Ennis, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended May 31, 2020, the first quarter of fiscal 2021, compared with the three months ended May 31, 2019. Ennis manufactures and distributes business forms and other printed products, primarily through independent distributors in the United States. Management attributed the quarter’s sales decline chiefly to COVID-19-related economic disruption.
Key financial metrics
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Net sales | $89.0 million | $108.0 million | Down 17.6% |
| Gross profit / margin | $23.9 million / 26.9% | $32.7 million / 30.3% | Margin down 3.4 percentage points |
| Operating income / margin | $5.9 million / 6.6% | $13.0 million / 12.0% | Down 54.6% in dollars |
| Net earnings | $4.2 million | $9.6 million | Down 56.6% |
| Diluted EPS | $0.16 | $0.37 | Down $0.21 |
| Operating cash flow | $14.9 million | $15.7 million | Down $0.8 million |
| Capital expenditures | $1.1 million | $0.8 million | Up $0.3 million |
At May 31, 2020, cash was $75.8 million, working capital was $114.2 million and total current assets were $145.4 million versus current liabilities of $31.2 million. Management reported a current ratio of 4.66 and quick ratio of 3.56. The company had no revolving-credit debt and approximately $99.3 million of borrowing availability, net of $0.7 million in standby letters of credit, under a $100 million facility maturing November 11, 2021. It reported compliance with facility covenants. Total liabilities were $63.5 million, including operating lease liabilities of $18.4 million and an unfunded pension liability of $8.9 million.
Cash increased $7.6 million from February 29, 2020. Operating cash flow was supported by a $9.3 million accounts-receivable reduction; cash used for investing was $1.0 million, and cash used for financing was $6.3 million, including $5.9 million of dividends. The quarterly dividend was $0.225 per share, unchanged year over year; a subsequent quarterly dividend of the same amount was declared for payment in August 2020.
Material changes versus prior period
- COVID-19-related weakness, especially in transactional forms, drove much of the sales decline. Flesh, acquired in July 2019, contributed approximately $6.2 million of current-quarter sales.
- Lower production reduced factory utilization and efficiency; product mix also weighed on gross margin. Cost of goods sold fell 13.5%, less than the decline in sales.
- SG&A declined 8.1% to $18.1 million, but rose to 20.4% of sales from 18.3%. The company cited approximately $0.7 million of Flesh-related SG&A, $0.6 million in legal fees for trade-secret infringement cases, and a $0.6 million increase in its bad-debt reserve related to COVID-19.
- Operating cash flow decreased modestly despite lower earnings, with working-capital movements affecting the comparison. Investing cash use was lower than the prior-year period, which included $8.9 million for the Integrated acquisition.
Outlook, commentary and risks
- No formal numeric earnings or sales guidance was provided. Management said COVID-19 could result in lower sales and earnings for the remainder of fiscal 2021 than absent the pandemic, and expected negative effects at least into the latter part of the fiscal year. Duration and magnitude remained uncertain.
- Plants were deemed essential and most continued operating, but at reduced production levels. The company had furloughed 320 employees, ceased operations at one underutilized owned facility, exited two facilities with expiring leases and moved production elsewhere. Management said these actions were intended to preserve capacity to serve demand when conditions improve.
- Management cited strong liquidity and expected operating cash flows, supplemented if needed by the credit facility, to cover foreseeable operating and capital needs. Fiscal-year capital expenditures, excluding acquisitions, were expected to be within the historical range of $3 million to $5 million.
- Paper suppliers and supply availability remain important risks; management said COVID-19 had not materially disrupted supply to date, but supplier disruption could hurt results. Other risks include continuing decline in traditional forms demand and digital substitution, price competition, customer consolidation, customer credit risk, and the uncertain effect of the pandemic on demand and operations.
- Goodwill was $82.5 million. Despite the substantial revenue decline, management’s quarter-end review found prior impairment assumptions materially accurate and recorded no impairment. A prolonged downturn could still increase impairment risk.
- The credit facility restricts leverage, fixed-charge coverage and dividends. The company reported covenant compliance. Minimum required pension contributions for the plan year ending February 2021 were zero; assuming stable funding, management expected annual cash contributions of $1.5 million to $3.0 million, subject to investment returns and discount rates.
- Other notable items: a $112,000 gain on disposal of assets, primarily manufacturing equipment; no material pending legal proceedings were reported, although the company cited ongoing trade-secret infringement cases; and a board member-related entity accounted for approximately $0.5 million of sales and $0.1 million of lease payments in the quarter.
Important facts for investors to verify
- Whether sales and production recover, particularly in transactional forms, and whether cost reductions can offset persistent lower volume without impairing service or margins.
- Subsequent bad-debt experience, receivable collections and the adequacy of the $940,000 allowance for doubtful receivables.
- Liquidity, credit-facility availability and covenant compliance as the facility approaches its November 2021 maturity.
- Potential goodwill impairment and pension funding needs if economic, market or operating assumptions deteriorate.
- Whether the declared dividend and planned capital spending remain supportable under prolonged pandemic-related weakness.