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, 2005
-----------------------------------------------
Commission File Number 1-5807
------------------------------------------
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.)
2441 Presidential Pkwy, Midlothian, TX 76065
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 775-9801
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
1510 N. Hampton, Suite 300, DeSoto, TX 75115
- -----------------------------------------------------------------
(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 September 16, 2005 was 25,454,624.
ENNIS, INC.
INDEX
Part I. Financial information
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
August 31, 2005 and February 28, 2005 2 - 3
Condensed Consolidated Statements of Earnings --
Three and Six Months Ended August 31, 2005 and
2004 4
Condensed Consolidated Statements of Cash
Flows -- Six Months Ended August 31, 2005 and
2004 5
Notes to Condensed Consolidated Financial
Statements 6 - 14
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 15 - 26
Item 3 - Quantitative and Qualitative Disclosures
of Market Risk 27
Item 4 - Controls and Procedures 287
Part II. Other Information
Item 6 - Exhibits and Reports on Form 8-K 29
Signatures 30
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 31, February 28,
2005 2005
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 2,066 $ 10,694
Accounts receivable, net 54,233 46,685
Prepaid expenses 5,614 5,162
Inventories 78,294 79,900
Other current assets 6,625 6,732
------- -------
Total current assets 146,832 149,173
------- -------
Property, plant and equipment, net 70,328 72,019
Goodwill, net 178,118 178,472
Trademarks, net 62,016 62,090
Purchased customer list, net 22,454 23,275
Other assets 9,753 12,217
------- -------
$ 489,501 $ 497,246
======= =======
(Continued)
2
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
August 31, February 28,
2005 2005
---- ----
(unaudited)
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 29,125 $ 33,887
Accrued expenses:
Employee compensation and
benefits 14,432 16,135
Federal and state income tax
payable 1,431 1,389
Taxes other than income 2,194 3,154
Other 5,547 5,116
Current installments of long-
term debt 18,332 21,702
------- -------
Total current
liabilities 71,061 81,383
------- -------
Long-term debt, less current
installments 102,475 112,342
Deferred credits, principally income
taxes 30,636 31,790
Shareholders' equity:
Series A junior participating
preferred stock $10 par value,
authorized 1,000,000 shares;
None issued -- --
Common stock $2.50 par value,
authorized 40,000,000 shares;
issued 30,053,443 shares
at August 31, 2005 and
February 28, 2005 75,134 75,134
Additional paid in capital 123,311 123,640
Retained earnings 169,915 156,666
Accumulated other comprehensive
income 22 6
------- -------
368,382 355,446
Treasury stock:
Cost of 4,598,819 shares at
August 31, 2005 and 4,635,444
shares at February 28, 2005 (83,053) (83,715)
------- -------
Total shareholders'
equity 285,329 271,731
------- -------
$ 489,501 $ 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 Six Months Ended
August 31, August 31,
2005 2004 2005 2004
---- ---- ---- ----
Net sales $148,116 $73,374 $297,229 $139,110
Costs and expenses:
Cost of sales 110,864 54,022 222,499 102,698
Selling,
general and
administrative 17,791 10,813 35,628 20,199
------- ------- ------- -------
128,655 64,835 258,127 122,897
------- ------- ------- -------
Income from
operations 19,461 8,539 39,102 16,213
------- ------- ------- -------
Other income
(expense):
Interest expense (2,323) (167) (4,566) (301)
Other income
(expense), net (81) 216 (171) 140
------- ------- ------- -------
(2,404) 49 (4,737) (161)
------- ------- ------- -------
Earnings before
income taxes 17,057 8,588 34,365 16,052
Provision for income
taxes 6,481 3,218 13,231 6,100
------- ------- ------- -------
Net earnings $ 10,576 $ 5,370 $ 21,134 $ 9,952
======= ======= ======= =======
Weighted average
number of common
shares outstanding
- basic 25,453,566 16,427,776 25,440,230 16,416,737
Plus incremental
