ENNIS, INC. — FY2018 Form 10-K
Reporting period: Fiscal year ended February 28, 2018; filed May 11, 2018. The company manufactures and sells business forms and related printed products, primarily through independent distributors in the United States. Results below are for continuing operations unless noted.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $370.2 million | $356.9 million |
| Gross profit / margin | $116.9 million / 31.6% | $104.0 million / 29.1% |
| Income from operations / margin | $47.3 million / 12.8% | $40.5 million / 11.4% |
| Continuing-operations earnings | $32.8 million; $1.29 diluted EPS | $26.4 million; $1.03 diluted EPS |
| Net earnings, including discontinued operations | $32.9 million; $1.30 diluted EPS | $1.8 million; $0.07 diluted EPS |
| Operating cash flow | $45.3 million | $58.9 million |
| Cash and working capital | $96.2 million and $133.8 million | $80.5 million and $119.3 million |
| Long-term debt | $30.0 million | $30.0 million |
Cash flow from investing was a $4.0 million use in FY2018, compared with $86.1 million provided in FY2017, which included proceeds from the apparel-business sale. Financing used $25.6 million in FY2018, including $22.3 million of dividends and $3.3 million of share repurchases. FY2018 dividends were $0.875 per share, including a $0.10 special dividend; FY2017’s $2.20 included a $1.50 special dividend.
The revolving facility allows up to $100 million and matures August 11, 2020. At year-end, $30.0 million was drawn, $1.2 million of letters of credit was outstanding, and approximately $68.8 million of borrowing capacity remained. The company reported compliance with its covenants and cash exceeding 3.2 times outstanding debt. Current ratio was 5.52 to 1.
Changes versus the prior year
- Sales increased 3.7%; management attributed approximately $36 million of FY2018 sales to the Independent Printing acquisition, completed in January 2017. The filing does not provide a clear organic-sales growth figure.
- Gross margin improved by 2.5 percentage points. Management said the health-plan changes implemented in 2017 reduced FY2018 medical costs by more than $4 million; unusually high medical claims had hurt FY2017 results.
- SG&A rose 10.1% to $69.5 million, including approximately $8.0 million related to Independent, $0.8 million of additional trademark amortization, $1.2 million in employee bonuses, and $1.8 million more in performance bonuses.
- Continuing-operations earnings increased, while total net earnings also benefited from discontinued-operations income of $0.1 million versus a $24.6 million loss in FY2017.
- The effective tax rate declined to 30.2% from 34.0%. Enactment of the Tax Cuts and Jobs Act reduced income tax expense by $3.6 million through remeasurement of deferred tax balances.
Outlook, risks and unusual items
- No specific sales or earnings forecast was provided. Management expects FY2019 capital expenditures of $3–$5 million and pension contributions of approximately $2–$3 million; it expects operating cash flow to cover normal operating and capital needs and anticipates further repurchases when considered appropriate.
- Management described a soft, highly competitive market and ongoing decline in traditional printed forms. Digital substitution, distributor consolidation, price competition, and the company’s ability to develop newer products and offset industry attrition are significant uncertainties.
- Paper prices and availability are key risks: supplier capacity changes and announced price increases could raise costs, and the company may not be able to pass all increases through. The company also cited freight and labor cost pressures and reliance on a limited number of paper suppliers.
- The $2.0 million receivable related to escrow from the apparel sale was written off in FY2018 after an arbitrator ruled in Gildan’s favor; Ennis filed a complaint seeking to vacate the ruling. A related tax benefit and a separate tax-basis adjustment contributed to discontinued-operations results.
- Goodwill was $70.6 million and other intangible assets were $49.3 million at year-end; no goodwill impairment was recorded. The company began amortizing previously indefinite-lived trademarks in FY2018, adding about $0.8 million to SG&A.
- The pension plan was 98.7% funded on a projected-benefit-obligation basis and 106.8% on an accumulated-benefit-obligation basis. Funding status remains sensitive to investment returns, interest rates, and actuarial assumptions.
- After year-end, on April 30, 2018, the company acquired a New York tag-and-label operation for $4.75 million in cash plus assumed trade payables. The Ohio tag-operation acquisition in July 2017 cost $1.4 million; management considered both acquisitions immaterial.
- Ordinary-course litigation was not considered likely to materially affect financial position or results. The auditor issued unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Important facts for investors to verify
- How much of sales growth and margin improvement is repeatable after separating acquisition contribution, medical-cost normalization, and tax benefits?
- Whether paper-cost increases can be passed through without worsening volume, pricing, or margins, and whether supply availability remains adequate.
- Progress integrating Independent and the newer tag, label, folder, and other product businesses, including their sales and profitability contribution.
- Resolution and ultimate financial impact of the disputed $2.0 million apparel-sale escrow receivable.
- Cash-flow sustainability alongside dividends, buybacks, acquisition spending, pension contributions, and the $30.0 million variable-rate borrowing.
- Whether continuing declines in traditional print products or changes in pension assumptions could trigger goodwill impairment or higher future funding needs.