FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER
SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended AUGUST 31, 2001
-----------------------------------------------
Commission File Number 1-5807
------------------------------------------
ENNIS BUSINESS FORMS, INC.
----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0256410
----------------------------------------------------------------
(State or other Jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
1510 N. Hampton, Suite 300, DeSoto, TX 75115
----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 228-7801
----------------------------------------------------------------
(Registrant's telephone number, including area code)
No Change
----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at August 31, 2001
------------------------- ------------------------------
Common stock, par value 16,273,122
$2.50 per share
ENNIS BUSINESS FORMS, INC.
INDEX
Part I. Financial information - unaudited
Condensed Consolidated Balance Sheets --
August 31, 2001 and February 28, 2001 2 - 3
Condensed Consolidated Statements of
Earnings -- Three and Six Months Ended
August 31, 2001 and 2000 4
Condensed Consolidated Statements of Cash
Flows -- Six Months Ended August 31,
2001 and 2000 5
Notes to Condensed Consolidated Financial
Statements 6 - 9
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 10 - 11
Part II. Other Information 12
Signatures 13
PART I. FINANCIAL INFORMATION
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
August 31, February 28,
2001 2001
---------- ----------
Assets
------
Current assets:
Cash and equivalents $ 14,326 $ 8,964
Investment securities 2,066 980
Accounts receivable, net 28,669 29,957
Inventories 12,163 13,088
Other current assets 4,964 5,274
-------- --------
Total current assets 62,188 58,263
-------- --------
Investment securities 361 2,170
Property, plant and equipment, net 54,405 57,781
Cost of purchased businesses in excess
of amounts
allocated to tangible net assets, net 22,815 23,615
Other assets 853 1,025
-------- --------
Total assets $140,622 $142,854
======== ========
(Continued)
2
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
(Unaudited)
August 31, February 28,
2001 2001
----------- ------------
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Current installments of long-term
debt $ 4,143 $ 4,176
Accounts payable 5,519 6,067
Accrued expenses 9,355 7,665
Federal and state income taxes
payable 342 --
-------- --------
Total current liabilities 19,359 17,908
-------- --------
Long-term debt, less current
installments 17,928 23,555
Deferred credits, principally Federal
income taxes 9,819 9,851
Shareholders' equity:
Preferred stock, at par value -- --
Common stock, at par value 53,125 53,125
Additional paid in capital 1,040 1,040
Retained earnings 130,228 127,817
Accumulated other comprehensive loss (456) --
-------- --------
183,937 181,982
Less: Treasury stock 90,421 90,442
-------- --------
Total shareholders' equity 93,516 91,540
-------- --------
Total liabilities and
shareholders' equity $140,622 $142,854
======== ========
See accompanying notes to condensed consolidated financial
statements.
3
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
2001 2000 2001 2000
---- ---- ---- ----
Net sales $58,695 $58,806 $118,518 $108,153
Costs and expenses:
Cost of sales 41,729 41,673 85,471 76,333
Selling, general and administrative
expenses 10,034 10,344 19,888 18,893
------- ------- -------- --------
51,763 52,017 105,359 95,226
------- ------- -------- --------
Earnings from operations 6,932 6,789 13,159 12,927
------- ------- -------- --------
Other income (expense):
Interest expense (469) (694) (1,155) (704)
Investment and other income 239 187 308 273
------- ------- -------- --------
(230) (507) (847) (431)
------- ------- -------- --------
Earnings before income taxes 6,702 6,282 12,312 12,496
Provision for income taxes 2,655 2,497 4,857 4,857
------ ------- -------- -------
Net earnings $ 4,047 $ 3,785 $ 7,455 $ 7,639
======= ======= ======== =======
Weighted average number of common shares
outstanding 16,271,913 16,251,223 16,271,421 16,225,760
========== ========== ========== ==========
Per share amounts:
Net earnings per basic and diluted
share of common stock $ .25 $ .23 $ .46 $ .47
===== ===== ===== =====
Cash dividends $.155 $.155 $.31 $.31
===== ===== ===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS BUSINESS FORMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
August 31
2001 2000
---- ----
Cash flows from operating activities:
Net earnings $ 7,455 $ 7,639
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 5,221 4,312
Changes in operating assets and
liabilities 3,551 (2,746)
Other 127 932
------- -------
Net cash provided by operating
activities 16,354 10,137
------- -------
Cash flows from investing activities:
Acquisition of business, net of cash
acquired -- (34,199)
Capital expenditures (1,032) (1,720)
Redemption of investments 723 --
Other -- 43
-------- -------
Net cash used in investing
activities (309) (35,876)
-------- --------
Cash flows from financing activities:
Debt issued to finance Northstar
acquisition -- 36,500
Repayment of debt issued to finance
Northstar acquisition (5,190) --
Dividends declared (5,044) (5,032)
Other (449) (312)
-------- -------
Net cash provided by (used in)
financing activities (10,683) 31,156
-------- -------
Net change in cash and equivalents 5,362 5,417
Cash and equivalents at beginning of period 8,964 2,037
-------- -------
Cash and equivalents at end of period $ 14,326 $ 7,454
======== =======
See accompanying notes to condensed consolidated financial
statements.
