Ennis, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2018. Ennis manufactures and distributes commercial printing products, primarily through independent distributors in the United States.
Financial performance
| Metric | Three months ended Aug. 31, 2018 | Three months ended Aug. 31, 2017 | Six months ended Aug. 31, 2018 | Six months ended Aug. 31, 2017 |
|---|---|---|---|---|
| Net sales | $98.6 million | $94.9 million | $192.0 million | $189.5 million |
| Gross profit / margin | $30.3 million / 30.8% | $30.9 million / 32.5% | $60.5 million / 31.5% | $60.9 million / 32.1% |
| Operating income / margin | $12.8 million / 12.9% | $13.8 million / 14.5% | $25.2 million / 13.1% | $26.4 million / 14.0% |
| Net earnings | $9.6 million | $8.5 million | $18.8 million | $16.3 million |
| Diluted EPS | $0.37 | $0.34 | $0.74 | $0.64 |
| Cash dividends per share | $0.225 | $0.200 | $0.425 | $0.375 |
Quarterly sales increased 3.9% year over year, while six-month sales rose 1.3%. Net earnings increased 12.0% for the quarter and by $2.5 million for the six-month period. Lower income tax expense helped earnings: the effective rate was 25% in 2018 versus 37% in 2017, reflecting the Tax Cuts and Jobs Act. Higher raw-material costs and acquisition-related mix reduced gross margins.
Cash, liquidity and debt
- Six-month operating cash flow was $24.3 million, compared with $19.2 million a year earlier. Investing used $29.6 million, chiefly for acquisitions; financing used $11.4 million, including $10.8 million of dividends.
- Cash was $79.5 million at August 31, 2018, down from $96.2 million at February 28, 2018. Working capital was $127.7 million, versus $133.8 million, and the current ratio was 5.0x.
- Long-term debt was $30.0 million, unchanged from February 28. The $100 million revolving facility matures August 11, 2020; approximately $68.8 million remained available after borrowings and letters of credit. Ennis reported covenant compliance.
- The company paid dividends of $10.8 million and repurchased $0.7 million of stock during the six months. The board declared a subsequent quarterly dividend of $0.225 per share, payable November 5, 2018.
Material developments, outlook and risks
- Acquisitions: Ennis acquired Wright Business Graphics on July 31 for a stated purchase price of $38.5 million, comprising $16.2 million in Ennis shares and $22.3 million in cash, including debt payoff. Wright reported approximately $58 million in fiscal-year sales through March 31, 2018. Ennis also acquired Allen-Bailey Tag & Label for $4.7 million cash plus assumed trade payables; up to $0.5 million of contingent consideration may be payable. Acquisitions contributed sales but diluted reported margins; management expects margins to improve after reviewing cost structures and implementing its cost systems.
- Management outlook: Ennis expects operating cash flows, supplemented by its credit facility if needed, to cover foreseeable operating and capital requirements. Fiscal 2019 capital expenditures are expected to be $3–$5 million, excluding possible acquisitions; approximately $2.5 million had been spent. The company expects to contribute $2–$3 million to its pension plan in fiscal 2019.
- Industry risks: Management described soft demand, competitive pricing, ongoing decline in traditional print, and rising paper, freight and other input costs. Paper supply is tight, with some grades subject to allocation; timely recovery of cost increases through customer pricing is uncertain. Customer consolidation, technology substitution, supplier concentration and acquisition integration also pose risks.
- Other matters: The company had no material pending legal proceedings beyond routine litigation and reported no material changes to previously disclosed risk factors. Disclosure controls were deemed effective, with no material change in internal control over financial reporting during the quarter. Management expects lease accounting adoption in fiscal 2020 to significantly increase balance-sheet assets and liabilities; revenue-standard adoption had no significant impact.
Important facts for investors to verify
- Whether Ennis can pass through elevated paper and freight costs and restore margins, particularly in the acquired businesses.
- Wright and Allen-Bailey integration, purchase accounting, acquisition contributions and any final working-capital or contingent-payment adjustments.
- Cash generation and liquidity after acquisition spending, dividends, pension contributions and planned capital expenditures.
- Credit-facility covenant headroom, variable-rate exposure, and the effect of interest-rate changes; a one-point rate change on period-end variable-rate debt was estimated to affect annual results by about $0.3 million.
- Supplier and deposit concentration: $78.0 million of cash was above FDIC insurance limits at August 31, 2018; management said balances fluctuate and losses cannot be ruled out.