Ennis, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended February 28, 2017 (including the fourth quarter). Unless noted, operating results below are for continuing operations, principally business forms and other printed products. The former apparel business is reported as discontinued operations following its sale.
Business context and significant transactions
- Ennis manufactures and sells business forms, labels, tags, envelopes, presentation folders and related printed products, primarily through independent distributors. It operated 60 U.S. manufacturing plants.
- On May 25, 2016, Ennis sold its Apparel Segment to Gildan for $110.0 million cash, subject to customary adjustments. Net cash proceeds reported were $107.4 million. The sale resulted in a $27.1 million after-tax loss, including the write-off of $16.1 million of foreign currency translation adjustments before tax.
- Ennis acquired Independent Printing on January 27, 2017, for $17.7 million cash. Independent reported approximately $37 million of unaudited calendar-2016 sales; it contributed about $3 million of Ennis sales in FY2017. Two smaller acquisitions were also completed.
Financial performance
| Metric | FY2017 | FY2016 | Change / context |
|---|---|---|---|
| Net sales, continuing operations | $356.9 million | $385.9 million | Down 7.5% |
| Gross profit / margin | $104.0 million / 29.1% | $116.3 million / 30.1% | Margin down 1.0 percentage point |
| Income from operations | $40.5 million / 11.4% of sales | $51.0 million / 13.2% | Down $10.5 million |
| Continuing-operations earnings | $26.4 million; $1.03 diluted EPS | $32.3 million; $1.25 diluted EPS | Down year over year |
| Consolidated net earnings | $1.8 million; $0.07 diluted EPS | $35.7 million; $1.39 diluted EPS | FY2017 includes the apparel-sale loss |
| Cash from operating activities | $58.9 million | $86.7 million | Lower, partly because apparel operations were sold |
| Cash from investing activities | $86.1 million provided | $4.1 million used | FY2017 principally includes apparel-sale proceeds |
| Cash from financing activities | $72.5 million used | $84.6 million used | FY2017 included dividends, debt repayment and share repurchases |
- Fourth-quarter FY2017 sales were $86.6 million, gross profit was $24.9 million, and quarterly net earnings reported were $7.2 million. Comparable fourth-quarter FY2016 figures were $91.2 million, $25.3 million and $5.3 million, respectively.
- Management’s non-GAAP adjustment for elevated medical costs increased FY2017 continuing-operations earnings by $2.8 million after tax, or $0.10 per diluted share, producing adjusted earnings of $29.2 million and adjusted diluted EPS of $1.13. Adjusted gross margin was 29.9%. These are management-defined non-GAAP measures, not substitutes for GAAP results.
Liquidity, debt and capital allocation
- At February 28, 2017, cash was $80.5 million, long-term debt was $30.0 million, working capital was $119.3 million and the current ratio was 5.0:1. Cash exceeded outstanding debt by $50.5 million.
- The revolving facility provides up to $100 million and matures August 2020. Including $1.2 million in letters of credit, approximately $68.8 million of borrowing capacity remained. The company reported covenant compliance; its facility includes leverage and fixed-charge coverage requirements.
- FY2017 dividends totaled $2.20 per share, including a $1.50 special dividend following the apparel sale. Ennis repurchased approximately $8.4 million of shares and had $21.7 million available under its repurchase authorization at year-end.
- Capital expenditures were $3.1 million. Management expected FY2018 capital expenditures of $3–5 million, pension contributions of $2–3 million, and sufficient operating cash flow for normal operating and capital needs. These are expectations, not guarantees.
Material changes, outlook and risks
- Management attributed lower sales to soft demand, intensified price competition and cheaper imported paper; the Omaha-to-Columbus folder-operations move reduced FY2017 sales by an estimated $5.8 million. The operation was marginally profitable in the last two quarters, with management expecting improved profitability in FY2018.
- Medical claims exceeded historical levels, leading to an additional $4.3 million charge to earnings in FY2017. A new reimbursement program and health-plan changes began in calendar 2017; management said early indications were positive but savings remained uncertain.
- Management expected Independent’s contribution to be more significant in FY2018 and to more than offset normal industry revenue attrition. The filing gives no specific consolidated FY2018 revenue or earnings guidance.
- Key business risks include declining demand from digitization, customer and industry consolidation, intense price competition, paper-cost and supplier exposure, labor and benefit costs, customer credit risk, and potential goodwill or intangible-asset impairment. Pension obligations are sensitive to investment performance, discount rates and actuarial assumptions.
- Goodwill was $70.6 million and other intangible assets were $53.9 million at year-end; no impairment charge was recorded for FY2017. The pension liability was $4.8 million, and the company estimated a 10-basis-point discount-rate change could alter the pension liability by about $0.9 million.
- Management reported effective disclosure controls and internal control over financial reporting; the auditor issued unqualified opinions. Independent Printing was excluded from the internal-control assessment because of its recent acquisition. The company reported no material litigation outcome expected and no off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the reported FY2017 GAAP earnings with management’s adjusted results and assess whether the medical-cost and relocation adjustments are genuinely nonrecurring.
- Track post-acquisition sales, margins and cash generation at Independent, and whether folder operations achieve the expected improvement.
- Assess the sustainability of recurring sales and margins amid print-industry attrition, imports and pricing pressure; FY2017 backlog fell to $14.9 million from $18.9 million.
- Review cash deployment after the asset sale, including the special dividend, continuing repurchases, debt and pension funding needs.
- Consider the $79.5 million of cash balances reported above FDIC-insured limits, as well as credit-facility covenant capacity and pension assumptions.