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 MAY 31, 2005
------------------------------------------------
Commission File Number 1-5807
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ENNIS, 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.)
2441Presidential Pkwy, Midlothian, TX 76065
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 775-9801
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
- -----------------------------------------------------------------
(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 by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act).
Yes X No
---- -----
The number of shares of the registrant's Common Stock, par value
$2.50, outstanding at May 31, 2005 was 25,451,749.
ENNIS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
May 31, 2005 and February 28, 2005 2 - 3
Condensed Consolidated Statements of
Earnings -- Three Months Ended
May 31, 2005 and 2004 4
Condensed Consolidated Statements of Cash
Flows --Three Months Ended
May 31, 2005 and 2004 5
Notes to Condensed Consolidated Financial
Statements 6 - 11
Item 2 - Management's Discussion and Analysis
of FinancialCondition and Results
of Operations 12 - 25
Item 3 - Quantitative and Qualitative
Disclosures of Market Risk 26
Item 4 - Controls and Procedures 26 - 27
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 28
Signatures 29
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
May 31, February 28,
2005 2005
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 6,894 $ 10,694
Accounts receivable, net 45,340 46,685
Prepaid expenses 5,610 5,162
Inventories 75,639 79,900
Other current assets 6,751 6,732
------- -------
Total current assets 140,234 149,173
------- -------
Property, plant and equipment, net 72,627 72,019
Goodwill 178,838 178,472
Trademarks, net 62,053 62,090
Purchased customer list, net 22,865 23,275
Other assets 10,411 12,217
------- -------
$487,028 $497,246
======= =======
(Continued)
2
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
May 31, February 28,
2005 2005
---- ----
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 29,378 $ 33,887
Accrued expenses:
Employee compensation and
benefits 14,602 16,135
Federal and state income tax
payable 7,103 1,389
Taxes other than income 2,469 3,154
Other 3,699 5,116
Current installments of long-term
debt 17,860 21,702
------- -------
Total current
liabilities 75,111 81,383
------- -------
Long-term debt, less current
installments 102,149 112,342
Deferred credits, principally income
taxes 31,140 31,790
Shareholders' equity:
Series A junior participating
preferred stock, of $10 par
value, Authorized 1,000,000 -- --
shares; None issued
Common stock of $2.50 par value,
Authorized 40,000,000 shares;
issued 30,053,443 shares at May
31, 2005 and February 28, 2005 75,134 75,134
Additional paid in capital 123,640 123,640
Retained earnings 162,975 156,666
Accumulated other comprehensive
income (loss) (16) 6
------- -------
361,733 355,446
Treasury stock:
Cost of 4,601,694 shares at
May 31, 2005 and 4,635,444 shares
at February 28, 2005,
respectively (83,105) (83,715)
------- -------
Total shareholders'
equity 278,628 271,731
------- -------
$487,028 $497,246
======= =======
See accompanying notes to condensed consolidated financial
statements.
3
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended
May 31,
2005 2004
---- ----
Net sales $149,113 $65,736
Costs and expenses:
Cost of sales 111,635 48,676
Selling, general and
administrative 17,837 9,386
------- -------
129,472 58,062
------- -------
Earnings from operations 19,641 7,674
------- -------
Other expense:
Interest expense (2,243) (134)
Other expense, net (90) (76)
------- -------
(2,333) (210)
------- -------
Earnings before income taxes 17,308 7,464
Provision for income taxes 6,750 2,882
------- -------
Net earnings $ 10,558 $ 4,582
======= =======
Weighted average number of common
shares outstanding - basic 25,426,595 16,406,631
Plus incremental shares from
assumed exercise of stock options 265,962 287,919
---------- ----------
Weighted average number of common
shares outstanding - diluted 25,692,557 16,694,550
========== ==========
Per share amounts:
Net earnings - basic $.42 $.28
==== ====
Net earnings - diluted $.41 $.27
==== ====
Cash dividends per share $.155 $.155
===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Three Months Ended
May 31,
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $10,558 $4,582
Adjustments to reconcile net earnings
to net cash provided by operating
activities:
Depreciation 3,908 2,209
Amortization of trademark and
customer list 479 33
Gain on the sale of equipment (2) (3)
Bad debt expense 369 201
Changes in operating assets and
liabilities:
Receivables 976 97
Prepaid expenses (448) 322
Inventories 4,261 458
Other current assets (19) 6
Accounts payable and accrued
expenses (2,431) 3,375
Other assets and liabilities 1,103 398
------ ------
Net cash provided by operating
activities 18,754 11,678
------ ------
Cash flows from investing activities:
Capital expenditures (4,521) (2,139)
Proceeds from disposal of property
7 7
Additional costs related to acquisition (366) --
------ ------
Net cash used in investing
activities (4,880) (2,132)
------ ------
Cash flows from financing activities:
Debt issued 5,000 --
Repayment of debt (19,035) (1,500)
Dividends (3,940) (2,542)
(Purchase)/issue of treasury stock, net 301 282
------ ------
Net cash used in financing
activities (17,674) (3,760)
------ ------
Net change in cash and cash equivalents (3,800) 5,786
Cash and cash equivalents at beginning of
period 10,694 15,067
------ ------
Cash and cash equivalents at end of period $6,894 $20,853
====== ======
See accompanying notes to condensed consolidated financial
statements.
5
ENNIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
These unaudited condensed consolidated financial
statements of Ennis, Inc. and its subsidiaries (collectively
the "Company" or "Ennis"), for the quarter ended May 31, 2005
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, 2005, from which the
accompanying condensed consolidated balance sheet at February
28, 2005 was derived. All significant intercompany balances
and transactions have been eliminated in consolidation. In
the opinion of management, all adjustments considered
necessary for a fair presentation of the interim financial
information have been included. In preparing the financial
statements, the Company is required to make estimates and
assumptions that affect the disclosure and reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The Company evaluates these
estimates and judgments on an ongoing basis, including those
related to bad debts, inventory valuations, property, plant
and equipment, intangible assets and income taxes. The
Company bases estimates and judgments on historical
experience and on various other factors that are believed to
be reasonable under the circumstances. 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 and Stock Based Compensation
-----------------------------------------------
At May 31, 2005, the Company has two incentive stock option
plans: the 1998 Option and Restricted Stock Plan amended and
restated as of June 17, 2004 and the 1991 Incentive Stock
Option Plan. The Company has 1,155,652 shares of unissued
common stock reserved under the stock option plans for
issuance to officers and directors, and supervisory employees
of the Company and its subsidiaries. The exercise price of
each option granted equals the quoted market price of the
Company's common stock on the date of grant, and an option's
maximum term is ten years. Options may be granted at
different times during the year and vest over a five-year
period. For the three-month periods ended May 31, 2005 and
2004, 35,000 and 35,000 of options, respectively, were not
included in the diluted earnings per share computation
because their exercise price exceeded the average fair market
value of the Company's stock for the period.
The Company accounts for employee and director stock-based
compensation arrangements in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), and related
interpretations, and complies with the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation and
Disclosure." Under APB No. 25, compensation expense for
fixed awards is based upon the difference, if any, on the
date of the grant between the estimated fair value of the
Company's stock and the exercise price and is amortized over
the vesting period. All stock-based awards to non-employees,
if any, are accounted for at their fair value. The Company
is required to disclose the pro forma net income if the fair
value method defined in SFAS No. 123 has been applied.
6
The following table represents the effect on net income and
earnings per share as if the Company had applied the fair
value based method and recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-
based Employee Compensation (in thousands, except per share
amounts):
For the Three Months Ended May 31, 2005 2004
---- ----
Net earnings:
As reported $10,558 $4,582
Deduct: Stock-based Employee
compensation expense not included
in reported income, net of
related tax effects 12 10
------ -----
Pro forma $10,546 $4,572
====== =====
Net earnings per share:
As reported - basic $.42 $.28
Pro forma - basic .41 .28
As reported - diluted .41 .27
Pro forma - diluted .41 .27
For purposes of pro forma disclosures, the estimated fair
value of stock-based compensation plans and other options is
amortized to expense primarily over the vesting period. The
changes in Shareholders' equity during the three months ended
May 31, 2005 is from earnings, dividends paid and options
exercised.
