10-Q: Ennis, Inc. Reports Q1 Sales Decline Amid Strategic Acquisitions and Industry Headwinds

Ennis, Inc. reported a 5.7% decrease in net sales and a 8.3% drop in net earnings for the first quarter ended May 31, 2025, despite an improved gross profit margin and strategic acquisitions aimed at diversifying its product portfolio.

Summary

• Net sales for the three months ended May 31, 2025, were $97.2 million, a decrease of $5.9 million or 5.7% compared to $103.1 million in the prior year period.
• The decrease in net sales was primarily due to an $11.4 million decline from legacy plants, partially offset by a $5.5 million increase from recent acquisitions.
• Gross profit was $30.2 million (31.1% of revenue) for the quarter, compared to $30.9 million (30.0% of revenue) in the prior year, indicating an improvement in gross profit margin.
• Net earnings for the quarter were $9.8 million, down from $10.7 million in the comparable prior year quarter.
• Diluted earnings per share (EPS) decreased to $0.38 from $0.41 in the same period last year.
• Selling, general, and administrative (SG&A) expenses decreased by $0.3 million, or 1.7%, to $16.9 million.
• Cash and cash equivalents decreased significantly to $32.6 million at May 31, 2025, from $67.0 million at February 28, 2025.
• Working capital decreased by $29.2 million, or 24.4%, to $90.2 million at May 31, 2025, primarily due to the acquisition of NEC and ESS.
• Net cash provided by operating activities was $8.0 million, a substantial decrease from $23.1 million in the prior year period, mainly due to increases in accounts/other receivables and inventories.
• Net cash used in investing activities increased to $30.8 million, primarily due to the $34.9 million acquisition of Northeastern Envelope Company (NEC) and Envelope Superstore (ESS).
• The company repurchased 260,560 shares of common stock for $5.0 million during the quarter under its stock repurchase program.
• Inventories increased by $14.3 million to $53.1 million, partly due to purchasing buffer stock in anticipation of a carbonless paper mill closure.

Sentiment

Score: 4

Explanation: The company experienced declines in sales, net earnings, and operating cash flow, indicating a challenging quarter. However, the gross profit margin improved, SG&A decreased, and strategic acquisitions were completed, showing proactive management in a difficult industry. The significant cash outflow for acquisitions and inventory build-up impacts short-term liquidity but is presented as a strategic investment for future stability.

Positives

• Gross profit margin improved to 31.1% from 30.0% in the prior year, indicating effective cost management and pricing strategies.
• Selling, general, and administrative (SG&A) expenses decreased by 1.7% due to operational efficiencies.
• The acquisition of Northeastern Envelope Company (NEC) and Envelope Superstore (ESS) for $34.9 million strengthens production capabilities and diversifies product offerings, contributing $5.5 million in new revenues.
• The company maintains a strong current ratio of 3.0 to 1.0, indicating solid short-term liquidity.
• A quarterly cash dividend of $0.25 per share was declared, demonstrating continued shareholder returns.
• The company is not required to make a contribution to its pension plan for fiscal year 2026, easing cash flow requirements.

Negatives

• Net sales decreased by 5.7% year-over-year, driven by an $11.4 million decline from legacy plants due to weaker volume demand and increased competition.
• Net earnings decreased by 8.3% to $9.8 million, and diluted EPS fell to $0.38 from $0.41.
• Cash and cash equivalents significantly declined by $34.4 million during the quarter, primarily due to the NEC and ESS acquisition.
• Net cash provided by operating activities decreased substantially from $23.1 million to $8.0 million, impacted by increases in accounts/other receivables and inventories.
• Other income decreased significantly from $1.0 million to $0.2 million, mainly due to lower interest income from reduced cash and investment balances.
• Working capital decreased by 24.4% due to the cash used for acquisitions and increased inventory levels.

Risks

• Continued consolidation of traditional supply channels and product obsolescence due to technological advances (e.g., electronic distribution, digital printing) pose ongoing challenges to demand for traditional printed documents.
• Paper supplier capacity adjustments, increased pricing, and potential supply allocations due to demand/supply curve imbalance, including the closure of the sole U.S. carbonless paper mill, could impact costs and supply.
• Highly competitive conditions and an over-supplied, price-competitive print industry exert downward pressure on prices and production volumes.
• Continued consolidation of customers (independent distributors) may impact margins and sales.
• Dependence on a limited number of key paper suppliers creates vulnerability to supply disruptions or unfavorable pricing.
• Cybersecurity risks and the impact of the internet and other electronic media on the demand for forms and printed materials remain significant threats.
• Customer credit risk and competitors' pricing strategies could adversely affect financial performance.
• A decline in business volume and profitability could result in an impairment in reported goodwill, negatively impacting operational results.
• The ability to retain key management personnel is crucial for business continuity and strategic execution.
• Challenges in identifying, managing, or integrating future acquisitions could hinder growth strategies.

