ENNIS, INC. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2012. Ennis manufactures printed business products and activewear through its Print and Apparel segments. Unless otherwise noted, amounts are in millions of dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net sales | $138.3 | $130.4 | $280.9 | $273.6 |
| Gross profit | $33.9 | $34.1 | $62.2 | $73.8 |
| Gross margin | 24.5% | 26.1% | 22.1% | 27.0% |
| Operating income | $12.6 | $15.8 | $18.9 | $34.6 |
| Net earnings | $7.6 | $9.7 | $11.5 | $21.1 |
| Diluted EPS | $0.29 | $0.37 | $0.44 | $0.81 |
- Q2 sales rose 6.1%, while six-month sales increased 2.7%. Print growth, primarily from acquisitions, more than offset lower Apparel sales.
- Print sales rose 24.3% in Q2 and 27.2% for six months. Print gross margin improved to 30.7% in Q2 and 29.3% for six months, compared with 28.6% and 28.7%.
- Apparel sales fell 14.5% in Q2 and 21.7% for six months. Apparel gross margin declined to 14.4% in Q2 and 10.6% for six months, from 23.4% and 25.3%. The six-month Apparel segment reported a $1.8 million loss, versus $17.6 million profit a year earlier.
- SG&A increased 15.8% in Q2 to $21.3 million and 10.4% for six months to $43.4 million, partly reflecting the prior-year Print acquisitions.
Cash flow, balance sheet and liquidity
- Six-month operating cash flow was $29.4 million, versus $12.7 million. Inventory reductions were a major source of cash; lower earnings were an offset.
- Investing activities used $2.9 million, including $0.9 million of capital expenditures; the period also included $3.7 million in acquisition purchase-price adjustment proceeds. Financing activities used $29.1 million, including $20.0 million of debt repayment and $9.1 million of dividends.
- Cash was $13.2 million at August 31, up from $10.4 million at February 29. Working capital was $158.2 million, down from $169.0 million; the current ratio was 4.8, up from 4.4.
- Revolving-credit debt was $70.0 million, down from $90.0 million. The $150 million facility matures August 18, 2016; after $3.5 million in standby letters of credit, availability was approximately $76.5 million. Ennis reported compliance with its covenants.
- Six-month dividends were $0.35 per share, versus $0.31. A further $0.175 per-share dividend was declared September 21, payable October 30, 2012.
Changes, outlook and risks
- The February 2012 PrintXcel and Printegra acquisition contributed materially to Print sales; its purchase price was adjusted from $40.0 million to approximately $36.2 million. Print management cited improved operating efficiencies and signs of stability in the underlying business.
- Management attributed the earnings decline chiefly to Apparel’s higher cotton costs and difficult pricing conditions. Cotton costs flowing through Q2 cost of sales were 45% above the prior-year quarter. Management said Apparel margin had improved 740 basis points sequentially and expected further improvement as lower-cost materials replaced higher-cost inventory.
- Management expected a better Apparel business environment in the second half of fiscal 2013, while noting that market softness, pricing pressure and the timing of inventory turnover made the outlook uncertain. No consolidated earnings guidance was provided.
- Expected fiscal-2013 capital expenditures, excluding acquisitions, were $4–$5 million. The company expected a $2–$3 million pension contribution in fiscal Q4, although the stated minimum required contribution for the plan year was zero following MAP-21.
- Key risks include structural decline in traditional printed forms from digital alternatives; economic and competitive pressures; volatile paper and cotton costs and delays in passing cost increases through; Apparel demand and pricing softness; operational efficiency at the Mexico manufacturing facility; supplier concentration; variable-rate debt exposure; and possible impairment of goodwill or intangible assets. A one-percentage-point interest-rate move on outstanding variable-rate debt was estimated to affect results by about $0.7 million.
- The company reported no material change in risk factors, no material pending legal proceedings beyond routine litigation, and effective disclosure controls as of August 31, 2012. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Apparel margins recover as lower-cost cotton inventory flows through, and whether competitive selling prices offset that benefit.
- How much Print growth is attributable to acquisitions versus underlying operations, and whether acquired operations sustain improved efficiencies.
- Inventory valuation and demand assumptions, including the pace of inventory reduction and the risk of further write-downs.
- Revolver availability, covenant headroom and floating-rate exposure, together with expected pension funding and capital spending.
- The sensitivity of goodwill and indefinite-lived trademarks to any sustained earnings or cash-flow deterioration.