shares from
assumed
exercise of
stock options 302,849 317,675 284,897 298,908
---------- ---------- ---------- ----------
Weighted average
number of common
shares outstanding
- diluted 25,756,415 16,745,451 25,725,127 16,715,645
========== ========== ========== ==========
Per share amounts:
Net earnings
- basic $.42 $.33 $.83 $.61
==== ==== ==== ====
Net earnings
- diluted $.41 $.32 $.82 $.59
==== ==== ==== ====
Cash dividends
per share $.155 $.155 $.310 $.310
===== ===== ===== =====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
August 31,
2005 2004
---- ----
Cash flows from operating activities:
Net earnings $21,134 $ 9,952
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 7,847 4,358
Amortization of trademark and
customer list 973 66
Gain on the sale of equipment (178) (188)
Bad debt expense 747 429
Changes in operating assets and
liabilities
Accounts Receivable (8,295) 933
Prepaid expenses (452) 295
Inventories 1,606 (958)
Other current assets 93 (89)
Accounts payable and accrued
expenses (6,604) (3,217)
Other assets 1,232 (11)
------ ------
Net cash provided by operating
activities 18,103 11,570
------ ------
Cash flows from investing activities:
Capital expenditures (6,138) (3,581)
Purchase of operating assets, net of cash
acquired of $133 -- (17,701)
Proceeds from disposal of property 196 235
------ ------
Net cash used in investing
activities (5,942) (21,047)
------ ------
Cash flows from financing activities:
Debt issued 9,000 11,000
Repayment of debt (22,237) (3,335)
Dividends (7,885) (5,088)
Exercise of stock options 333 363
------ ------
Net cash (used in) provided by
financing activities (20,789) 2,940
------ ------
Net change in cash and cash equivalents (8,628) (6,537)
Cash and cash equivalents at beginning of
period 10,694 15,067
------ ------
Cash and cash equivalents at end of period $ 2,066 $ 8,530
====== ======
Total interest paid was $4,551,000 and $292,000 and taxes paid
were $11,000,000 and $4,800,000 for the six months ended August
31, 2005 and 2004 respectively.
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 August 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
-----------------------------------------------
The Company has stock options granted to key executive and
managerial employees and non-employee directors. At August
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 reserved 1,152,477 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.
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 earnings 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):
Three Months Six Months Ended
Ended August 31, August 31,
(in thousands) 2005 2004 2005 2004
---- ---- ---- ----
Net earnings:
As reported $10,576 $5,370 $21,134 $9,952
Deduct: Stock-based
Employee compensation
expense not included
in reported income,
net of related tax 12 11 23 21
effects
------ ----- ------ -----
Pro forma $10,564 $5,359 $21,111 $9,931
====== ===== ====== =====
Net earnings per
share:
As reported - basic $.42 $.33 $.83 $.61
Pro forma - basic .42 .33 .83 .60
As reported - diluted .41 .32 .82 .59
Pro forma - diluted .41 .32 .82 .59
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 six months ended
August 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 and six months ended August 31,
2005 and 2004 (in thousands):
Three Months Six Months Ended
Ended August 31, August 31,
2005 2004 2005 2004
---- ---- ---- ----
Components of net
periodic
benefit cost
Service cost $355 $367 $ 711 $ 734
Interest cost 611 604 1,222 1,208
Expected return
on assets (693) (666) (1,386) (1,332)
Amortization of:
Prior service
cost (36) (36) (72) (72)
Unrecognized net
loss 264 267 528 534
--- --- ----- -----
Net periodic
benefit cost $501 $536 $1,003 $1,072
=== === ===== =====
7
3. Employee Benefit Plans (continued)
----------------------------------
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.
4. Due From Factors
----------------
Pursuant to terms of an agreement between the Company and
various factors, the Company sells a majority of its trade
accounts receivable to the factors on a non-recourse basis.