3. Employee Benefit Plans
----------------------
The following table provides the components of net periodic
benefit cost for the three months ended May 31, 2005 and 2004
(in thousands):
May 31, 2005 May 31, 2004
------------ ------------
Components of net
periodic benefit cost:
Service cost $356 $367
Interest cost 611 604
Expected return on assets (693) (666)
Amortization of:
Prior service cost (36) (36)
Unrecognized net loss 264 267
---- ----
Net periodic benefit cost $502 $536
==== ====
The Company is required to make contributions to its defined
benefit pension plan. These contributions are required under the
minimum funding requirements of the Employee Retirement Pension
Plan Income Security Act (ERISA). For the current fiscal year
ending February 28, 2006, there is not a minimum contribution
requirement and no pension payments have been made; however, the
Company anticipates it will pay $2,500,000 in the fourth quarter
of fiscal year 2006.
7
4. Inventories
-----------
The Company values the raw material content of most of its
business forms inventories at the lower of last-In, first-Out
(LIFO) cost or market and all apparel inventory at the lower
of first-In, first-Out (FIFO) cost or market. The following
table summarizes the components of inventory at the different
stages of production (in thousands of dollars):
May 31, February 28,
2005 2005
---- ----
Raw material $26,992 $26,717
Work-in-process 16,514 17,669
Finished goods 32,133 35,514
------ ------
$75,639 $79,900
====== ======
5. Intangible Assets
-----------------
The Company has adopted the provisions of SFAS No. 142,
Goodwill and other Intangible Assets, which requires that
goodwill and other intangible assets be tested for impairment
annually and when an event occurs indicating that it is
possible an impairment exists.
Intangible assets with determinable lives are amortized on a
straight-line basis over the estimated useful life. The cost
of trademarks is based on fair values at the date of
acquisition. Trade names with determinable lives have an
aggregate value of $1,234,000, less accumulated amortization
of $181,000 and $144,000 as of May 31, 2005 and February 28,
2005, respectively. Amortization expense for these
intangibles will be $149,000 in each of the five succeeding
years. Trademarks with indefinite-lived lives with a net
book value of $61,000,000 at May 31, 2005 are evaluated for
impairment on an annual basis.
Purchased customer lists have an aggregate value of
$23,760,000, less accumulated amortization of $895,000 and
$485,000 as of May 31, 2005 and February 28, 2005,
respectively. Amortization expense for these intangibles
will be $1,643,000 in each of the five succeeding years.
6. Accumulated other comprehensive income (loss)
---------------------------------------------
Accumulated other comprehensive income (loss) consists of the
unrealized portion of changes in the fair value of the
Company's cash flow hedge and foreign currency translation.
Comprehensive income was approximately $10,536,000 for the
three months ended May 31, 2005 and $4,639,000 for the three
months ended May 31, 2004. Amounts charged directly to
Shareholder's Equity related to the Company's interest rate
swap and foreign currency translation are included in "other
comprehensive income."
8
7. Acquisitions
------------
Ennis completed its merger with Alstyle Apparel, Inc.
("Alstyle") November 19, 2004. Alstyle shareholders received
8,803,583 shares valued at approximately $145,523,000 and
$2,889,000 cash. Debt of approximately $98,074,000 was
assumed. Alstyle produces and sells activewear apparel with 6
facilities in California and Mexico and 7 distribution
centers located throughout the U.S. and Canada. Alstyle was
acquired to supplement and broaden the scope of products
offered by Ennis. The purchase price has been allocated to
assets acquired and liabilities assumed based on fair market
value at the date of acquisition. Customer list valued at
$22,000,000 at date of acquisition is amortized over its
useful life and trademarks valued at $61,000,000 with an
indefinite amount is evaluated for impairment on an annual
basis. Approximately $37,774,000 of goodwill related to
Alstyle acquisition is deductible for tax purposes. The
Company is continuing to determine the valuation of
liabilities. Alstyle operates as a separate segment. The
purchase price of Alstyle is calculated as follows (in
thousands of dollars):
Ennis common stock issued
8,803,583 shares $145,523
Cash 2,889
Alstyle debt assumed 98,074
-------
Purchase price of Alstyle $246,486
=======
On November 1, 2004, the Company acquired 100% of the stock
of Royal Business Forms, Inc., (Royal) a privately held
company headquartered in Arlington, Texas for $3,700,000 in
Ennis treasury stock (approximately 178,000 shares). Royal
has been in existence and operating in Arlington, Texas since
1959 and has customers throughout the United States. The
acquisition of Royal continues the Ennis strategy of growth
through related manufactured products for Ennis' existing
customer base. The acquisition will add additional short-run
print products and solutions and financial documents sold
through the indirect sales (distributorship) marketplace.
Effective June 30, 2004, the Company completed its
acquisition of all of the outstanding stock of Crabar/GBF,
Inc. (Crabar/GBF) for approximately $18,000,000 with
consideration in the form of debt assumed and cash. The
primary reason for the acquisition was to increase Ennis'
market share. However, Crabar/GBF will add high-quality long
and medium run print production, along with pressure
sensitive label and form-label combinations to Ennis' current
line of medium and short run print products and solutions.
The transaction was financed with $11,000,000 in bank loans
with the balance being provided by internal cash resources
The company has recognized certain costs related to exit
activities and integration costs attributable to the
Crabar/GBF acquisition. These costs totaling approximately
$1,500,000 were recognized as part of the assumed liabilities
and included in "Other - Accrued Expenses" in the
Consolidated Balance Sheet. The costs were primarily related
to contracts related to previous owners. Other costs include
lease exit costs and severance payments.
The following is a summary of the purchase price allocation
at February 28, 2005 (in thousands):
9
Crabar/GBF Royal Alstyle
---------- ----- -------
Cash $ 133 $ 601 $3,187
Accounts receivable, net 7,553 1,125 4,457
Other receivables 1,082 -- 639
Prepaid expenses 298 76 1,451
Other current assets -- 211 1,697
Inventories 4,435 1,985 55,801
Fixed assets 8,087 808 21,033
Goodwill 5,956 -- 138,134
Trademarks 80 -- 61,000
Customer list 1,760 -- 22,000
Other identifiable 92 -- 3,763
intangibles
Accounts payable and accrued 11,476 1,106 66,676
liabilities
------- ----- -------
$ 18,000 $ 3,700 $246,486
======= ====== =======
The results of operations for Alstyle, Royal and Crabar/GBF
are included in the Company's condensed consolidated
financial statements from the dates of acquisition. The
following table represents certain operating information on a
pro forma basis as though all three companies had been
acquired as of March 1, 2004, after the estimated impact of
adjustments such as amortization of intangible assets,
interest expense, interest income and related tax effects (in
thousands except per share amounts):
For the Three Months Ended May 31, 2004
----
Net sales $ 151,285
Net earnings 9,028
Net earnings per share - basic .35
Net earnings per share - diluted .35
The pro forma results are not necessarily indicative of what
would have occurred if the acquisitions had been in effect
for the period presented.
8. Segment Data
------------
The Company operates in two operational segments - the
Printing Segment and the Apparel Segment. The first group in
the Printing segment, the Forms Solutions Group is primarily
in the business of manufacturing and selling business forms
and other printed business products primarily to distributors
located in the United States. The second group in the
Printing Segment, the Promotional Solutions Group is
primarily engaged in the business of design, manufacturing,
and distribution of printed and electronic media,
presentation products, flexographic printing, advertising
specialties and Post-it (registered trademark) Notes. The
third group in the Printing Segment, the Financial Solutions
Group, designs, manufactures and markets printed forms and
specializes in internal bank forms, secure and negotiable
documents and custom products. The second segment, the
Apparel Solutions Group, which consists of the newly acquired
Alstyle, is primarily engaged in the production and sale of
activewear including t-shirts, fleece goods and other
wearables. Corporate information is included to reconcile
segment data to the consolidated financial statements and
includes assets and expenses related to the Company's
corporate headquarters and other administrative costs.
