ENNIS, INC. — Q1 FY2025 Form 10-Q
Reporting period: Three months ended May 31, 2024; comparative period is the three months ended May 31, 2023. Ennis manufactures and sells business forms and other printed products, primarily through independent distributors. It operated 57 manufacturing plants across 19 states and reported one segment.
Financial results
| Metric | Q1 FY2025 | Q1 FY2024 | Change |
|---|---|---|---|
| Net sales | $103.1 million | $111.3 million | Down 7.4% |
| Gross profit | $30.9 million | $34.0 million | Down 9.2% |
| Gross margin | 30.0% | 30.6% | Down 60 basis points |
| Operating income | $13.7 million | $15.7 million | Down 12.5% |
| Net earnings | $10.7 million | $11.6 million | Down 8.1% |
| Diluted EPS | $0.41 | $0.45 | Down $0.04 |
| Operating cash flow | $23.1 million | $21.7 million | Up $1.4 million |
SG&A was $17.2 million, down 6.0% year over year, but rose slightly as a share of sales to 16.7% from 16.5%. Other income was $1.0 million, primarily reflecting higher interest income ($1.4 million versus $0.8 million). The effective tax rate was 27.5%, compared with 28.0%.
Liquidity, cash flow and capital
- At May 31, 2024, cash was $91.4 million and short-term U.S. Treasury investments were $32.3 million. Working capital was $174.3 million; the current ratio was 5.7:1.
- Cash increased $9.8 million during the quarter. Operating activities provided $23.1 million; investing activities used $5.1 million and financing activities used $8.3 million.
- Capital expenditures were $2.5 million. The company expects current-fiscal-year capital requirements, excluding acquisitions, to be within its historical range of $3 million to $6 million.
- The filing reports no outstanding debt at May 31, 2024; $0.3 million was outstanding under a standby letter-of-credit arrangement secured by cash collateral. Operating lease liabilities totaled $8.6 million.
- Cash dividends paid were $0.25 per share. The company repurchased 91,883 shares for $1.8 million at an average price of $19.79; $21.5 million remained authorized for repurchases.
Material changes and management commentary
Sales declined $8.2 million year over year: weaker volume reduced revenue by $10.6 million, partly offset by approximately $2.4 million from recent acquisitions. Management attributed softer demand and increased price competition to a weakened market environment. Sales nevertheless rose 5.8% sequentially from the quarter ended February 29, 2024. Gross margin improved 60 basis points sequentially to 30.0%; management cited ERP integration at two acquired businesses, cost discipline and pricing strategies.
Management expects cash, short-term investments and operating cash flows to fund operating and normal capital needs for the next 12 months and beyond, and expects capital requirements to remain within historical levels. It anticipates a pension contribution of approximately $1.2 million before the end of the current fiscal year; expected annual contributions under stable funding conditions are $1 million to $3 million. No specific sales or earnings guidance was provided.
Risks, contingencies and notable items
- Key business risks include structural decline in traditional forms demand from digital alternatives, price competition, customer-channel consolidation, paper supply and cost pressures, dependence on a limited number of suppliers, and execution and integration of acquisitions. Management stated paper supply remained stable in the quarter, while margins remained pressured by weak volumes and competition.
- Cash balances included $90.6 million above FDIC insurance limits. Management said it did not believe deposits posed significant risk, but noted no assurance against losses.
- A subsidiary was awarded $5.8 million in damages and fees in litigation; the amount has not been recognized because the defendants’ appeal is pending. Defendants posted approximately $5.1 million in cash bonds, potentially recoverable if the appeal is unsuccessful.
- Other ordinary-course claims are not expected by management to have a material adverse effect. The company reported no material changes to its risk factors or contractual obligations.
- On June 25, 2024, after quarter-end, the company acquired Printing Technologies, Inc. and Paper Solutions, Inc. for approximately $4.9 million plus assumed trade payables. The board also declared a $0.25-per-share dividend payable August 5, 2024.
Important facts for investors to verify
- Whether demand and pricing conditions improve, and whether sequential sales and margin gains persist.
- How effectively the company realizes efficiencies from acquisition integration and manages acquisition-related costs and growth.
- Cash deployment across dividends, repurchases, capital expenditures and acquisitions, including liquidity after the June 2024 acquisition.
- Paper availability, supplier concentration, input-cost recovery and customer consolidation effects on sales and margins.
- Outcome and timing of the appealed $5.8 million judgment, which remains unrecognized, and the recoverability of the related cash bonds.
- Pension funding needs and exposure of uninsured bank deposits.