The price at which the accounts are sold is the invoice
amount reduced by the factor commission of between 0.25%
and0.50% Additionally, some trade accounts receivable are
sold to the factors on a recourse basis. Trade accounts
receivable not sold to the factor remain in the custody and
control of the Company and the Company maintains all credit
risk on those accounts as well as accounts which are sold to
the factor with recourse.
The Company may request payment from the factor in advance of
the collection date or maturity. Any such advance payments
are assessed in interest charges through the collection date
or maturity at the prime rate as published by The Chase
Manhattan Bank. The Company's obligations with respect to
advances from the factor are limited to the interest charge
thereon. Advance payments are limited to a maximum of 90%
(ninety percent) of eligible accounts receivable.
At August 31, 2005, included in receivables in the balance
sheet amounts, due from factors consists of the following (in
thousands):
Outstanding factored receivables
Without recourse $18,776
With recourse 1,675
Advances (18,217)
------
Due from factors $ 2,234
======
5. Allowance for Doubtful Accounts and Concentration of Credit
Risk
-------------------------------------------------------------
Accounts receivable are reduced by an allowance for an
estimate of amounts that are uncollectible. Substantially
all of the Company's receivables are due from customers in
North America.
8
5. Allowance for Doubtful Accounts and Concentration of Credit
Risk (continued)
-------------------------------------------------------------
The Company extends credit to its customers based upon its
evaluation of the following factors: (i) the customer's
financial condition, (ii) the amount of credit the customer
requests and (iii) the customer's actual payment history
(which includes disputed invoice resolution). In some cases,
the Company extends open credit to customers that refuse to
make financial disclosure, but who have an extended history
of timely payment and low levels of disputed invoices. The
Company does not typically require its customers to post a
deposit or supply collateral. The Company's allowance for
doubtful accounts reserve is based on an analysis that
estimates the amount of its total customer receivable balance
that is not collectable. This analysis includes assessing a
default probability to customers' receivable balances. The
assessed default probability is influenced by several factors
including (i) current market conditions, (ii) periodic review
of customer credit worthiness, and (iii) review of customer
receivable aging and payment trends. Credit losses from
continuing operations have consistently been within
management's expectations.
The activity in the Company's allowance for doubtful accounts
is as follows (in thousands):
Balance
at Additions Balance
Beginning Charged at the
of the Charged to to Other End of
Description Period Operations Accounts Deductions Period
----------- --------- ---------- -------- ---------- -------
Six months ended
August 31, 2005 $3,567 747 -- 475(1) 3,839
Year ended
February 28, 2005 $1,771 893 1,620(2) 717(1) 3,567
Year ended
February 29, 2004 $1,294 890 47(3) 460(1) 1,771
(1) Charge-off of uncollectible receivables.
(2) Principally Allowance from Acquisition of Alstyle Apparel,
Crabar/GBF, Inc., and Royal Business Forms, Inc.
(3) Principally Reserve from Acquisition of Alstyle Apparel.
6. 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):
August 31, February 28,
2005 2005
---- ----
Raw material $24,130 $26,717
Work-in-process 14,738 17,669
Finished goods 39,426 35,514
------ ------
$78,294 $79,900
====== ======
9
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. The purchase contract included a holdback
provision of $10,000,000 which is included on the
consolidated balance sheet at August 31, 2005. 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 value at the date of acquisition. Customer
lists valued at $22,000,000 at date of acquisition are
amortized over their useful lives 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. 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 adds 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 adds 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 at acquisition date. 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):
10
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
intangibles 92 -- 3,763
Accounts payable and
accrued liabilities 11,476 1,106 66,676
------ ----- -------
$ 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 August 31, 2004 2004
----
Net sales $ 143,597
Net earnings 7,624
Net earnings per share - basic .30
Net earnings per share - diluted .30
For the Six Months Ended August 31, 2004 2004
----
Net sales $ 294,882
Net earnings 16,652
Net earnings per share - basic .65
Net earnings per share - diluted .65
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. 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 recorded at the lower of cost or fair value.