5
ENNIS BUSINESS FORMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
These unaudited condensed consolidated financial statements
of Ennis Business Forms, Inc. and its subsidiaries
(collectively the "Company" or "Ennis"), for the quarter
ended August 31, 2001 have been prepared in accordance with
generally accepted accounting principles for interim
financial reporting. Accordingly, they do not include all of
the information and footnotes required by generally accepted
accounting principles for complete financial statements and
should be read in conjunction with the audited consolidated
financial statements and notes thereto included in the
Company's Form 10-K for the year ended February 28, 2001,
from which the accompanying condensed consolidated balance
sheet at February 28, 2001 was derived. All significant
intercompany balances and transactions have been eliminated
in consolidation. In the opinion of management, all
adjustments (consisting only of normal recurring adjustments)
considered necessary for a fair presentation of the interim
financial information have been included. The results of
operations for any interim period are not necessarily
indicative of the results of operations for a full year.
2. Stock Option Plans
------------------
As of August 31, 2001, the Company has reserved 911,027
shares of common stock under incentive stock option plans.
For the three and six month periods ended August 31, 2001 and
2000, 600,000 and 801,250 options, respectively, were not
included in the diluted earnings per share computation
because their inclusion would not be dilutive.
3. Inventories
-----------
The Company uses the Last-In, First-Out (LIFO) method of
pricing the raw material content of most of its business
forms inventories, and the First-In, First-Out (FIFO) method
is used to value the remainder. The following table
summarizes the components of inventory at the different
stages of production (in thousands of dollars):
August 31, February 28,
2001 2001
----------- -----------
Raw material $ 6,326 $ 7,159
Work-in-process 1,340 1,220
Finished goods 4,497 4,709
-------- -------
$12,163 $13,088
======== =======
4. Accumulated other comprehensive loss
------------------------------------
Accumulated other comprehensive loss consists of the
effective unrealized portion of changes in the fair value of
the Company's cash flow hedge. Comprehensive income was
approximately $6,999,000 for the six months ended August 31,
2001. There were no differences between net income and
comprehensive income in fiscal year 2001.
6
5. Segment Data
------------
The Company operates three business segments. The Forms
Solutions Group is primarily in the business of manufacturing
and selling business forms and other printed business
products to customers primarily located in the United States.
The Promotional Solutions Group is comprised of Adams McClure
(design, production and distribution of printed and
electronic media), Admore (presentation products) and Wolfe
City (flexographic printing, advertising specialties and Post-
itr Notes). On June 6, 2000, the Company acquired Northstar
Computer Forms, Inc. (Northstar) which became the Financial
Solutions Group. Segment data for the three months and six
months ended August 31, 2001 and 2000 were as follows (in
thousands):
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
--------- ---------- ---------- ---------- ------------
Three months ended August 31, 2001:
Net sales $28,661 $18,347 $11,687 $ -- $ 58,695
Depreciation and 675 671 1,129 134 2,609
amortization
Segment earnings
(loss) before
income tax 5,453 2,018 633 (1,402) 6,702
Segment assets 51,983 38,927 44,244 5,468 140,622
Capital expenditures 227 126 54 62 469
Three months ended August 31, 2000:
Net sales $30,182 $18,285 $ 10,339 $ -- $ 58,806
Depreciation and 793 726 1,042 123 2,684
amortization
Segment earnings
(loss) before
income tax 5,973 1,729 15 (1,435) 6,282
Segment assets 42,266 43,082 48,444 19,231 153,023
Capital expenditures 203 278 340 232 1,053
Six months ended August 31, 2001:
Net sales $57,510 $37,581 $23,427 $ -- $118,518
Depreciation and 1,330 1,361 2,260 270 5,221
amortization
Segment earnings
(loss) before
income tax 10,326 3,794 1,090 (2,898) 12,312
Segment assets 51,983 38,927 44,244 5,468 140,622
Capital expenditures 366 249 81 336 1,032
Six months ended August 31, 2000:
Net sales $60,300 $37,514 $10,339 $ -- $108,153
Depreciation and 1,545 1,460 1,042 265 4,312
amortization
Segment earnings
(loss) before
income tax 11,966 3,473 15 (2,958) 12,496
Segment assets 42,266 43,082 48,444 19,231 153,023
Capital expenditures 405 354 340 621 1,720
"Post-it" is a registered trademark of 3M.