Segment data for the three months ended May 31, 2005 and 2004
were as follows (in thousands):
10
Apparel
Printing Segment Segment
---------------- -------
Forms Promotional Financial Apparel
Solutions Solutions Solutions Solutions Consolidated
Group Group Group Group Corporate Totals
----- ----- ----- ----- --------- ------
Three months ended May 31, 2005:
Net sales $46,479 $22,522 $11,723 $ 68,389 $ -- $149,113
Depreci-
ation 837 593 409 1,909 160 3,908
Amortiza-
tion of
trademark 90 -- -- 389 -- 479
Segment earnings
(loss) before
income tax 5,281 3,886 1,924 8,367 (2,150) 17,308
Segment
assets 86,115 42,296 32,848 311,801 13,968 487,028
Capital
expendi-
tures 107 121 101 3,868 324 4,521
Three months ended May 31, 2004:
Net sales $34,562 $19,462 $ 11,712 $ -- $ -- $ 65,736
Depreci-
ation 776 626 702 -- 105 2,209
Amortiza-
tion of
trademark 33 -- -- -- -- 33
Segment earnings
(loss) before
income tax 5,536 2,163 1,486 -- (1,721) 7,464
Segment
assets 80,246 34,842 35,331 -- 7,610 158,029
Capital
expendi-
tures 267 241 100 -- 1,531 2,139
"Post-it" is a registered trademark of 3M.
9.Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
The Company's interest rate swap is held for purposes other
than trading. The Company utilized swap agreements related to
its term and revolving loans to effectively fix the interest
rate for a specified principal amount of the loans. The
swap has been designated as a cash flow hedge and the
after-tax effect of the mark-to-market valuation that
relates to the effective amount of derivative financial
instrument is recorded as an adjustment to accumulated
other comprehensive income with the offset included in
accrued expenses.
The Company utilized a swap agreement related to the term loan
and revolving credit facility to effectively fix the interest
rate at 3.2% for a pre-set principal amount of the loans.
The pre-set principal amount of the loan covered by the
current swap agreement declines quarterly in connection with
expected principal reductions and totaled $4,500,000 at May
31, 2005. The fair value of the swap at May 31, 2005 was
approximately $4,000 and the change in the fair value of the
loss from March 1, 2004, net of tax, has been added to
accumulated other comprehensive income.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Ennis, Inc. (formerly Ennis Business Forms, Inc.) was organized
under the laws of Texas in 1909. Ennis, Inc. and its
subsidiaries (collectively known as "Ennis" or the "Company")
prints and constructs a broad line of business forms and other
business products and also manufactures a line of activewear for
distribution throughout North America. Distribution of all of
these products throughout the United States and Canada is
primarily through independent dealers and with respect to
activewear products, through sales representatives. This
distributor group encompasses print distributors, stationers,
quick printers, computer software developers, activewear
wholesalers, screen printers and advertising agencies, among
others.
During the fiscal year ended February 28, 2005, the Company
acquired Crabar/GBF, Inc. (Crabar/GBF) and Royal Business Forms,
Inc. (Royal) and merged with Centrum Acquisition, Inc. and its
wholly owned subsidiary, which did business under the name of
Alstyle Apparel, Inc. (collectively Alstyle). Alstyle was merged
into a wholly owned subsidiary of the Company. Crabar/GBF was a
privately owned business forms manufacturer with $69 million in
revenues in its most recent fiscal year. The purchase price of
this transaction was $18 million in cash and assumed debt. The
transaction closed as of June 30, 2004. On November 1, 2004 the
Company announced an agreement to acquire Royal, an Arlington,
Texas based manufacturer of business forms for $3.7 million in
Ennis stock. Approximately 178,000 shares of treasury stock were
issued in this transaction. Royal had revenues of $12.1 million
in its most recent fiscal year. Alstyle, an Anaheim, California
based company had approximately $200 million in annual revenues
and 3,500 employees in North America at the time of the
announcement of the merger on June 25, 2004. The transaction
provided that the Alstyle shareholders would receive Ennis shares
based upon a $242 million valuation of Alstyle less debt
outstanding as of the day of the merger (approximately $104
million). This amount, plus cost of acquisition, totaled $246.5
million. On November 4, 2004, Ennis shareholders approved the
issuance of 8,803,583 shares of Ennis common stock to enable the
completion of this merger which was closed on November 19, 2004.
The Company also entered into a new $150 million financing
facility with LaSalle Bank, N.A. providing a $50 million term
loan and a $100 million revolver in conjunction with the Alstyle
merger. All of these transactions are explained in more detail
in Management's Discussion and Analysis and Footnotes of the
Company's 2005 Annual Report.
In February of 2005, the Company announced a change in management
in which the Forms Solutions, Promotional Solutions and Financial
Solutions Groups began reporting to a newly created executive
officer position. This officer reports to the President and CEO,
as does the President of the Apparel Group. As discussed in the
Form 10-K filed on May 17, 2005, beginning this fiscal quarter
the Company will report on two operational segments - the
Printing Segment and the Apparel Segment. The Printing Segment
combines all of the Company's printing operations into a single
segment for both management and reporting purposes.
12
Business Segment Overview
- -------------------------
Printing Segment
- ----------------
Forms Solutions Group - The Forms Solutions Group operates
through 17 manufacturing locations throughout the United States.
The Forms Solutions Group sells through approximately 40,000
private printers and independent distributors and therefore sales
reflect a smaller percentage of selling expense than would exist
in companies who market directly to the end use. The products
sold include snap sets, continuous forms, laser cut sheets, tags,
labels, integrated products, jumbo rolls and pressure sensitive
products in short, medium and long runs. The Group sells under
the Ennis, Royal, Witt Printing and Calibrated brand names.
Promotional Solutions Group - The Promotional Solutions Group
operates 7 facilities in four states. The group operates under
the Adams-McClure brand (which provides Point of Purchase
advertising for large franchise and fast food chains as well as
kitting and fulfillment); the Admore brand (which provides
presentation folders and document folders); Ennis Tag & Label
(which provides tags and labels, promotional products and
advertising concept products) and GenForms (which provides short-
run and long-run label production). With respect to Adams-
McClure, the business is generally provided through advertising
agencies. The other facilities receive business through
independent distributors.
Financial Solutions Group - The Financial Solutions Group
operates in 4 facilities located in three states. The Financial
Group sells directly to customers and to resellers through a
sales staff (Northstar) as well as through distributors
(Northstar and GFS). Northstar has redirected its focus to large
banking organizations on a direct basis (where a distributor is
not acceptable or available to the end-user) and has acquired
several of the top 200 banks in the United States and is actively
working on other large banks within the top 200 tier of banks in
the United States.
Apparel Segment
- ---------------
Apparel Solutions Group - The Apparel Segment operates through
6 manufacturing facilities in California and Mexico. Alstyle
markets high quality knit basic activewear (t-shirts, tank tops
and fleece) across all market segments. Approximately 88% of
Alstyle's revenues are derived from t-shirt sales, and 94% of
those are domestic sales. Alstyle's branded product lines are
AAA, Gaziani, Diamond Star and Tennessee River.
Alstyle is headquartered in Anaheim, California where they knit
domestic cotton yarn and some polyester fibers are knitted into
tubular material. The material is dyed at that facility and then
shipped to plants in Ensenada or Hermosillo, Mexico to cut and
sewn into finished goods. Alstyle also ships a small amount of
their dyed and cut product to El Salvador or Costa Rica for
sewing. After sewing and packaging is completed, product is
reshipped to Anaheim where it is either stored at the
distribution center in Anaheim, or re-directed to distribution
centers in Los Angeles, California; Chicago, Illinois; Dallas,
Texas; Philadelphia, Pennsylvania; Atlanta, Georgia or
Mississauga, Canada.
Alstyle utilizes a customer-focused internal sales team comprised
of 19 sales representatives assigned to specific geographic
territories in the United States and Canada. Sales
representatives are allocated performance objectives for their
respective territories and are provided financial incentives for
achievement of their target objective. Sales representatives are
responsible for developing business with large accounts and spend
approximately half their time in the field.