Trade names with determinable lives have an aggregate value
of $1,234,000, less accumulated amortization of $218,000 and
$144,000 as of August 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 August 31, 2005 are evaluated for
impairment on an annual basis.
11
Purchased customer lists have an aggregate value of
$23,760,000, less accumulated amortization of $1,306,000 and
$485,000 as of August 31, 2005 and February 28, 2005,
respectively. Amortization expense for these intangibles
will be $1,643,000 in each of the five succeeding years.
The change in goodwill is the result of liabilities of the
Alstyle acquisition settled at less than originally
estimated.
9. Shareholders' Equity
--------------------
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 $21,150,000 1for the
six months ended August 31, 2005 and $10,026,000 for the six
months ended August 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."
Changes in Retained Earnings are as follows:
Retained Earnings
February 28, 2005 $156,666,000
Net Earnings 21,134,000
Cash dividends declared and paid (7,885,000)
-----------
Retained Earnings August 31, 2005 $169,915,000
===========
10.Segment Data
------------
The Company operates in two 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. Assets in this group at August
31, 2005 decreased from August 31, 2004 primarily from
improved accounts receivable collections and inventory
management of Crabar/GBF assets. 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. Assets
in this group at August 31, 2005 increased from August 31,
2004 primarily from increased accounts receivable and
inventory requirements from Adams McClure sales increases.
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
Alstyle acquired in November 2004, is primarily engaged in
the production and sale of activewear including t-shirts,
fleece goods and other wearables. Alstyle sales are
seasonal, with sales in the first and second quarters
generally being the highest. 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.
12
Segment data for the three and six months ended August 31,
2005 and 2004 were as follows (in thousands):
Apparel
Printing Segment Segment
---------------- -------
Forms Promotional Financial Apparel
Solutions Solutions Solutions Solutions Consolidated
Group Group Group Group Corporate Totals
----- ----- ----- ----- --------- ------
Three months ended August 31, 2005:
Net sales $48,868 $23,901 $11,129 $ 64,218 $ -- $ 148,116
Depreciation 799 598 408 1,974 160 3,939
Amortization of
Trademark 89 -- -- 405 -- 494
Segment earnings
(loss) before 7,344 1,671 1,894 8,085 (1,937) 17,057
income tax
Segment assets 86,988 47,339 32,688 314,037 8,449 489,501
Capital
expenditures 210 1,085 64 205 53 1,617
Three months ended August 31, 2004:
Net sales $43,227 $19,183 $10,964 $ -- $ -- $ 73,374
Depreciation 841 614 562 -- 132 2,149
Amortization of
trademark 33 -- -- -- -- 33
Segment earnings
(loss) before
income tax 6,377 2,723 1,508 -- (2,020) 8,588
Segment assets 100,085 35,390 31,860 -- 8,150 175,485
Capital
expenditures 348 471 54 -- 569 1,442
Six months ended August 31, 2005:
Net sales $95,347 $46,423 $22,852 $132,607 $ -- $ 297,229
Depreciation 1,636 1,191 817 3,883 320 7,847
Amortization of
trademark 179 -- -- 794 -- 973
Segment earnings
(loss) before
income tax 12,625 5,557 3,818 16,452 (4,087) 34,365
Segment assets 86,988 47,339 32,688 314,037 8,449 489,501
Capital 317 1,206 165 4,073 377 6,138
expenditures
Six months ended August 31, 2004:
Net sales $77,790 $38,644 $22,676 $ -- $ -- $139,110
Depreciation 1,609 1,241 1,268 -- 240 4,358
Amortization of
trademark 66 -- -- -- -- 66
Segment earnings
(loss) before
income tax 11,913 4,886 2,994 -- (3,741) 16,052
Segment assets 100,085 35,390 31,860 -- 8,150 175,485
Capital
expenditures 615 712 154 -- 2,100 3,581
"Post-it" is a registered trademark of 3M.
13
11.Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
The Company's interest rate swaps are 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 loans covered by
the swap agreements declines quarterly in connection with
expected principal reductions and totaled $3,000,000 at
August 31, 2005. The fair value of the swap at August 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.