7
6. Purchase of Northstar
---------------------
On June 6, 2000, the Company completed its acquisition of
Northstar Computer Forms, Inc. (Northstar). The following
table presents certain operating information on a pro forma
basis as though Northstar had been acquired as of March 1,
2000, after including the estimated impact of adjustments such
as amortization of goodwill and depreciation, interest
expense, reduced interest income and related tax effects (in
thousands, except per share amounts):
For the Six Months Ended August 31, 2000
Net sales 115,537
Net earnings 7,554
Earnings per share - basic and 0.47
diluted
7. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended by SFAS No.
138, on March 1, 2001. SFAS No. 133 establishes standards for
derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the balance
sheet and measure those instruments at fair value. It
establishes conditions under which a derivative may be
designated as a hedge, and establishes standards for reporting
changes in the fair value of a derivative.
The Company uses principally floating-rate debt to finance its
operations. These debt obligations expose the Company to
variability in interest payments due to changes in interest
rates. Management believes it is prudent to limit the
variability of its interest payments. To meet this objective
and in accordance with the Company's hedging policy, the
Company utilizes interest rate swaps to manage overall
borrowing costs and reduce exposure to adverse fluctuations in
interest rates. The Company does not enter into derivative
instruments for any purpose other than cash flow hedging
purposes. That is, the Company does not speculate using
derivative instruments.
The Company assesses interest rate cash flow risk by
continually identifying and monitoring changes in interest
rate exposures that may adversely impact expected future cash
flows and by evaluating hedging opportunities.
The Company has entered into an interest rate swap agreement
with a notional amount of $20,600,000 at August 31, 2001. The
interest rate swap agreement expires in fiscal 2003 and
effectively converts the floating rate debt under the term
loan and revolving credit facility to fixed rate debt. The
estimated fair value of the swap agreement at August 31, 2001
was a liability of approximately $456,000, which is included
in accrued expenses in the accompanying condensed consolidated
balance sheet. The transition adjustment recorded upon
adoption of SFAS No. 133 on March 1, 2001 was $501,000, net of
tax and the change during the six months ended August 31, 2001
was due to the early extinguishments of a portion of the
hedged debt obligation and amounts reclassified into interest
expense.
8
Changes in the fair value of interest rate swaps designed as
hedging instruments of the variability of cash flows
associated with floating rate obligations are reported in
accumulated other comprehensive income. These amounts
subsequently are reclassified into interest expense as a yield
adjustment in the same period in which the related interest on
the floating-rate debt obligations affects earnings.
During the next twelve months, approximately $250,000 of
losses in accumulated other comprehensive income related to
the interest rate swap are expected to be reclassified into
interest expense as a yield adjustment of the hedged debt
obligation.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
-------------------------------
At August 31, 2001, the Company's financial position
continues to be strong. Working capital increased from
$40,355,000 at February 28, 2001 to $42,829,000 at August 31,
2001. The Company has $14,326,000 in cash and equivalents,
$2,066,000 in short term investments, $361,000 in long term
investments and $17,928,000 in long-term debt, less current
installments. The Company expects to generate sufficient cash
flow to more than cover its operating and capital requirements
for the foreseeable future.
Results of Operations
---------------------
Net sales for the three months ended August 31, 2001
remained relatively unchanged. Net sales for the six months
ended August 31, 2001 increased 9.6% from the corresponding
period in the prior year. The decrease in sales for the three
months ended August 31, 2001 was caused by a 2.7% decline in
revenue in the Forms Solutions Group due to weak economic
conditions offset by a 2.4% increase in the Financial Solutions
Group, Northstar Computer Forms, Inc. (Northstar) and a .1%
increase in the Promotional Solutions Group. The increase for
the six months resulted from Northstar, which we acquired in June
2000 and accounted for an increase of 12.1% and a .1% increase in
the Promotional Solutions Group. This was mitigated by a 2.6%
decline in revenue in the Forms Solutions Group. The decline in
the Forms Solution Group was a result of weakness in the general
economy. The Promotional Solutions Group remained relatively
unchanged.
