EBF

Business Context and Reporting Period

Company: Ennis, Inc.
Filing Type: Form 10-K (Annual Report)
Period Ended: February 28, 2010
Business Overview: Ennis operates two primary segments: the Print Segment (manufacturing business forms and printed products, ~55% of sales) and the Apparel Segment (manufacturing activewear, primarily t-shirts under the Alstyle brand, ~45% of sales). The company distributes products primarily through independent dealers in North America.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net sales decreased 11.4% to $517.7 million, driven by a severe economic recession and digital substitution in the Print Segment. Print sales fell 13.7%, while Apparel sales declined 8.4%.
• Profitability Recovery: The company returned to profitability with $35.2 million in net earnings, reversing a $32.8 million loss in 2009. This turnaround was primarily due to the absence of a non-cash impairment charge (which totaled $67.9 million in 2009) and improved gross margins.
• Margin Expansion: Consolidated gross margin improved by 150 basis points to 26.1%, aided by cost-control initiatives and favorable cotton pricing in the fourth quarter.
• Debt Reduction: Long-term debt decreased significantly by approximately $34.4 million as the company utilized strong operating cash flows to pay down its revolving credit facility.
• Inventory Management: Inventories were reduced by $26.0 million, contributing to a $27.1 million cash inflow from operating activities.

Outlook, Risks, and Management Commentary

• Guidance & Outlook: Management anticipates continued economic volatility. While the fourth quarter of 2010 showed sales improvement, high unemployment and housing sector weakness remain risks. The company expects to achieve $10 million to $15 million in annualized cost savings once the new Agua Prieta, Mexico facility is fully operational in fiscal 2011.
• Capital Projects: Construction of the new apparel manufacturing facility in Mexico is underway, with an estimated total cost of $45 million to $50 million. Start-up costs are expected to negatively impact fiscal 2011 results by approximately $6 million to $8 million.
• Key Risks:
  • Digital Obsolescence: Continued erosion of demand for printed business documents due to digital technologies.
  • Commodity Prices: Volatility in cotton (40% of apparel costs) and paper prices, with limited ability to pass costs to customers in a competitive market.
  • Foreign Operations: Reliance on Mexican manufacturing facilities subject to regulatory changes, tariffs, and political instability.
  • Customer Credit: Increased risk of non-payment due to economic downturns, particularly among retail customers.
• Unusual Items: Fiscal 2009 included a $63.2 million goodwill impairment and $4.7 million trademark impairment charge related to the Apparel Segment. No such charges were recorded in 2010.

Investor Verification Checklist

• Impairment Testing: Verify the assumptions used in the annual goodwill and intangible asset impairment tests, given the $117.3 million goodwill balance.
• Agua Prieta Facility: Monitor the timeline and cost overruns for the new Mexico facility, as delays could increase start-up costs beyond the projected $6-8 million.
• Cotton Pricing: Assess the company's ability to pass through rising cotton costs to customers in the highly competitive apparel market.
• Print Segment Trends: Evaluate the rate of decline in traditional print sales versus growth in custom/digital hybrid products.
• Debt Covenants: Confirm continued compliance with the credit facility covenants, specifically the total funded debt to EBITDA ratio.