ENNIS, INC. — Q3 FY2018 Form 10-Q
Reporting period: Three and nine months ended November 30, 2017; fiscal year ends February 28. Unaudited results cover continuing operations, principally printed business forms and related products. The apparel segment was sold in May 2016 and is reported as discontinued operations.
Financial performance
| Metric | Three months ended Nov. 30, 2017 | Prior-year quarter | Nine months ended Nov. 30, 2017 | Prior-year period |
|---|---|---|---|---|
| Net sales | $93.6 million | $88.7 million | $283.1 million | $270.3 million |
| Gross profit / margin | $29.9 million / 31.9% | $25.3 million / 28.5% | $90.6 million / 32.0% | $79.0 million / 29.2% |
| Operating income / margin | $13.2 million / 14.1% | $9.2 million / 10.4% | $39.4 million / 13.9% | $30.8 million / 11.4% |
| Continuing-operations earnings | $8.3 million | $5.7 million | $24.6 million | $19.2 million |
| Diluted EPS from continuing operations | $0.33 | $0.22 | $0.97 | $0.74 |
Quarterly sales increased 5.5%; nine-month sales rose 4.7%. For the nine-month comparison, net earnings were $24.6 million versus a $4.4 million loss in 2016, when the discontinued apparel business generated a $23.6 million after-tax loss, including the sale loss. The current nine-month period had no discontinued-operation earnings or loss.
Cash flow and liquidity: Nine-month operating cash flow was $33.8 million, down from $42.6 million; capital expenditures were $2.1 million. Cash increased to $92.9 million from $80.5 million at February 28, 2017. Working capital was $135.6 million and the current ratio was 6.0:1. The company reported $30.0 million of revolving-credit borrowings, $1.2 million of letters of credit, and approximately $68.8 million of remaining borrowing capacity. It was in compliance with credit covenants.
Debt and shareholder returns: The revolving facility runs to August 2020 and bears a 2.5% rate at November 30, 2017; a one-percentage-point rate increase would raise annual expense by approximately $0.3 million. Nine-month dividends were $14.6 million, or $0.575 per share. The company repurchased 191,033 shares under its program for approximately $3.3 million, with $18.4 million remaining authorized.
Material changes and management commentary
- Independent Printing, acquired in January 2017, contributed $9.8 million of quarterly sales and $1.3 million of quarterly operating income; for the nine months it contributed $29.9 million of sales and $4.2 million of income. A small Ohio tag-operation acquisition was completed in July 2017.
- Management attributed improved gross margin in part to prior-year costs from relocating folder operations and elevated medical claims. It estimated those prior-year impacts at $3.0 million and $2.9 million, respectively, for the nine-month period. Management said folder operations’ prior turnaround momentum continued.
- Trademark and trade-name assets formerly treated as indefinite-lived began being amortized in fiscal 2018, adding approximately $0.6 million to nine-month SG&A; expected fiscal-2018 amortization impact was approximately $0.83 million.
- Operating cash flow fell year over year, while investing cash flow shifted from $104.9 million provided to $3.4 million used, principally because prior-year investing cash included $107.4 million of net apparel-sale proceeds. Financing cash use also declined, partly because the prior-year period included a special $1.50-per-share dividend.
Outlook, risks and unusual items
- No specific sales or earnings guidance was provided. Management expects operating cash flows, supplemented by the credit facility if needed, to cover foreseeable operating and capital needs. Fiscal-year capital spending was expected to remain within the historical $3–5 million range; approximately $2.1 million had been spent by November 30.
- Management described a soft, price-competitive print market, long-term declines in traditional forms, digital substitution, customer-channel consolidation, and uncertainty about whether announced paper-price increases would hold and be passed on. Paper sourcing is concentrated among a limited number of suppliers.
- Other stated risks include recovering higher materials, freight, labor and benefit costs; competition and foreign imports; customer credit exposure; acquisition integration; and potential goodwill impairment if business volume and profitability decline. The company reported $92.0 million of cash above FDIC insurance limits at November 30.
- After quarter-end, the company paid a $3.0 million pension contribution on December 28, 2017. The board declared a regular $0.20-per-share dividend and, following enactment of the Tax Cuts and Jobs Act, a special $0.10-per-share dividend, both payable February 9, 2018. It also approved a one-time $500 bonus for more than 2,200 non-management employees. Management expected the tax law to reduce its effective tax rate and net deferred tax liabilities, partly offset by reduced deductions; the filing did not quantify the effects.
- The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and no material change in internal control over financial reporting during the quarter. Management assessed disclosure controls as effective.
Investor verification priorities
- Assess how much sales and earnings growth is attributable to Independent versus underlying business trends, and whether its SG&A burden improves as integration proceeds.
- Track gross-margin durability against paper-price changes, competitive pricing, and continued attrition in traditional print products.
- Reconcile operating cash-flow trends with earnings, working-capital movements, pension funding, dividends, and repurchases.
- Review the credit facility’s covenants, utilization and rate exposure alongside the company’s substantial cash balance, including uninsured deposits.
- Confirm the eventual tax-law impact, including deferred-tax remeasurement, employee bonus expense, and dividend-related cash requirements.