13
Alstyle employs a staff of customer service representatives that
handle call-in orders from smaller customers. Sales personnel
sell directly to Alstyle's customer base, which consists
primarily of screen printers, embellishers, retailers, and mass
marketers.
A majority of Alstyle's sales are related to direct customer,
branded products and the remainder related to private label and
re-label programs. Generally, sales to screen printers and mass
marketers are driven by the availability of competitive products
and price considerations, while sales in the private label
business are characterized by slightly higher customer loyalty.
Alstyle's most popular styles are produced based on forecasts to
permit quick shipment and to level production schedules. Alstyle
offers same-day shipping and uses third party carriers to ship
products to its customers.
Alstyle's sales are seasonal, with sales in the first and second
quarters generally being the highest. The general apparel
industry is characterized by rapid shifts in fashion, consumer
demand and competitive pressures, resulting in both price and
demand volatility. However, the imprinted activewear market that
Alstyle sells to is "event" driven. Blank t-shirts can be thought
of as "walking billboards" promoting movies, concerts, sports
teams, and "image" brands. Still, the demand for any particular
product varies from time to time based largely upon changes in
consumer preferences and general economic conditions affecting
the apparel industry.
Liquidity and Capital Resources
- -------------------------------
Cash Flow
Cash provided by operating activities for the quarter ended in
May 2005 was $18.8 million, compared to $11.7 million in the same
quarter of the prior year. The increase is primarily due to the
contributions of the entities (Crabar/GBF, Royal and Alstyle)
added to the Company in fiscal year 2005. Cash flow was utilized
for payment of dividends, capital expenditures and repayment of
debt. Due to the cyclical nature of the Alstyle operation, cash
flow from operations in the remaining quarters is expected to
fall in relation to Alstyle's quarterly activity.
Working Capital
Working capital at the end of May 2005 was $65.1 million, a
decrease of $2.7 million from February 2005. The current ratio at
the end of the current quarter was 1.9 to 1, a slight improvement
from the end of the fiscal year. The Company's cash and
equivalents at the end of the quarter were $6.9 million, down
from the end of February 2005 primarily as a result of debt
repayments.
Credit Facility
In March 2005, the Company borrowed an additional $5 million on
the revolver. These funds, along with internally generated funds
were used to pay-off approximately $7.2 million in capitalized
and operating leases from Alstyle. During the balance of the
quarter, the Company repaid $10 million on the revolver, $2.5
million on the term loan, and an addition $1.4 million in
capitalized leases and met other regularly scheduled debt
payments, all from cash generated from operations. For the
remainder of the fiscal year, the Company expects to retire
another $7.5 million on the term loan, plus approximately $6
million to $7 million of other debt. It is anticipated that the
available line of credit is sufficient to cover, should it be
required, working capital requirements for the foreseeable
future.
14
As previously reported, Alstyle continues to sell substantially
all of its account receivable to factors based upon agreements
with various financial institutions. The Company continues with
plans to fund these receivables through the existing bank line or
from working capital generated by Alstyle over the next year or
two.
Pension
The Company is required to make contributions to its defined
benefit pension plan. These contributions are required under the
minimum funding requirements of the Employee Retirement Pension
Plan Income Security Act (ERISA). For the current fiscal year
ending February 28, 2006, there is not a minimum contribution
requirement and no pension payments have been made; however, the
Company anticipates it will pay $2,500,000 in the fourth quarter
of fiscal year 2006.
Inventory
The Company believes current inventory levels are sufficient to
satisfy customer demand and anticipates having adequate sources
of raw materials to meet future business requirements. The
previously reported long-term contracts with paper and yarn
suppliers continue to be in effect. Inventory values declined
during the quarter primarily as a result of Alstyle sales
exceeding their production of finished goods in each month of the
quarter.
Capital Expenditures
In March 2005, the Company acquired ownership of certain assets,
which had been held by Alstyle under operating leases. These
capital expenditures of approximately $3.8 million were above and
beyond the previously reported expected capital expenditures of
$5 million to $7 million for the current fiscal year. Including
these expenditures, the Company now expects capital requirements
for the fiscal year to be between $9 million and $11 million, and
expects to generate sufficient cash flow from operating
activities to fund any capital requirements.
Commitments
There have been no material changes in our contractual
obligations since fiscal year-end 2005 outside the normal course
of business.
15
Accounting Standards
- --------------------
In November 2004, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 151, "Inventory Costs - an amendment of ARB No. 43,
Chapter 4". This statement clarifies the accounting for abnormal
amounts of idle facility expense, freight handling costs and
wasted material (spoilage). This statement requires that these
types of costs be recognized as current period charges. SFAS No.
151 is effective prospectively for inventory costs incurred
during fiscal years beginning after June 15, 2005, with earlier
application permitted for such costs incurred during fiscal years
beginning after November 24, 2004. Management does not expect the
adoption of SFAS No. 151 to have a significant impact on the
Company's financial statements as the Company's current method of
accounting for inventory costs are consistent with this standard.
In December 2004, the FASB issued SFAS No. 153, "Exchanges of
Nonmonetary Assets - an amendment of APB Opinion No. 29". SFAS
No. 153 amends Accounting Principles Board ("APB") Opinion 29
concerning the accounting for exchanges of similar productive
assets. Such transactions should be accounted for at fair value,
the basic principle for nonmonetary transactions, unless the
exchange lacks commercial substance. The effective date of SFAS
No. 153 is for nonmonetary asset exchanges taking place in fiscal
years beginning after December 16, 2004. The Company has adopted
SFAS No. 153 effective March 1, 2005. Adoption of this standard
did not have a significant impact on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123 (revised 2004),
"Share Based Payment". This statement replaces SFAS 123,
"Accounting for Stock-Based Compensation," and supersedes APB
Opinion 25, "Accounting for Stock Issued to Employees." SFAS No.
123 (revised 2004) requires that the cost of share-based payment
transactions (including those with employees and non-employees)
be recognized as compensation costs in the financial statements.
SFAS No. 123 (revised 2004) applies to all share-based payment
transactions in which an entity acquires goods or services by
issuing (or offering to issue) its shares, share options, or
other equity instruments (except for those held by an ESOP) or by
incurring liabilities in amounts based (even in part) on the
price of the entity's shares or other equity instruments, or that
require (or may require) settlement by the issuance of an
entity's shares or other equity instruments. This statement
applies to all new awards granted during the fiscal year
beginning after June 15, 2005 and to previous awards that are
modified or cancelled after such date. We have not yet fully
evaluated the effect of SFAS No. 123 (revised 2004) on our
financial statements and have not determined the method of
adoption we will use to implement SFAS No. 123 (revised 2004).
In December 2004, the FASB issued FSP FAS 109-1, "Application of
FASB Statement No. 109, "Accounting for Income Taxes," to the Tax
Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004 (AJCA)." The AJCA introduces a
special 9% tax deduction on qualified production activities. FSP
FAS 109-1 clarifies that this tax deduction should be accounted
for as a special tax deduction in accordance with Statement 109.
Based upon the Company's preliminary evaluation of the effects of
this guidance, we do not believe that it will have a significant
impact on the Company's financial statements.
16
In December 2004, the FASB issued FSP FAS 109-2, "Accounting and
Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creations Act of 2004." The
AJCA introduces a limited time 85% dividends received deduction
on the repatriation of certain foreign earnings to a U.S.
taxpayer (repatriation provision), provided certain criteria are
met. FSP FAS 109-2 provides accounting and disclosure guidance
for the repatriation provision.
Based upon the Company's preliminary evaluation of the effects of
the repatriation provision, we do not believe that it will have
any impact on the Company's financial statements.
During March 2005, the Securities Exchange Commission issued
Staff Accounting Bulletin ("SAB") No. 107, guidance on SFAS No.
123 (revised 2004). SAB No. 107 was issued to assist preparers by
simplifying some to the implementation challenges of SFAS No 123
(revised 2004) while enhancing the information that investors
receive. The Company will consider the guidance provided by SAB
No. 107 as it implements SFAS No. 123 (revised 2004) during
fiscal 2006.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes
and Error Corrections". SFAS No. 154 amends Accounting
Principles Board (APB) Opinion 20, concerning the accounting for
changes in accounting principles, requiring retrospective
application to prior periods' financial statements of changes in
an accounting principle, unless it is impracticable to do so.
