.
Financial performance
| Metric | Three months ended Aug. 31, 2017 | Six months ended Aug. 31, 2017 | Comparable 2016 |
|---|---|---|---|
| Net sales | $94.9 | $189.5 | $91.2 quarter; $181.7 six months |
| Gross profit / margin | $30.8 / 32.4% | $60.7 / 32.0% | 29.6% in both periods |
| Operating income / margin | $13.6 / 14.4% | $26.2 / 13.8% | $11.0 / 12.0% quarter; $21.6 / 11.9% six months |
| Continuing-operations earnings | $8.5 | $16.3 | $6.8 quarter; $13.5 six months |
| Diluted EPS from continuing operations | $0.34 | $0.64 | $0.26 quarter; $0.52 six months |
| Net earnings (loss) | $8.5 | $16.3 | $6.8 quarter; loss of $10.1 six months |
| Operating cash flow | $19.2 for six months | $29.1 for six months |
Quarterly sales rose 4.1% and six-month sales rose 4.3% year over year. Independent Printing, acquired in January 2017, contributed $10.4 million of quarterly sales and $20.1 million for the six-month period—more than the reported sales increases, indicating weakness in the pre-acquisition business in aggregate. Gross margin improved year over year; management cited prior-period medical costs and costs from relocating folder operations as factors weighing on 2016 margins.
Cash, debt and liquidity
- Cash was $83.9 million at August 31, up from $80.5 million at February 28, 2017. Working capital was $128.6 million; the current ratio was 5.9:1.
- Operating activities generated $19.2 million of cash in the six months. Investing activities used $2.9 million, including $1.6 million of capital expenditures and $1.35 million for an acquisition. Financing activities used $12.9 million, principally dividends and share repurchases.
- Revolver borrowings were $30.0 million, unchanged from February 28. With $1.2 million in letters of credit, approximately $68.8 million remained available under the $100 million facility, which matures August 11, 2020. The company reported compliance with its covenants.
- Six-month dividends were $0.375 per share; the prior-year $1.85 included a special dividend following the apparel sale. Ennis repurchased 191,033 shares for an average $17.33 per share, spending $3.3 million; $18.4 million remained authorized. A $0.20-per-share quarterly dividend was declared after quarter-end.
Changes, outlook and risks
- Compared with the prior-year six months, continuing-operations earnings improved, while reported net income also reflects the prior-year apparel-segment disposal loss. Ennis sold its Apparel Segment in May 2016; the prior-year six-month results included a $23.6 million after-tax discontinued-operations loss.
- Management expects sufficient operating cash flow, supplemented by the credit facility as needed, to fund foreseeable operating and capital needs. Fiscal 2018 capital expenditures are expected to be $3 million–$5 million; pension contributions are expected at $2 million–$3 million despite no minimum required contribution for the plan year. No earnings or revenue guidance was provided.
- Management said the relocated folder operation had returned to margins more in line with historical levels, though sales remained below historical norms, and expected further improvement. Early results from changes to the health plan were described as positive, but savings remain uncertain.
- Key business pressures include secular decline in traditional print demand, digital substitution, industry overcapacity and pricing competition, customer consolidation, cheaper imported paper, and dependence on a limited number of paper suppliers. Management also cited risks around acquisition integration, cost recovery, credit, and possible goodwill impairment.
- Ennis began amortizing certain trademarks and trade names in fiscal 2018 because of the declining trend in print sales. This added about $0.2 million to quarterly SG&A and $0.4 million for six months; estimated fiscal 2018 expense from this change was approximately $0.83 million.
- The filing reports no material pending legal proceedings beyond routine litigation, no material changes to previously disclosed risk factors, and no off-balance-sheet arrangements. Disclosure controls were assessed as effective.
Most important facts for investors to verify
- How much of sales and earnings growth is attributable to Independent versus underlying business trends, especially given ongoing print-market attrition.
- Whether the improved gross margins and folder-operation performance persist, and whether health-plan changes deliver expected savings.
- Cash generation and working-capital trends, including the decline in operating cash flow versus the prior-year period.
- Liquidity, covenant compliance, and capacity to sustain dividends, repurchases, pension contributions, and planned capital expenditures.
- Potential effects of trademark amortization, acquisition integration, pension funding, and industry pressures on future results.