Gross profit margins decreased from 29.1% in the three
months ended August 31, 2000 to 28.9% in the three months ended
August 31, 2001. Gross profit margins decreased from 29.4% in
the six months ended August 31, 2000 to 27.9% in the six months
ended August 31, 2001. The decrease for the three months ended
August 31, 2001 is the result of margin pressures in the Forms
Solutions Group (approximately 1.2 percentage points of the
reduction), and in the Promotional Solutions Group (approximately
.5 percentage points of the reduction) due to weakened economic
conditions, offset by an approximate 1.5% increase from the
Financial Solutions Group (Northstar) resulting from no longer
incurring integration inefficiencies incurred last year. The
decrease for the six months ended August 31, 2001 is the result
of margin pressures in the Forms Solutions Group (approximately
3.3 percentage points of the reduction), and in the Promotional
Solutions Group (approximately 1.6 percentage points of the
reduction), offset by an approximate 3.4% increase from the
Financial Solutions Group (Northstar) resulting from no longer
incurring integration inefficiencies incurred last year.
Selling, general and administrative expenses decreased 3%
for the three months ended August 31, 2001 and increased 5.3% for
the six months ended August 31, 2001when compared to the
corresponding period in the prior year. The decrease for the
three months ended August 31, 2001 resulted from cost reductions
in the Forms Solutions Group of 1.1% and Promotional Solutions
Group of 6.7% less an increase in the Financial Solutions Group
of 4.6% and Corporate of .2%. The increase for the six months was
mainly attributable to the acquisition of Northstar in June 2000
which accounted for an increase of 14.3%. This was mitigated by
cost reductions in the Forms Solutions Group of 1.2%, the
Promotional Solutions Group of 6.5% and in Corporate of 1.3%.
10
Interest expense decreased from $694,000 in the three months
ended August 31, 2000 to $469,000 in the three months ended
August 31, 2001 as a result of repayment of debt. Interest
expense increased from $704,000 in the six months ended August
31, 2000 to $1,155,000 in the six months ended August 31, 2001
as a result of the $36,500,000 debt incurred on June 6, 2000 to
finance the Northstar Acquisition.
Investment and other income increased for the three months
and six months ended August 31, 2001 from the same period in the
prior year due to increased amounts of funds available for
investment.
The effective rate of the Federal and state income tax
expense was 39.45% and 38.9% for the six months ended August 31,
2001 and August 31, 2000, respectively. The primary reason for
the increase is due to non-deductible goodwill from the
acquisition of Northstar.
Recent Accounting Pronouncements
--------------------------------
In July 2001, the Financial Accounting Standards Board
(FASB) issued Statements of Financial Accounting Standards No.
141 "Business Combinations" and No. 142 "Goodwill and Other
Intangible Assets." Statement 141 requires that all business
combinations initiated after June 30, 2001 be accounted for under
the purchase method. Statement 142, which is effective for the
Company March 1, 2002, requires that goodwill no longer be
amortized to earnings, but instead be reviewed for impairment.
The Company is currently assessing the impact of this statement
on its financial statements.
Forward looking statement
-------------------------
Management's result of operations contains forward-looking
statements that reflect the Company's current view with respect
to future revenues and earnings. These statements are subject to
numerous uncertainties, including (but not limited to) the rate
at which the business forms market is contracting, the
application of technology to the production of business forms,
demand for the Company's products in the context of a contracting
market, variability in the prices of paper and other raw
materials, and competitive conditions in the business forms
market. Because of such uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements, which
speak only as of September 28, 2001.
11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
-----------------------------------------------
(b) Reports on Form 8-K
None
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ENNIS BUSINESS FORMS, INC.
Date September 28, 2001 /s/Robert M. Halowec
------------------ ---------------------------------
Robert M. Halowec
Vice President Finance
and Chief Financial Officer
Date September 28, 2001 /s/Harve Cathey
------------------ ---------------------------------
Harve Cathey
Secretary and Treasurer
Principal Accounting Officer
13