The effective date of SFAS No. 154 is for accounting changes and
corrections of errors made in fiscal years beginning after
December 15, 2005. The Company will adopt SFAS No. 154 in fiscal
2007 and does not expect it to have a significant impact on the
Company's financial statements.
Results of Operations - Consolidated
- ------------------------------------
Net sales for the quarter ended in May 2005 were $149.1 million,
an increase of 126.8% over the same quarter in the prior year and
a 10.9 % increase over the prior quarter. The change from the
prior year quarter was driven by the acquisitions of Crabar/GBF,
Royal and Alstyle. The change from the prior quarter was
primarily attributable to increased revenues from Alstyle. Gross
margins for the quarter ended May 2005 were 25.1%, compared to
26% in the prior year quarter and 23.4% in the prior quarter.
The change from the prior year was attributable to the addition
of Alstyle, which experienced gross margins of 24.4% in the
current quarter. The improvement in margins from the prior
quarter is attributable both to the change in margins at Alstyle
which experienced margins of 23.3% in the prior quarter and to
improved margins in the rest of the Company. Selling, general
and administrative expenses were $17.8 million (12.0% of net
sales) in the quarter ended in May 2005, compared to $9.4 million
(14.3% of net sales) in the prior year quarter and $18.1 million
(13.5% of net sales) in the prior quarter. The increase from the
prior year is attributable to the acquisitions of Crabar/GBF,
Royal and Alstyle. The $.3 million decrease from the prior
quarter is spread among all operating entities. The increase in
interest expense from the prior year quarter to the current year
is the result of the debt incurred or assumed from the Alstyle
transaction. The slight increase in interest expense from the
prior quarter is the result of interest penalties from the early
pay-off of certain of the capitalized leases.
The effective income tax rate in the current year quarter is
slightly higher than the prior year quarter and less than the
prior quarter. Going forward it is expected that the effective
tax rate will stay in the range from 38.9% to 39.3%.
17
Results of Operations - Printing Segment
Forms Solutions Group -- Net sales in the group were $46.5
million, an increase of $11.9 million from the prior year quarter
and a decrease of $3 million from the prior quarter. The
increase from the prior year is the result of $10.4 million in
sales from the Crabar/GBF entities and $2.8 million in sales from
Royal, offset by a $1.3 million decline in pre-acquisition units.
The decrease from the prior quarter was a reflection of the
ongoing industry shrinkage. Gross margins in the group declined
from the prior year quarter to the current year. The decline is
the result of the addition of the Crabar/GBF units to the group.
Margins at the Crabar/GBF units, primarily due to the long-run
nature of their business, were general 10% to 14% less than the
margins historically earned by the pre-acquisition units of the
group. Since Royal and all of the Crabar/GBF units were in the
group in both the current quarter and the prior quarter, the
change in margins for those two periods was less significant.
Promotional Solutions Group -- Net sales for the group were
$22.5 million in the quarter, compared to $19.5 million in the
prior year and $21.1 million in the prior quarter. The increase
from the prior year quarter was primarily attributable to the
addition of the Cerritos facility to the group. The increase
from the prior quarter was the result of increased sales in all
of group's operating units except Cerritos which experienced a
$.1 million decline from the prior quarter. Gross margins
improved in the current year for all of the pre-acquisition units
as a result of manufacturing efficiencies and cost savings.
Gross margins continued to improve in all units from the prior
quarter to the current quarter for similar reasons.
Financial Solutions Group -- Net sales for the group were $11.7
million in both the current quarter and the prior year quarter.
In the prior quarter, net sales were $12.2 million. Gross
margins for the current quarter were 28.9% compared to 26.5% in
the prior year quarter. The improvement in gross margins were
the result of cost saving programs which were implemented during
the second quarter of the past fiscal year. Gross margins were
relatively unchanged from the prior quarter.
Results of Operations - Apparel Segment
- ---------------------------------------
Apparel Solutions Group -- Net sales of the group were $68.4
million in the current quarter, compared to $51.7 million in the
prior quarter. The $16.7 million increase is the result of the
transition from Alstyle's low point in their annual business
cycle (December, January, February) to the high point in their
annual business cycle. Gross margins percentage improved from the
prior quarter from 23.2% to 24.3%, however the absolute gross
margin earned increased 38.7% from period to period, which
combined with a reduction in selling, general and administrative
expenses, resulted in a quarter to quarter 160% increase in
pretax earnings.
18
Critical Accounting Policies and Judgments
- ------------------------------------------
In preparing our consolidated financial statements, we are
required to make estimates and assumptions that affect the
disclosures and reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported
amounts of revenues and expenses during the reporting period. We
evaluate our estimates and judgments on an ongoing basis,
including those related to allowance for doubtful accounts,
inventory valuations, property, plant and equipment, intangible
assets, accrued liabilities and income taxes. We base our
estimates and judgments on historical experience and on various
other factors that we believe to be reasonable under the
circumstances. Actual results may differ materially from these
estimates under different assumptions or conditions. The Company
believes the following accounting policies are the most critical
due to their affect on the Company's more significant estimates
and judgments used in preparation of its consolidated financial
statements.
The Company maintains a defined-benefit pension plan for
employees. Included in our financial results are pension costs
that are measured using actuarial valuations. The actuarial
assumptions used may differ from actual results.
Intangibles generated through acquisitions are based upon
independent appraisals of their values and are either amortized
over their useful life, or evaluated periodically (at least once
a year) to determine whether the value has been impaired by
events occurring during the fiscal year.
We exercise judgment in evaluating our long-lived assets for
impairment. The Company assesses the impairment of long-lived
assets that include other intangible assets, goodwill, and plant
and equipment annually or whenever events or changes in
circumstances indicate that the carrying value may not be
recoverable. In performing tests of impairment, the Company must
make assumptions regarding the estimated future cash flows and
other factors to determine the fair value of the respective
assets in assessing the recoverability of its goodwill and other
intangibles. If these estimates or the related assumptions
change, the Company may be required to record impairment charges
for these assets in the future. Actual results could differ from
assumptions made by management. We believe our businesses will
generate sufficient undiscounted cash flow to more than recover
the investments we have made in property, plant and equipment, as
well as the goodwill and other intangibles recorded as a result
of our acquisitions. The Company cannot predict the occurrence
of future impairment triggering events nor the impact such events
might have on its reported asset values.
Revenue is generally recognized upon shipment of products. Net
sales represents gross sales invoiced to customers, less certain
related charges, including discounts, returns and other
allowances. Returns, discounts and other allowances have
historically been insignificant. In some cases and upon customer
request, the Company prints and stores custom print product for
customer specified future delivery, generally within six months.
In this case, risk of loss passes to the customer, the customer
is invoiced under normal credit terms and revenue is recognized
when manufacturing is complete. Approximately $3,329,000 of
revenue was recognized under these agreements during the quarter
ended May 31, 2005. Sales in foreign countries were not
significant for the three month period ended May 31, 2005.
19
Derivative instruments are recognized on the balance sheet at
fair value. Changes in fair values of derivatives are accounted
for based upon their intended use and designation. The Company's
interest rate swap is held for purposes other than trading. The
Company utilized swap agreements related to its term and
revolving loans to effectively fix the interest rate for a
specified principal amount of the loans. The swap has been
designated as a cash flow hedge, and the after tax effect of the
mark-to-market valuation that relates to the effective amount of
derivative financial instrument is recorded as an adjustment to
accumulated other comprehensive income with the offset included
in accrued expenses.
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
jurisdiction in which we operate. This process involves
estimating our actual current tax exposure together with
assessing temporary differences resulting from different
treatment of items for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which
are included in our consolidated balance sheet. We must then
assess the likelihood that our deferred tax assets will be
recovered from future taxable income and to the extent we believe
that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance, we
must include an expense within the tax provision in the
consolidated statements of income. In the event that actual
results differ from these estimates, our provision for income
taxes could be materially impacted.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements
speak only as of the date when made. We undertake no obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
Risk Factors
- ------------
You should carefully consider the risks described below, as well
as the other information included or incorporated by reference in
our Annual Report on Form 10-K, before making an investment in
the Company's common stock. The risks described below are not
the only ones we face in our business. Additional risks and
uncertainties not presently known to us or that we currently
believe to be immaterial may also impair our business operations.