12.Recent Accounting Requirements
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.
14
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 the cost of the 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 that 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 in the prior fiscal
quarter the Company reports 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.
15
Business Segment Overview
- -------------------------
Printing Segment
- ----------------
Forms Solutions Group - The Forms Solutions Group operates
through 16 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 be 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.
16
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 relate 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 six months ended in
August 2005 was $18,103,000 an increase of 56.5% from the same
period in the prior year. The increase is the result of
acquisitions of Crabar/GBF, Royal and Alstyle Apparel in the
prior year. Cash provided by operations, along with some
additional borrowing under the revolving credit arrangement and
existing cash balances was utilized for capital expenditures,
debt repayment and dividends.
Working Capital
Working capital increased during the six months ended in August
2005 from $67,790,000 at February 2005 to $75,771,000. The
current ratio improved to 2.1 to 1. The Company has $2,066,000
in cash and cash equivalents at the end of the six-month period.
Credit Facility
During the six months ended in August 2005, the Company has drawn
$9,000,000 from the revolving credit facility and repaid
$5,000,000 on the term note, $10,000,000 to the revolver and
$7,237,000 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.
As previously reported, Alstyle continues to sell substantially
all of its account receivable to factors based upon agreements
with various financial institutions. $4,000,000 of the total
amount drawn under the revolver during the quarter ended in
August 2005 was used to finance the growth in accounts receivable
the Company is not factoring. The Company continues with plans to
fund these receivables through the existing bank line or from
working capital generated by Alstyle over the next twelve to
eighteen months.
17
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 contribute approximately $2,500,000
in the fourth quarter of fiscal year 2006.
Inventories
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 continues to expect 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.
Accounting Standards
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.
18
Results of Operations - Consolidated
- ------------------------------------
Net sales for the quarter and six months ended in August 2005
were $148.1 million and $297.2 million respectively. This is an
increase of 101.9% for the quarter and 113.7% for the six-month
period. Acquisitions provided 94.0% and 109.1% of the respective
increases. Gross margins for the current quarter were 25.2%
compared to 26.4% in the prior year quarter. For the six-month
period, gross margins were 25.1% compared to 26.2% in the prior
year six-month period. The overall decline in gross margin for
the current quarter and the six-month period is the result of
acquisitions in the prior year. These acquisitions, Crabar/GBF,
Royal and Alstyle, generally produce gross margins which are less
than those produced by the pre-acquisition units. In addition,
the current quarter and the six-month period are impacted by
weakened gross margins in the Promotional Group, as discussed
below. Selling, general and administrative expenses were $17.8
million and $35.6 million for the quarter and six months ended in
August 2005. The increases of 64.5% and 76.4% for the respective
periods are attributable to the prior year acquisitions.
Selling, general and administrative expenses declined as a
percent of revenues 2.7% for the quarter and 2.5% for the six-
month period. 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
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 be approximately 38.5%
Results of Operations - Printing Segment
- ----------------------------------------
Forms Solutions Group -- Net sales for the group were $48.9
million and $95.3 million for the quarter and six months ended in
August 2005, compared to $43.2 million and $77.8 million in the
prior year periods. The $5.7 million increase from the prior
year quarter was the result of $.9 million incremental sales from
the Crabar/GBF units in the group, $3.0 million from Royal and
$1.8 million from the pre- acquisition units. The $17.5 million
increase for the six-month period came from $10.3 million in
incremental sales from Crabar/GBF units, $5.8 million from Royal
and $1.4 million from the pre-acquisition units. . 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
generally 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
$23.9 million in the quarter, compared to $19.2 million in the
prior year and $22.5 million in the prior quarter. The increase
from the prior year quarter was primarily attributable to the
increased sales from the Adams McClure facility to the group.
The increase from the prior quarter was the result of increased
sales in all of the group's operating units. Gross margins for
this group were negatively impacted by operational performance
issues encountered by the Adams McClure facility in executing a
large contract. Management has evaluated the causes of the
operational problems, and is implementing changes in both
personnel and processes to prevent the recurrence of this event.
