ENNIS, INC. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2012 (the first quarter of fiscal 2013). Ennis manufactures printed business products and activewear through its Print and Apparel segments. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Key financial results
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net sales | $142.5 | $143.3 | Down 0.6% |
| Gross profit | $28.2 | $39.7 | Down 28.9% |
| Gross margin | 19.8% | 27.7% | Down 7.9 percentage points |
| Operating income | $6.2 | $18.8 | Down 67.0% |
| Net earnings | $3.9 | $11.4 | Down 66.0% |
| Diluted EPS | $0.15 | $0.44 | Down $0.29 |
| Operating cash flow | $14.8 | $11.3 | Up $3.5 |
Print sales rose 30.1% to $87.3 million, principally reflecting $22.9 million of sales from acquisitions; Print gross margin was 27.9%, versus 28.8%. Apparel sales fell 27.5% to $55.2 million; its gross margin contracted to 7.0% from 26.8%, and the segment recorded a $2.8 million loss before tax versus $10.9 million of profit a year earlier. Consolidated SG&A increased 5.3% to $22.0 million. The effective tax rate was 36.5%, compared with 36.0%.
Cash, debt and liquidity
- Cash was $15.0 million at May 31, compared with $10.4 million at February 29, 2012. Working capital was $166.6 million and the current ratio was 5.2, up from 4.4.
- Operating cash flow of $14.8 million was supported substantially by inventory reductions; inventory fell $15.2 million from fiscal year-end. Investing used $0.1 million, including $0.1 million of capital expenditures. Financing used $9.6 million, including $5.0 million of debt repayment and $4.6 million of dividends.
- Revolver debt was $85.0 million, down from $90.0 million at February 29. The $150 million facility matures August 18, 2016; after $3.5 million of letters of credit, approximately $61.5 million remained available. Ennis reported covenant compliance.
- The quarterly dividend increased to $0.175 per share from $0.155. Management expected fiscal 2013 capital expenditures of $4–5 million and a fourth-quarter pension contribution of $2–3 million.
Material changes, outlook and risks
- Management attributed the sharp earnings and margin decline chiefly to Apparel: cotton costs flowing into cost of sales were 96% higher year over year, while competitive pricing limited cost recovery. Lower-cost cotton was beginning to replace higher-cost inventory, but management expected comparable margin pressure for another quarter or two.
- Management said Apparel-market softness, destocking and aggressive competitor promotions were weighing on sales. It expected a better business environment in the second half of fiscal 2013 as higher-cost inventory was worked through and anticipated more normalized sales and pricing; the timing depended on inventory turnover and achievable selling prices.
- PrintXcel and Printegra were acquired in February 2012 for approximately $40 million plus assumed trade liabilities, funded with revolver borrowings. The acquisitions expanded print capabilities. PrintGraphics, acquired in September 2011 for approximately $6 million, was also included in results. The PrintXcel/Printegra purchase-price allocation remained preliminary, with a $0.5 million goodwill adjustment in the quarter.
- Major risks include ongoing substitution of digital products for printed forms; volatile paper, cotton and freight costs; inability to pass costs through in competitive markets; economic uncertainty and apparel demand volatility; supplier concentration (one supplier provided 48% of Apparel yarn requirements); reliance on Mexican manufacturing and trade arrangements; pension funding and interest-rate exposure; and potential goodwill or intangible impairment. A one-percentage-point interest-rate change on quarter-end variable-rate debt would affect annual results by approximately $0.9 million.
- No material pending legal proceedings or off-balance-sheet arrangements were reported. Management stated disclosure controls were effective and that there had been no material change in internal control over financial reporting during the quarter. No material risk-factor changes from the prior annual report were reported.
Important facts for investors to verify
- Whether Apparel margins recover as higher-cost cotton inventory is sold, and whether management’s second-half fiscal 2013 improvement outlook is realized.
- How much of Print’s sales growth and earnings reflects acquired businesses versus underlying performance, including final purchase accounting for PrintXcel and Printegra.
- Current revolver availability, covenant headroom, and the company’s ability to manage floating-rate debt and planned pension contributions.
- Whether inventory reductions and cash generation are sustainable without impairing customer service or future sales.
- Progress on capital spending and production efficiency at the Agua Prieta facility, as well as developments in cotton, paper and supplier costs.