Ennis, Inc. — FY2012 Form 10-K
Business context and reporting period. Ennis manufactures printed business products and activewear through its Print and Apparel segments. This annual report covers the fiscal year ended February 29, 2012; the fourth quarter ended that date. Amounts below are in U.S. dollars unless stated otherwise.
Financial performance
| Metric | FY2012 | FY2011 |
|---|---|---|
| Net sales | $517.0 million | $550.0 million |
| Gross profit / margin | $130.5 million / 25.2% | $154.5 million / 28.1% |
| Operating income / margin | $51.7 million / 10.0% | $70.8 million / 12.9% |
| Net earnings / diluted EPS | $31.4 million / $1.21 | $44.6 million / $1.72 |
| Operating cash flow | $24.6 million | $32.8 million |
| Cash at year-end | $10.4 million | $12.3 million |
| Revolver borrowings | $90.0 million | $50.0 million |
| Working capital / current ratio | $169.0 million / 4.36:1 | $135.3 million / 3.87:1 |
Fiscal fourth quarter: Sales were $121.5 million, gross profit was $26.5 million, net earnings were $3.3 million, and diluted EPS was $0.13. In the year-earlier quarter, sales were $131.4 million, gross profit was $36.1 million, net earnings were $9.8 million, and diluted EPS was $0.38.
FY2012 cash used in investing was $50.8 million, including $46.0 million for acquisitions; financing provided $23.7 million, including $40.0 million of revolver borrowings and $16.1 million of dividends. The annual dividend was $0.62 per share. Debt was variable-rate; a one-percentage-point rate change would affect annual results by approximately $0.9 million. The company reported $56.5 million of revolver availability, including the effect of $3.5 million in standby letters of credit, and said it was compliant with credit covenants.
Material changes and management commentary
- Sales fell 6.0% year over year, mainly as Apparel sales declined $38.3 million, or 13.8%. Print sales increased $5.3 million, or 1.9%, including contributions from acquisitions.
- Apparel gross margin fell to 21.6% from 27.9%; management attributed the decline to high cotton costs and selling-price pressure. Print gross margin was 28.4%, compared with 28.3%.
- Operating cash flow declined $8.2 million. Inventory increased to $132.6 million from $100.4 million, reflecting higher cotton costs, slower turns, and acquired Print inventory.
- On February 10, 2012, Ennis acquired certain PrintXcel and Printegra assets for $40.0 million plus assumed trade liabilities. On September 30, 2011, it acquired PrintGraphics and related property for $6.0 million. The filing reports $45.956 million of net cash used for business purchases.
- The Agua Prieta, Mexico apparel facility was fully operational and production had transitioned from Anaheim. Management estimated total transition and start-up impacts of $7.5–$8.5 million, of which $3.2–$3.9 million affected FY2012 results.
Outlook, risks, and contingencies
- Management described the near-term Apparel outlook as challenging: elevated contracted cotton costs were still flowing through inventory while market prices and demand were weak. It expected margin pressure for the next several quarters and said a better business environment could emerge in the second half of FY2013 if inventory costs and selling prices realigned.
- For FY2013, management expected capital expenditures of $4–$5 million, excluding possible acquisitions, and pension contributions of $2–$3 million. It expected operating cash flows to cover normal operating and capital needs. No formal earnings or revenue guidance was provided.
- Key risks include structural substitution of printed forms by digital technologies; economic weakness and competitive pricing; cotton, paper, freight, and energy cost volatility; dependence on a major yarn supplier; customer credit losses; labor and foreign-operation risks; and disruption or underperformance at the Mexico facility.
- Goodwill and other intangible assets were approximately $121.6 million and $87.4 million, respectively. The annual impairment test found no impairment. The pension liability increased to $7.5 million from $2.0 million, primarily reflecting a lower discount rate and asset performance.
- The revolving facility matures in August 2016, is secured by specified company assets and equity interests, and contains financial and operating covenants. Contractual obligations included $14.9 million of operating leases and $36.0 million of estimated pension benefit payments. The company reported no off-balance-sheet arrangements and believed pending ordinary-course litigation would not materially affect its financial position or results.
- Auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Internal-control audit coverage excluded PrintXcel and Printegra, acquired shortly before year-end.
Important facts for investors to verify
- Whether Apparel demand, selling prices, and margins recovered as high-cost cotton inventory was sold through.
- Acquisition contribution, integration progress, and whether acquired sales and earnings justify the purchase prices and added debt.
- Inventory quality, aging, and turnover, including the effect of cotton-cost changes and the adequacy of inventory reserves.
- Revolver usage, available capacity, covenant headroom, and exposure to floating interest rates.
- Progress at the Agua Prieta facility, including realized cost savings, efficiency, and remaining transition commitments.
- Pension funding assumptions and required contributions, and the sensitivity of goodwill and intangible valuations to business performance.