e10vq
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For the Quarterly Period Ended May 31, 2007
OR
|
|
|
o |
|
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
For
the Transition Period from
to
Commission File Number 1-5807
ENNIS, INC.
(Exact Name of Registrant as Specified in Its Charter)
|
|
|
Texas
|
|
75-0256410 |
|
|
|
(State or Other Jurisdiction of Incorporation or
|
|
(I.R.S. Employer Identification No.) |
Organization) |
|
|
|
|
|
2441 Presidential Pkwy., Midlothian, Texas
|
|
76065 |
|
|
|
(Address of Principal Executive Offices)
|
|
(Zip code) |
(972) 775-9801
(Registrants Telephone Number, Including Area Code)
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 þ No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in
Rule 12b-2 of the Exchange Act.
Large accelerated Filer o Accelerated filer þ Non-accelerated filer o
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).
Yes o No þ
As of June 27, 2007, there were 25,585,701 shares of the Registrants common stock outstanding.
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2007
TABLE OF CONTENTS
2
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
February 28, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
2,551 |
|
|
$ |
3,582 |
|
Accounts receivable, net of allowance for doubtful receivables
of $2,973 at May 31, 2007 and $2,698 at February 28, 2007 |
|
|
54,068 |
|
|
|
47,285 |
|
Prepaid expenses |
|
|
5,039 |
|
|
|
5,628 |
|
Inventories |
|
|
87,838 |
|
|
|
85,696 |
|
Deferred income taxes |
|
|
7,444 |
|
|
|
7,444 |
|
Assets held for sale |
|
|
1,881 |
|
|
|
1,881 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
158,821 |
|
|
|
151,516 |
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, at cost |
|
|
|
|
|
|
|
|
Plant, machinery and equipment |
|
|
128,070 |
|
|
|
127,521 |
|
Land and buildings |
|
|
40,922 |
|
|
|
40,680 |
|
Other |
|
|
22,574 |
|
|
|
22,506 |
|
|
|
|
|
|
|
|
Total property, plant and equipment |
|
|
191,566 |
|
|
|
190,707 |
|
Less accumulated depreciation |
|
|
130,767 |
|
|
|
127,650 |
|
|
|
|
|
|
|
|
Net property, plant and equipment |
|
|
60,799 |
|
|
|
63,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
|
178,388 |
|
|
|
178,314 |
|
Trademarks and tradenames, net |
|
|
63,015 |
|
|
|
63,052 |
|
Customer lists, net |
|
|
19,868 |
|
|
|
20,287 |
|
Deferred finance charges, net |
|
|
1,269 |
|
|
|
1,382 |
|
Other assets |
|
|
590 |
|
|
|
620 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
482,750 |
|
|
$ |
478,228 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
3
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
February 28, |
|
|
|
2007 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
Liabilities and Shareholders Equity |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
25,781 |
|
|
$ |
25,597 |
|
Accrued expenses |
|
|
|
|
|
|
|
|
Employee compensation and benefits |
|
|
14,293 |
|
|
|
15,799 |
|
Taxes other than income |
|
|
658 |
|
|
|
611 |
|
Federal and state income taxes payable |
|
|
5,413 |
|
|
|
973 |
|
Other |
|
|
5,153 |
|
|
|
5,615 |
|
Current installments of long-term debt |
|
|
532 |
|
|
|
652 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
51,830 |
|
|
|
49,247 |
|
|
|
|
|
|
|
|
Long-term debt, less current installments |
|
|
83,386 |
|
|
|
88,971 |
|
Liability for pension benefits |
|
|
3,106 |
|
|
|
2,702 |
|
Deferred income taxes |
|
|
19,861 |
|
|
|
19,603 |
|
Other liabilities |
|
|
1,014 |
|
|
|
1,302 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
159,197 |
|
|
|
161,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity |
|
|
|
|
|
|
|
|
Series A junior participating preferred stock of $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 May 31 and February 28, 2007 |
|
|
75,134 |
|
|
|
75,134 |
