ENNIS, INC. — Q2 FY2021 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended August 31, 2020; comparisons are with the periods ended August 31, 2019. Ennis manufactures and sells commercial printing products, principally through U.S. independent distributors. The company reported 57 manufacturing plants. COVID-19 materially reduced demand, particularly for transactional forms, while sales of some specialty products were comparatively stable.
Financial performance
| Metric | Three months ended Aug. 31, 2020 | Three months ended Aug. 31, 2019 | Six months ended Aug. 31, 2020 | Six months ended Aug. 31, 2019 |
|---|---|---|---|---|
| Net sales | $86.6m | $108.8m | $175.6m | $216.8m |
| Gross profit / margin | $25.2m / 29.0% | $32.5m / 29.8% | $49.1m / 27.9% | $65.2m / 30.0% |
| Operating income / margin | $8.9m / 10.3% | $12.8m / 11.8% | $14.8m / 8.4% | $25.8m / 11.9% |
| Net earnings | $6.4m | $9.5m | $10.6m | $19.2m |
| Diluted EPS | $0.25 | $0.37 | $0.41 | $0.74 |
- Year over year, quarterly sales fell 20.4% and six-month sales fell 19.0%; net earnings declined approximately 32.6% and 44.7%, respectively. Six-month sales comparisons included approximately $10.5m from the prior-year acquisitions.
- Quarterly gross margin improved sequentially from 26.9% in Q1 to 29.0% in Q2, and operating margin improved from 6.6% to 10.3%, which management attributed to cost controls. Both remained below the prior-year comparable quarter.
- Six-month operating cash flow was $28.2m, versus $27.7m a year earlier. Investing used $0.4m, compared with $20.3m, largely reflecting the absence of prior-year acquisition spending. Financing used $12.2m, including $11.7m in dividends and $0.4m in share repurchases. Cash increased $15.6m to $83.9m.
- At August 31, cash was $83.9m, working capital $120.6m, and the current ratio 4.48. Total assets were $360.2m and total liabilities $65.9m. The company had no revolving-credit debt, approximately $99.3m of borrowing capacity after letters of credit, and was compliant with facility covenants. The $100m facility expires November 11, 2021.
- Quarterly and six-month dividends were $0.225 and $0.45 per share, respectively. A further $0.225-per-share dividend was declared September 18, payable November 6, 2020.
Changes, outlook and risks
- Management attributed the sales and earnings decline primarily to pandemic-related economic restrictions and lower demand, especially for transactional forms. Reduced production also hurt factory utilization and efficiency. The company furloughed 320 employees, closed or exited underutilized facilities, and continued adjusting costs.
- Management expects COVID-19 to continue challenging results and believes sales and earnings for the remainder of fiscal 2021 may be lower than they would have been without the pandemic. No quantified earnings or sales guidance was provided. Management said the pandemic’s duration and ultimate impact remain uncertain.
- Capital expenditures for the fiscal year are expected to be within the historical range of $3m–$5m; $1.3m had been spent in the first six months. Management said operating cash flows and the credit facility should cover foreseeable requirements.
- Risks include continued pandemic-related demand weakness, secular substitution of print by digital alternatives, customer consolidation, price competition, reliance on a limited number of paper suppliers, customer credit losses, and potential goodwill impairment. Management reported no goodwill impairment and said its review found prior assumptions materially accurate. Paper pricing and demand remain uncertain.
- Unusual items included a $0.3m quarterly gain and $0.4m six-month gain from asset disposals, primarily underutilized property and equipment. Six-month bad-debt expense, net of recoveries, was $0.8m versus $0.02m a year earlier. The pension liability was $8.9m; minimum required contributions for the pension year ending February 2021 were zero, though management expects annual contributions of $1.5m–$3.0m assuming stable funding.
- On September 28, 2020, CFO and Treasurer Richard Travis retired for personal reasons; Vera Burnett was appointed interim CFO and Treasurer while the company searches for a successor. The filing reported no material pending legal proceedings and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether sales and margins recover as pandemic-related restrictions and demand conditions evolve, particularly for transactional forms.
- Credit quality and receivable reserves: the allowance was $0.874m, and management cited higher bad-debt expense amid COVID-19.
- Liquidity and dividend sustainability, including covenant compliance and the November 2021 credit-facility maturity; the current dividend payout was approximately $5.9m.
- Pension funding assumptions and investment returns; the recorded unfunded liability was $8.9m.
- Concentration and deposit risk: $82.6m of cash was above FDIC-insured limits at August 31, 2020, and the company relies on a limited number of paper suppliers.
- Related-party dealings: a facility lease and product sales involved an entity controlled by a director; six-month payments and sales were approximately $0.2m and $1.3m, respectively.