19
Financial Solutions Group -- Net sales for the group were $11.1
million in the quarter compared to $11.0 million in the prior
year and $11.7 million and the prior year quarter. Gross margins
for the current quarter were 29.5% compared to 27.2% in the prior
year quarter. The improvement in gross margins was 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 $64.2
million and $132.6 million for the quarter and six months ended
in August 2005. Since the Apparel Group was not included in
either of the prior year periods, these amounts represent a major
portion of the current year net sales increase on a consolidated
basis. Historically, the Company's first and second fiscal
quarters have been the Apparel Group's highest revenue quarters.
Gross margins for the quarter were 26.0% and for the six month
period were 25.2%. The improvement in margins is the result of
the influence from favorably priced product mix along with
ongoing cost savings from efforts to reduce raw material costs
and change manufacturing processes to improve efficiency since
the Apparel Group was acquired by the Company.
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
20
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 consist of 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 from obsolescence passes to the
customer, the customer is invoiced under normal credit terms and
revenue is recognized when manufacturing is complete.
Approximately $3,344,000 and $6,673,000 of revenue was recognized
under these agreements during quarter and six months ended August
31, 2005. Sales in foreign countries were not significant for
the quarter or six month periods ended August 31, 2005.
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.
21
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 August 31, 2005, Ennis' goodwill
and intangible assets were approximately $263 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.
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.
22
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.
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 for paper
and for delivery services. We contract with a mill 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 August 31, 2005, approximately 18% 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.
23
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.
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
24
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.
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.
25
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 to meet customer demand for
additional value-added products and services; the ability to
timely or adequately 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 to 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 September 30, 2005.
26
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
$107 million at August 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
before income taxes. 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.
27
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures over financial
reporting that are designed to ensure that information required
to be disclosed in our Securities Exchange Act reports is
recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating the disclosure
controls and procedures over financial reporting, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives.
An evaluation was carried out under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures
(as defined in the Securities Exchange Act of 1934 Rules 13a-
15(e)). Based on that evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that, as of the end of the
period covered by this report, our disclosure controls and
procedures are effective.
Changes in Internal Control
During the three months ended August 31, 2005, the Company
implemented the first phase of its conversion to the JDEdwards
financial accounting system for its Apparel Segment. This
implementation provided conversion of the payroll and fixed
assets systems to the Company's JDEdwards ERP platform. The
remainder of the conversion will be completed in the third
quarter of fiscal year 2006. Except for the described system
conversion, there have not been any changes in the Company's
internal control over financial reporting (as defined in Rules
13a-15(f) and 15d-15(f) under the Exchange Act) during the three
months ended August 31, 2005, that have materially affected, or
are reasonably likely to materially affect, the Company's
internal control over financial reporting.
The Company believes the conversion and implementation to this
fully integrated financial system will further strengthen its
existing internal control over financial reporting, as well as
automate a number of its administrative processes and activities,
and enhance other operational management processes.
28
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 31 through 33 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 June 17, 2005
regarding election of directors, a press release dated
June 15, 2005 announcing first quarter operating
results and a press release dated June 17, 2005
announcing CFO retirement.
29
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 September 30, 2005 /s/Harve Cathey
---------------------- --------------------------------
Harve Cathey
Vice President - Finance and
CFO, Secretary and Principal
Financial and Accounting Officer
30
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.
31
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 JP Morgan Chase Bank, N.A.,
as Co-Syndication Agents incorporated 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
incorporated herein by reference to Exhibit
10.2 to the Registrant's Current Report on
Form 8-K filed on November 19, 2004.
Exhibit 10.14 Mutual Agreement, dated January 10, 2005,
between Parkdale and Alstyle Apparel, Inc.
incorporated herein by reference to Exhibit
10.14 to the Registrant's Form 10-K/A filed
on June 20, 2005.
32
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)
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.
33