If any of the following risks occur, our business, financial
condition or operating results could be materially harmed. In
such an event, our common stock could decline in price and you
may lose all or part of your investment.
Ennis may be required to write down goodwill and other intangible
assets in the future, which could cause its financial condition
and results of operations to be negatively affected in the future
When Ennis acquires a business, a portion of the purchase price
of the acquisition is allocated to goodwill and other
identifiable intangible assets. The amount of the purchase price,
which is allocated to goodwill and other intangible assets, is
determined by the excess of the purchase price over the net
identifiable assets acquired. At May 31, 2005 Ennis' goodwill and
intangible assets were approximately $263.8 million. Under
current accounting standards, if Ennis determines goodwill or
intangible assets are impaired, it would be required to write
down the value of these assets.
20
Ennis conducts an annual review to determine whether goodwill and
other identifiable intangible assets are impaired. Ennis
completed such an impairment analysis for its fiscal year ended
February 28, 2005, and concluded that no impairment charge was
necessary. Ennis cannot provide assurance that it will not be
required to take an impairment charge in the future. Any
impairment charge would have a negative effect on its
shareholders' equity and financial results and may cause a
decline in Ennis' stock price.
Printed business forms may be superceded over time by "paperless"
business forms or otherwise affected by technological
obsolescence and changing customer preferences, which could
reduce our sales and profits
Printed business forms and checks may eventually be superceded by
"paperless" business forms, which could have a material adverse
effect on Ennis' business over time. The price and performance
capabilities of personal computers and related printers now
provide a cost-competitive means to print low-quality versions of
many of our business forms on plain paper. In addition,
electronic transaction systems and off-the-shelf business
software applications have been designed to automate several of
the functions performed by our business form and check products.
In response to the gradual obsolescence of our standardized forms
business, we continue to develop our capability to provide custom
and full-color products. We are also seeking to introduce new
products and services that may be less susceptible to
technological obsolescence. If new printing capabilities and new
product introductions do not continue to offset the obsolescence
of our standardized business forms products, there is a risk that
the number of new customers we attract and existing customers we
retain may diminish, which could reduce our sales and profits.
Decreases in sales of our standardized business forms and
products due to obsolescence could also reduce our gross margins.
This reduction could in turn adversely impact our profits, unless
we are able to offset the reduction through the introduction of
new high margin products and services or realize cost savings in
other areas.
Our distributors face increased competition from various sources,
such as office supply superstores. Increased competition may
require Ennis to reduce prices or to offer other incentives in
order to enable its distributors to attract new customers and
retain existing customers
Low price, high value office supply chain stores offer
standardized business forms, checks and related products.
Because of their size, these superstores have the buying power to
offer many of these products at competitive prices. These
superstores also offer the convenience of "one-stop" shopping for
a broad array of office supplies that our distributors do not
offer. In addition, superstores have the financial strength to
reduce prices or increase promotional discounts to expand market
share. This could result in our reducing our prices or offering
incentives in order to enable our distributors to attract new
customers and retain existing customers.
Technological improvements may reduce our competitive advantage
over some of our competitors, which could reduce our profits
Improvements in the cost and quality of printing technology are
enabling some of our competitors to gain access to products of
complex design and functionality at competitive costs. Increased
competition from these competitors could force us to reduce our
prices in order to attract and retain customers, which could
reduce our profits.
21
Concentration of Business Form and Apparel Vendors and Suppliers
We use a limited number of vendors and suppliers to provide ink
for our printing segment, and we use as sole sources
Mead/Westvaco for paper and UPS for delivery services. We
contract with Parkdale Mills for our supplies of yarn. If there
are interruptions in supplies or service from these vendors or
suppliers, it could result in a disruption to our business, if we
are unable to readily find alternative service providers at
comparable rates.
Ennis could experience labor disputes that could disrupt its
business in the future
As of May 31, 2005, approximately 14% of Ennis' domestic
employees are represented by labor unions under collective
bargaining agreements, which are subject to periodic
renegotiations. Two unions represent all of the approximately
3,000 hourly employees in Mexico. Although Ennis has not
experienced any labor stoppages in the last 10 years, there can
be no assurance that any future labor negotiations may not prove
successful, may result in a significant increase in the cost of
labor or may break down and result in the disruption of our
business forms and apparel operations.
Alstyle obtains its raw materials from a limited number of
suppliers and any disruption in its relationships with these
suppliers, or any substantial increase in the price of raw
materials, could have a material adverse effect on Alstyle
Cotton yarn is the primary raw material used in Alstyle's
manufacturing processes. Cotton accounts for approximately 40%
of the manufactured product cost. Alstyle acquires its yarn from
five major sources that meet stringent quality and on-time
delivery requirements. The largest supplier provides over 50% of
Alstyle's yarn requirements and has an entire yarn mill dedicated
to Alstyle's production. The other major raw material components
used in Alstyle's manufacturing processes are chemicals used to
treat the fabric during the dyeing process. Alstyle sole-sources
the supply of these chemicals from one supplier. If Alstyle's
relations with its suppliers are disrupted, Alstyle may not be
able to enter into arrangements with substitute suppliers on
terms as favorable as its current terms and our results of
operations could be materially adversely affected.
Alstyle generally acquires its cotton yarn under short-term
purchase orders with its suppliers, and has exposure to swings in
cotton market prices. Alstyle does not use derivative
instruments, including cotton option contracts, to manage its
exposure to movements in cotton market prices. Alstyle may use
such derivative instruments in the future. While we believe that
Alstyle will be competitive with other companies in the United
States apparel industry in negotiating the price of cotton
purchased for future production use, any significant increase in
the price of cotton could have a material adverse effect on our
results of operations.
Alstyle faces intense competition to gain market share, which may
lead some competitors to sell substantial amounts of goods at
prices against which Alstyle cannot profitably compete
Demand for Alstyle's products is dependent on the general demand
for T-shirts and the availability of alternative sources of
supply. Alstyle's strategy in this market environment is to be a
low cost producer and to differentiate itself by providing
quality service to its customers. Even if this strategy is
successful, its results may be offset by reductions in demand or
price declines.
22
Apparel industry cyclicality
The United States apparel industry is sensitive to the business
cycle of the national economy. Moreover, the popularity, supply
and demand for particular apparel products can change
significantly from year to year. Alstyle may be unable to
compete successfully in any industry downturn due to excess
capacity.
Foreign political and economic risk
Alstyle operates cutting and sewing facilities in Mexico, and
sources certain product manufacturing and purchases in El
Salvador, Pakistan, China and Southeast Asia. Alstyle's foreign
operations could be subject to unexpected changes in regulatory
requirements, tariffs and other market barriers and political and
economic instability in the countries where it operates. The
impact of any such events that may occur in the future could
subject Alstyle to additional costs or loss of sales, which could
adversely affect its operating results. In particular, Alstyle
operates its facilities in Mexico pursuant to the "maquiladora"
duty-free program established by the Mexican and United States
governments. This program enables Alstyle to take advantage of
generally lower costs in Mexico, without paying duty on inventory
shipped into or out of Mexico. There can be no assurance that
the government of Mexico will continue the program currently in
place or that Alstyle will continue to be able to benefit from
this program. The loss of these benefits could have an adverse
effect on our business.
Alstyle's products are subject to foreign competition, which in
the past has been faced with significant U.S. government import
restrictions
Foreign producers of apparel often have significant labor cost
advantages. Given the number of these foreign producers, the
substantial elimination of import protections that protect
domestic apparel producers could materially adversely affect
Alstyle's business. The extent of import protection afforded to
domestic apparel producers has been, and is likely to remain,
subject to considerable political considerations.
The North American Free Trade Agreement (NAFTA) became effective
on January 1, 1994 and has created a free-trade zone among
Canada, Mexico and the United States. NAFTA contains a rule of
origin requirement that products be produced in one of the three
countries in order to benefit from the agreement. NAFTA has
phased out all trade restrictions and tariffs among the three
countries on apparel products competitive with those of Alstyle.
