Ennis, Inc. — Q3 FY2021 Form 10-Q
Reporting period: Three and nine months ended November 30, 2020. Ennis manufactures and sells commercial printing and business products, primarily through independent distributors. The filing was dated January 6, 2021.
Financial results
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $92.4 million, down 19.6% year over year | $268.1 million, down 19.2% |
| Gross profit / margin | $28.1 million / 30.4%, versus $33.8 million / 29.5% | $77.2 million / 28.8%, versus $99.0 million / 29.8% |
| Operating income / margin | $11.6 million / 12.5%, versus $14.1 million / 12.3% | $26.4 million / 9.8%, versus $39.9 million / 12.0% |
| Net earnings | $8.4 million, versus $10.6 million; diluted EPS $0.32 versus $0.41 | $19.0 million, versus $29.7 million; diluted EPS $0.73 versus $1.14 |
Quarterly sales rose 6.7% sequentially from the second quarter; operating income increased from $8.9 million and diluted EPS from $0.25. The company attributed year-over-year weakness primarily to reduced demand associated with COVID-19. Third-quarter cost reductions and acquisition integration helped improve gross and operating margins versus both the prior-year quarter and the preceding quarter. Nine-month SG&A was $51.3 million, down 13.2%, but increased to 19.2% of sales from 17.8%.
Cash, liquidity and capital
- Cash was $89.4 million at November 30, 2020, up $21.1 million from February 29, 2020. Working capital was $127.5 million, up $15.6 million; the current ratio was 4.9.
- Nine-month operating cash flow was $40.8 million, compared with $44.4 million. Investing used $0.8 million, versus $21.5 million, largely reflecting no comparable business-acquisition spending; financing used $18.8 million, versus $50.1 million.
- No revolving debt was outstanding. The $100 million credit facility had approximately $99.4 million of availability after letters of credit and matures November 11, 2021. Ennis reported compliance with its covenants.
- Total assets were $359.8 million and total liabilities $63.1 million. The balance sheet included an $8.9 million unfunded pension liability. Nine-month dividends were $0.675 per share; the board subsequently declared another $0.225 per share, payable February 4, 2021.
- Capital expenditures were $2.5 million for the nine months; management expected full-year spending of $3 million to $5 million, excluding possible acquisitions. The company repurchased 77,996 shares during the nine months for $1.2 million; $9.9 million remained authorized.
Outlook, risks and notable items
- Management said it expected COVID-19 to continue negatively affecting results on a comparative basis through at least the fiscal year-end. It gave no numerical earnings or revenue guidance and said the economic environment remained fluid.
- Approximately 300 employees had been furloughed; the company had ceased operations at two underutilized owned facilities and exited two facilities with expiring leases. Plants continued operating as essential businesses, often at reduced production levels.
- Management cited persistent demand and product-transition risks, including digital substitution for traditional forms, customer consolidation, price competition, and reliance on a limited number of paper suppliers. It said paper supply was not then a material concern, but supplier disruption could adversely affect results.
- COVID-19-related bad-debt expense increased; the nine-month allowance for doubtful accounts rose to $951,000 from $715,000 at fiscal year-end. Management also noted $88.2 million of cash was above FDIC insurance limits.
- A $0.6 million nine-month gain on asset disposals partly offset operating pressures. Goodwill impairment testing found significant fair-value cushion and no impairment was recorded. No material legal proceedings or material changes to previously reported risk factors were disclosed.
- After quarter-end, the company declared the dividend noted above and completed its acquisition of Infoseal LLC assets on December 31, 2020. The filing provides no purchase price for that transaction.
Key facts for investors to verify
- Whether sequential sales and margin improvements continued after November, given management’s warning of ongoing pandemic effects.
- The renewal or replacement of the credit facility, which was scheduled to mature in November 2021.
- Cash conversion, receivable collectability, and the risk associated with uninsured bank deposits.
- Pension funding needs and sensitivity to investment returns and discount rates.
- Infoseal’s purchase terms, integration, and contribution to results, as well as progress in adapting the product mix to digital substitution and changing customer demand.