Future Outlook

Management anticipates that current cash balances and expected cash flows from operations will be sufficient to cover operating and capital requirements for the next twelve months and beyond. Capital expenditures for operational maintenance are expected to be between $4.0 million and $7.0 million over the next twelve months, consistent with historical levels. The company will continue to seek new market opportunities and niches through acquisitions and invest in new and existing technology to transform its product portfolio and provide innovative solutions, including print-on-demand services and offerings that assist customers in their transition to digital business environments. The company expects to generate sufficient cash flows from operating activities to cover operating and other normal capital requirements for the foreseeable future.

Management Comments

• "We believe that our current cash balance of $32.6 million at May 31, 2025, as well as our anticipated cash flows from operations, which are expected to be similar to prior periods, should be adequate to cover the next twelve months and beyond of our operating and capital requirements."
• "We continue to take mitigating actions through our cost management and pricing strategies to maintain our margins and offset continued pressure from soft market conditions and increased competition on price."
• "We believe our inventory levels are sufficient to satisfy our customer demands and we anticipate having adequate sources of raw materials to meet future business requirements."
• "We expect our capital requirements for our current fiscal year, exclusive of capital required for possible acquisitions, will be within our historical levels of between $4.0 million and $7.0 million."

Industry Context

The printing industry is undergoing significant transformation, characterized by consolidation of traditional supply channels, product obsolescence due to digital technologies, and fluctuations in paper supplier capacity. Ennis, Inc. operates primarily through independent distributors, a segment distinct from the end-user market dominated by large manufacturers like R.R. Donnelley and Taylor Corporation. The company positions itself as the largest provider of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders to independent distributors in the U.S. The shift towards electronic distribution, digital printing, and print-on-demand services presents both challenges and opportunities, pushing companies like Ennis to diversify product offerings and invest in new technologies.

Comparison to Industry Standards

• The document states that it is not possible to determine the company's share of the total business products market due to a lack of adequate public statistical information.
• The company believes it is the largest producer of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders in the United States distributing primarily through independent distributors.
• The company competes on service, quality, and price within the distributor market, leveraging its strategic locations and buying power.

Legal Proceedings

• Crabar/GBF, Inc., a subsidiary of Ennis, was awarded $5.8 million in actual damages, exemplary damages, and attorneys' fees in a case against Wright Printing Company, its owner Mark Wright, and CEO Mardra Sikora in October 2023. The defendants have posted cash bonds totaling approximately $5.1 million, which should be recoverable if their appeal is unsuccessful.
• Ennis and one of its subsidiaries are defendants in a lawsuit in Arizona concerning the lease of the former B&D Litho facility, which was closed in 2019. The company has denied the landlord's allegations and is contesting the claim, having accrued a liability reserve of approximately $0.4 million. The case is expected to be tried during either the fourth calendar quarter of 2025 or the first calendar quarter of 2026.

Related Party Transactions

• The company leases a facility and sells product to an entity controlled by a member of the Board. As of May 31, 2025, the total right-of-use asset and related lease liability was $1.6 million. During the three months ended May 31, 2025, total lease payments and sales made to the related party were approximately $0.1 million and $1.1 million, respectively. Accounts receivable balances from this related party were $0.2 million as of May 31, 2025.

Stakeholder Impact

• **Shareholders:** Experienced a decrease in diluted EPS to $0.38 from $0.41, but will receive a consistent quarterly cash dividend of $0.25 per share. The ongoing share repurchase program aims to return capital to shareholders.
• **Employees:** The company continues to manage compensation and benefits, with a slight decrease in overall compensation expense in SG&A, but an increase in employee compensation and benefits accrued expenses.
• **Customers:** The company is facing softening demand and increased competition, leading to downward pressure on prices and volumes. Strategic acquisitions aim to strengthen production capabilities and diversify product offerings to better serve customers.
• **Suppliers:** The company relies on a limited number of key paper suppliers and is preparing for a supply disruption due to a carbonless paper mill closure by purchasing buffer stock, indicating potential increased demand or changes in supplier relationships.
• **Creditors:** The company maintains a strong liquidity position with a current ratio of 3.0 to 1.0 and no significant outstanding debt under its credit facility, suggesting low credit risk.

Next Steps

• Continue to implement strategic initiatives to transform the product portfolio and provide innovative solutions, including print-on-demand services.
• Make investments in new and existing technology to adapt to the transition to digital business environments.
• Seek new market opportunities and niches through acquisitions.
• Continue to focus on effectively managing and controlling product costs through forecasting, production, and costing models.
• Work closely with suppliers to reduce procurement costs and minimize effects on operational results.
• Continue to reduce and leverage fixed costs and focus on maintaining margins.
• Monitor and manage the impact of continued customer consolidation on margins and sales.
• Proceed with the trial for the Arizona lawsuit concerning the former B&D Litho facility lease, expected in Q4 2025 or Q1 2026.
• Continue common stock repurchases under the authorized program, with $16.6 million remaining available as of May 31, 2025.
• Pay the declared quarterly cash dividend of $0.25 per share on August 11, 2025.

Key Dates

Recommendation

Keywords

Printing services, Business forms, Envelopes, Labels, Tags, Acquisitions, SEC filing, Quarterly report, Financial results, Cash flow, Share repurchase, Dividends, Supply chain, Paper industry, Digital transformation, Corporate governance