Alstyle performs substantially all of its cutting and sewing in
five plants located in Mexico in order to take advantage of the
NAFTA benefits. Subsequent repeal or alteration of NAFTA could
seriously adversely affect our business.
The Central American Free Trade Agreement (CAFTA) became
effective May 28, 2004 and retroactive to January 1, 2004 for
textiles and apparel. It creates a free trade zone similar to
NAFTA by and between the United States and Central American
countries (El Salvador, Honduras, Costa Rica, Nicaragua and
Dominican Republic.) Textiles and apparel will be duty-free and
quota-free immediately if they meet the agreement's rule of
origin, promoting new opportunities for U.S. and Central American
fiber, yarn, fabric and apparel manufacturing. The agreement
will also give duty-free benefits to some apparel made in Central
America that contains certain fabrics from NAFTA partners Mexico
and Canada. Alstyle sources approximately 5% of its sewing to a
contract manufacturer in El Salvador, and we do not anticipate
that this will have a material effect on its operations.
23
The World Trade Organization (WTO), a multilateral trade
organization, was formed in January 1995 and is the successor to
the General Agreement on Tariffs and Trade (GATT). This
multilateral trade organization has set forth mechanisms by which
world trade in clothing is being progressively liberalized by
phasing-out quotas and reducing duties over a period of time that
began in January of 1995. As it implements the WTO mechanisms,
the U.S. government is negotiating bilateral trade agreements
with developing countries (which are generally exporters of
textile and apparel products) that are members of the WTO to get
them to reduce their tariffs on imports of textiles and apparel
in exchange for reductions by the United States in tariffs on
imports of textiles and apparel.
In January 2005, United States import quotas have been removed on
knitted shirts from China. The elimination of quotas and the
reduction of tariffs under the WTO may result in increased
imports of certain apparel products into North America. In May
2005, quotas on three categories of clothing imports, including
knitted shirts, from China were re-imposed. These factors could
make Alstyle's products less competitive against low cost imports
from developing countries.
Environmental regulations
We are subject to extensive and changing federal, state and
foreign laws and regulations establishing health and
environmental quality standards, and may be subject to liability
or penalties for violations of those standards. We are also
subject to laws and regulations governing remediation of
contamination at facilities currently or formerly owned or
operated by us or to which we have sent hazardous substances or
wastes for treatment, recycling or disposal. We may be subject
to future liabilities or obligations as a result of new or more
stringent interpretations of existing laws and regulations. In
addition, we may have liabilities or obligations in the future if
we discover any environmental contamination or liability at any
of our facilities, or at facilities we may acquire.
We depend upon the talents and contributions of a limited number
of individuals, many of who would be difficult to replace
The loss or interruption of the services of these executives
could have a material adverse effect on our business, financial
condition and results of operations. Although we maintain
employment agreements with certain members of key management, it
cannot be assured that the services of such personnel will
continue.
Cautionary Statements
Certain statements in this report, and in particular, statements
found in Management's Discussion and Analysis of Financial
Condition and Results of Operations, constitute forward-looking
statements within the meaning of the Private Securities
Litigation Reform Act of 1995. We believe these forward-looking
statements are based upon reasonable assumptions within the
bounds of our knowledge of Ennis. All such statements involve
risks and uncertainties, and as a result, actual results could
differ materially from those projected, anticipated or implied by
these statements. Such forward-looking statements involve known
and unknown risks, including but not limited to, general
economic, business and labor conditions; the ability to implement
our strategic initiatives; the ability to be profitable on a
consistent basis; dependence on sales that are not subject to
long-term contracts; dependence on suppliers; the ability to
recover the rising cost of key raw materials in markets that are
highly price competitive; the ability meet customer demand for
additional value-added products and services; the ability to
timely or adequately
24
respond to technological changes in the industry; the impact of
the Internet and other electronic media on the demand for forms
and printed materials; postage rates; the ability manage
operating expenses; the ability to manage financing costs and
interest rate risk; a decline in business volume and
profitability could result in a further impairment of goodwill;
the ability to retain key management personnel; the ability to
identify, manage or integrate future acquisitions; the costs
associated with and the outcome of outstanding and future
litigation; and changes in government regulations.
In view of such uncertainties, investors should not place undue
reliance on our forward-looking statements since such statements
speak only as of the date when made. We undertake no obligation
to publicly update or revise any forward-looking statements,
whether as a result of new information, future events or
otherwise.
Forward looking statement
- -------------------------
Statements made in the Management's result of operations
concerning the Company's or management's intentions,
expectations, or predictions about future results or events are
"forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements
reflect management's current expectations or beliefs, and are
subject to risks and uncertainties that could cause actual
results or events to vary from stated expectations, which
variations could be material and adverse. Factors that could
produce such a variation include, but are not limited to the
following: the inherent unreliability of earnings, revenue and
cash flow predictions due to numerous factors, many of which are
beyond the Company's control; developments in the demand for the
Company's products and services; relationships with the Company's
major customers and suppliers; unanticipated delays, costs and
expenses inherent in the development and marketing of new
products and services; risks and uncertainties associated with
the successful integration of the acquisition of Alstyle Apparel,
the impact of governmental laws and regulations; and competitive
factors. The Company's cash dividends are declared by the board
of directors on a current basis, and therefore may be subject to
change. Because of such uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements, which
speak only as of June 15, 2005.
25
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
- -----------
The Company is exposed to market risk from changes in interest
rates on debt. A discussion of the Company's accounting policies
for derivative instruments is included in the Summary of
Significant Accounting Policies in the Notes to the Consolidated
Financial Statements.
The Company's net exposure to interest rate risk consists of a
floating rate debt instrument that is benchmarked to U.S. and
European short-term interest rates. The Company may from time to
time utilize interest rate swaps to manage overall borrowing
costs and reduce exposure to adverse fluctuations in interest
rates. The Company does not use derivative instruments for
trading purposes. The Company is exposed to interest rate risk
on short-term and long-term financial instruments carrying
variable interest rates. The Company's variable rate financial
instruments, including the outstanding credit facilities, totaled
$106 million at May 31, 2005. The impact on the Company's
results of operations of a one-point interest rate change on the
outstanding balance of the variable rate financial instruments as
of fiscal year ended 2006 would be approximately $1,000,000.
This market risk discussion contains forward-looking statements.
Actual results may differ materially from this discussion based
upon general market conditions and changes in domestic and global
financial markets.
Item 4. CONTROLS AND PROCEDURES
(a) Ennis management, with the participation of the Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures, as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934, as of May 31, 2005. No system of controls,
no matter how well designed and operated, can provide absolute
assurance that the objectives of the system of controls are met,
and no evaluation of controls can provide absolute assurance that
the system of controls has operated effectively in all cases. Our
disclosure controls and procedures however are designed to
provide reasonable assurance that the objectives of disclosure
controls and procedures are met.
As described in our management's report on our internal
control over financial reporting included in Ennis' 2005 Annual
Report (pp. 58 and 59), Ennis management and independent
registered public accounting firm identified a material weakness
as of February 28, 2005 in Ennis' internal control over financial
reporting, as defined in Rule 13a-15(f) under the Securities
Exchange Act, related to prompt financial close and determination
of proper adjustments in Alstyle Apparel, a newly acquired
subsidiary. That material weakness in internal control over
financial reporting also affected the effectiveness of our
disclosure controls and procedures, resulting in our conclusion
that disclosure controls and procedures were not effective as of
February 28, 2005.
During the first quarter of 2006, we improved Ennis'
financial controls and procedures and internal control over
financial reporting with respect to Alstyle Apparel in an effort
to remediate this material weakness and other control
deficiencies that were identified and evaluated in connection
with the determination of the material weakness. The remediation
included:
26
(bullet) Providing increased supervision and oversight
by Corporate level employees of the
accounting processes at our Alstyle subsidiary
(bullet) Establishing closing procedures to ensure that
all balance sheet accounts were appropriately
reconciled and all appropriate adjustments
were recorded
(bullet) Reviewing all adjusting journal entries to
ensure their accuracy and appropriateness.
