Business context and reporting period
Ennis, Inc. manufactures and sells commercial printing products, including business forms, labels, tags, envelopes and folders, primarily through U.S. independent distributors. It operates as one reportable segment. This Form 10-Q covers the fiscal first quarter ended May 31, 2021, compared with the three months ended May 31, 2020. Amounts below are in U.S. dollars.
Financial results and position
| Metric | Quarter ended May 31, 2021 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $96.9 million | $89.0 million | +8.9% |
| Gross profit; margin | $29.2 million; 30.1% | $23.9 million; 26.9% | Margin +3.2 percentage points |
| Operating income; margin | $10.5 million; 10.9% | $5.9 million; 6.6% | Higher |
| Net earnings | $7.3 million | $4.2 million | Higher |
| Diluted EPS | $0.28 | $0.16 | Higher |
| Operating cash flow | $11.9 million | $14.9 million | Lower by $3.0 million |
Cash was $81.3 million at May 31, up $6.1 million from February 28, 2021. Working capital was $116.0 million; the current ratio was 4.0 versus 4.2 at fiscal year-end. The company had no revolver borrowings and reported about $99.4 million of available borrowing capacity after $0.6 million of letters of credit. Its $100 million credit facility was scheduled to mature November 11, 2021; the company reported covenant compliance. Lease liabilities totaled $18.7 million. The unfunded pension liability was $6.3 million.
Capital expenditures were $0.7 million. The company paid $0.225 per share in dividends, totaling $5.9 million; it made no share repurchases during the quarter. The effective tax rate was 30.0%, compared with 26.0% a year earlier.
Material changes and unusual items
- Infoseal, acquired in December 2020, contributed $5.2 million of current-quarter sales and $0.02 of diluted EPS. Management attributed the remaining sales increase to improving customer activity and recovery from pandemic-related weakness.
- Management said workforce and facility actions taken in response to COVID-19 improved cost structure and gross margin. SG&A rose 4.4% to $18.9 million; Infoseal accounted for about $0.6 million of expense, and a transition-related restricted-stock award added $0.8 million of expense.
- A $0.3 million gain on asset disposals primarily reflected the sale of a previously held-for-sale facility.
- Operating cash flow declined despite higher earnings, with working-capital movements contributing to the change. Cash increased overall, supported by operating cash flow and asset-sale proceeds.
- On June 1, 2021, after quarter-end, Ennis acquired the assets and business of AmeriPrint Corporation, a trade printer. The filing does not provide purchase price or pro forma financial impact.
Outlook, commentary and risks
Management said first-quarter results were within forecasted parameters and expected cash from operations, supplemented by the credit facility if needed, to cover foreseeable operating and capital needs. It estimated current-year capital expenditures, excluding possible acquisitions, at $3 million to $5 million. Management anticipated customer price increases in the second half of fiscal 2022 to address higher paper, freight and other costs.
The company said economic reopening was reflected in sequentially higher sales and improved margins, but COVID-19 effects and recovery remained uncertain. Key risks include paper price increases or supply constraints, reliance on a limited number of suppliers, intense price competition, secular substitution of printed forms by digital alternatives, customer consolidation, credit risk, and execution or integration of acquisitions. Management reported that paper shortages were not then a major concern, citing its primary supplier relationship. The filing reported $80.4 million of cash above FDIC insurance limits. No material changes to previously disclosed risk factors or material pending legal proceedings were reported.
Important facts for investors to verify
- Whether sales recovery and margin improvements persist, and how much growth is attributable to Infoseal versus underlying demand.
- Whether planned pricing actions offset increases in paper, freight and labor costs without weakening demand.
- The renewal or replacement terms of the credit facility approaching its November 11, 2021 maturity.
- AmeriPrint’s purchase price, financing, integration progress and contribution to results.
- Future pension funding needs, given the $6.3 million unfunded liability and sensitivity to investment returns and discount rates.
- Potential dilution and compensation expense from new equity awards; the proposed 2021 incentive plan was subject to shareholder approval at the scheduled July 15, 2021 meeting.