As a result of such remediation, management concluded
that, as of May 31, 2005, our disclosure controls and procedures
were effective to provide reasonable assurance that information
required to be disclosed in the reports the Company files or
submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported on a timely basis.
Additionally, as described in our management's report on our
internal control over financial reporting included in Ennis' 2005
Annual Report (pp. 58 and 59), Ennis management also identified
as a material weakness insufficient controls over the accounting
for assets acquired. Because the item involved the acquisition
of Alstyle Apparel and the related FAS 141 adjustment, management
has met with its independent registered accounting firm and
established more formalized communication procedures. We
believe these enhanced communication procedures will help ensure
that we thoroughly analyze acquisitions in the future. Although
no acquisitions occurred during the quarter we have concluded
that as of June 14, 2005, our controls and procedures are
effective to provide reasonable assurance that accounting for
future acquisitions will be adequately recorded and disclosed in
the reports the Company files or submits under the Securities Act
of 1934.
(b) Changes in Internal Control Over Financial Reporting. During
the quarter ended May 31, 2005, the Company is continuing to
integrate the operations of the newly acquired operations of
Alstyle into its current internal control environment. It is
expected this integration will be completed by the end of the
Company's fiscal year. In addition to the changes discussed in
part (a) above we believe that further efforts to integrate
Alstyle will result in changes to virtually all areas of
Alstyle's internal controls in order to provide effective
monitoring and control of the newly integrated operations.
27
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The exhibits as listed on the accompanying index to
exhibits on pages 29 through 30 are filed as part of
this Form 10-Q.
(b) Reports on Form 8-K
The Company filed a report on Form 8-K on May 17, 2005
regarding a press release elaborating on internal
control issues disclosed in its recently filed Form 10-
K results.
28
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, INC.
Date June 15, 2005 /s/Harve Cathey
------------------- --------------------------------
Harve Cathey
Vice President - Finance and
CFO, Secretary and Principal
Financial and Accounting Officer
29
INDEX TO EXHIBITS
Exhibit 2.1 Agreement and Plan of Merger dated as
of June 25, 2004 by and among Ennis,
Inc., Midlothian Holdings LLC, and
Centrum Acquisition, Inc., incorporated
herein by reference to Exhibit 2.1 to the
Registrant's Form S-4 filed on September
3, 2004.
Exhibit 2.2 First Amendment to Agreement and Plan of
Merger dated as of August 23, 2004 by and
among Ennis, Inc., Midlothian Holdings
LLC, and Centrum Acquisition, Inc.,
incorporated herein by reference to
Exhibit 2.2 to the Registrant's Form S-
4 filed on September 3, 2004.
Exhibit 3.1 Restated Articles of Incorporation as
amended through June 23, 1983 with
attached amendments dated June 20, 1985,
July 31, 1985 and June 16, 1988
incorporated herein by reference to
Exhibit 5 to the Registrant's Form 10-K
Annual Report for the fiscal year ended
February 28, 1993.
Exhibit 3.2 Bylaws of the Registrant as amended
through October 15, 1997 incorporated
herein by reference to Exhibit 3(ii) to
the registrant's Form 10-Q Quarterly
Report for the quarter ended November
30, 1997.
Exhibit 3.3 Articles of Amendment to the Articles of
Incorporation of Ennis Business Forms,
Inc. filed on June 17, 2004 incorporated
herein by reference to Exhibit 3.3 to the
registrant's Form 10-Q Quarterly Report
for the quarter ended November 30, 2004.
Exhibit 10.1 Employee Agreement between Ennis, Inc.
and Keith S. Walters dated May 1, 2003
incorporated herein by reference to
Exhibit 10.1 to the Registrant's Form 10-
K Annual Report for the fiscal year ended
February 29, 2004.
Exhibit 10.2 Employee Agreement between Ennis, Inc.
and Ronald M. Graham dated May 1, 2003
incorporated herein by reference to
Exhibit 10.2 to the Registrant's Form 10-
K Annual Report for the fiscal year ended
February 29, 2004.
Exhibit 10.3 Employee Agreement between Ennis, Inc.
and Michael D. Magill dated October 7,
2003 incorporated herein by reference to
Exhibit 10.3 to the Registrant's Form 10-
K Annual Report for the fiscal year ended
February 29, 2004.
Exhibit 10.4 2004 Long-Term Incentive Plan
incorporated herein by reference to
Exhibit 4.1 of the Registrant's Form S-8
filed on January 5, 2005.
Exhibit 10.5 Stock Purchase Agreement dated as of
June 25, 2004, among Crabar/GBF, Inc.
the shareholders of Crabar/GBF, Inc. and
Ennis, Inc. incorporated herein by
reference to Exhibit 2 to the
Registrant's Current Report on Form 8-K
filed on July 15, 2004.
30
Exhibit 10.6 First Amendment Agreement dated as of
June 25, 2004, by and among Amin Amdani,
Rauf Gajiani, Centrum Acquisition, Inc.,
Ennis, Inc. and Midlothian Holdings LLC
incorporated herein by reference to
Exhibit 10.6 to the Registrant's Form S-
4 filed on September 3, 2004.
Exhibit 10.7 Indemnity Agreement dated as of June 25,
2004, by and among Laurence Ashkin, Roger
Brown, John McLinden, Arthur Slaven,
Ennis, Inc. and Midlothian Holdings LLC
incorporated herein by reference to
Exhibit 10.7 to the Registrant's Form S-4
filed on September 3, 2004.
Exhibit 10.8 Indemnity Agreement dated as of June 25,
2004, by and among Laurence Ashkin, Roger
Brown, John McLinden, Arthur Slaven,
Ennis, Inc. and Midlothian Holdings LLC
incorporated herein by reference to
Exhibit 10.8 to the Registrant's Form S-4
filed on September 3, 2004.
Exhibit 10.9 UPS Ground, Air Hundredweight and
Sonicair Incentive Program Carrier
Agreement incorporated herein by
reference to Exhibit 10 to the
Registrant's Form 10-K Annual Report for
the fiscal year ended February 29, 2003.
Exhibit 10.10 Addendum to UPS Ground, Air and
Sonicair Incentive Program Carrier
Agreement dated as of August 9, 2004,
between Ennis, Inc. and United Parcel
Service, Inc. incorporated herein by
reference to Exhibit 10.10 to the
Registrant's Form S-4 filed on September
3, 2004.*
Exhibit 10.11 Carbonless Paper Agreement dated as of
July 13, 2004 between Ennis, Inc &
MeadWestvaco Corporation incorporated
herein by reference to Exhibit 10.11 to
the Registrant's Form S-4 filed on
September 3, 2004.*
Exhibit 10.12 Credit Agreement dated as of November 19,
2004 among Ennis, Inc., various other co-
borrowers and lenders that sign and become
a party to the credit agreement, LaSalle
Bank National Association, as
Administrative Agent, Documentation Agent
and Arranger, and Compass Bank and
JPMorgan Chase Bank, N.A., as Co-
Syndication Agents incorported herein by
reference to Exhibit 10.1 to the
Registrant's Current Report on Form 8-K
filed on November 19, 2004.
Exhibit 10.13 Security Agreement dated as of November
19, 2004 among Ennis, Inc., various other
parties that sign and become a party to
the security agreement and LaSalle Bank
National Association, as the
Administrative Agent incorported herein by
reference to Exhibit 10.2 to the
Registrant's Current Report on Form 8-K
filed on November 19, 2004.
Exhibit 31.1 Certification Pursuant to Rule 13a-
14(a)/15d-14(a) (Chief Executive Officer)
Exhibit 31.2 Certification Pursuant to Rule 13a-
14(a)/15d-14(a) (Chief Financial Officer)
31
Exhibit 32 Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of
2002
Exhibit 99 Charter of the Audit Committee of The
Board of Directors of Ennis Business
Forms, Inc. as amended June 21, 2001
incorporated herein by reference to
Exhibit 99 to the Registrant's Form 10-Q
Quarterly Report for the quarter ended
May 31, 2001.
* Portions of Exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and
Exchange Commission.
32