|
Additional paid in capital |
|
|
122,283 |
|
|
|
122,305 |
|
Retained earnings |
|
|
213,779 |
|
|
|
207,190 |
|
Accumulated other comprehensive income (loss): |
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
459 |
|
|
|
25 |
|
Minimum pension liability |
|
|
(7,396 |
) |
|
|
(7,396 |
) |
|
|
|
|
|
|
|
|
|
|
(6,937 |
) |
|
|
(7,371 |
) |
|
|
|
|
|
|
|
|
|
|
404,259 |
|
|
|
397,258 |
|
|
|
|
|
|
|
|
|
|
Treasury stock |
|
|
|
|
|
|
|
|
Cost of 4,467,742 shares at May 31, 2007 and
4,475,962 shares at February 28, 2007 |
|
|
(80,706 |
) |
|
|
(80,855 |
) |
|
|
|
|
|
|
|
Total shareholders equity |
|
|
323,553 |
|
|
|
316,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
482,750 |
|
|
$ |
478,228 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
4
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except share and per share amounts)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
152,774 |
|
|
$ |
145,113 |
|
Cost of goods sold |
|
|
114,207 |
|
|
|
107,298 |
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,567 |
|
|
|
37,815 |
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
|
|
18,987 |
|
|
|
18,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
19,580 |
|
|
|
19,737 |
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,492 |
) |
|
|
(1,792 |
) |
Other income (expense), net |
|
|
(951 |
) |
|
|
38 |
|
|
|
|
|
|
|
|
|
|
|
(2,443 |
) |
|
|
(1,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
17,137 |
|
|
|
17,983 |
|
|
|
|
|
|
|
|
|
|
Provision for income taxes |
|
|
6,341 |
|
|
|
6,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
10,796 |
|
|
$ |
11,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
|
|
|
|
|
|
Basic |
|
|
25,585,449 |
|
|
|
25,479,722 |
|
|
|
|
|
|
|
|
Diluted |
|
|
25,874,789 |
|
|
|
25,790,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts |
|
|
|
|
|
|
|
|
Net earnings basic |
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Net earnings diluted |
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Cash dividends per share |
|
$ |
0.155 |
|
|
$ |
0.155 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
5
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
10,796 |
|
|
$ |
11,330 |
|
Adjustments to reconcile net earnings to net cash provided
by operating activities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
3,301 |
|
|
|
3,894 |
|
Amortization of deferred finance charges |
|
|
112 |
|
|
|
92 |
|
Amortization of trademarks and customer lists |
|
|
466 |
|
|
|
497 |
|
Loss on the sale of equipment |
|
|
10 |
|
|
|
3 |
|
Bad debt expense |
|
|
373 |
|
|
|
|
|
Stock based compensation |
|
|
124 |
|
|
|
59 |
|
Excess tax benefit of stock option exercises |
|
|
|
|
|
|
(3 |
) |
Deferred income taxes |
|
|
3 |
|
|
|
|
|
Changes in operating assets and liabilities, net of the
effects of acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(6,858 |
) |
|
|
(4,150 |
) |
Prepaid expenses |
|
|
622 |
|
|
|
(2,011 |
) |
Inventories |
|
|
(1,845 |
) |
|
|
675 |
|
Other current assets |
|
|
|
|
|
|
(1 |
) |
Prepaid pension asset/liability for pension benefits |
|
|
404 |
|
|
|
459 |
|
Other liabilities |
|
|
(528 |
) |
|
|
(501 |
) |
Other assets |
|
|
21 |
|
|
|
(517 |
) |
Accounts payable and accrued expenses |
|
|
2,483 |
|
|
|
2,352 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
9,484 |
|
|
|
12,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(1,018 |
) |
|
|
(636 |
) |
Purchase of business, net of cash acquired |
|
|
|
|
|
|
(4,627 |
) |
Proceeds from disposal of plant and property |
|
|
23 |
|
|
|
3 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(995 |
) |
|
|
(5,260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Repayment of debt |
|
|
(5,705 |
) |
|
|
(7,473 |
) |
Dividends |
|
|
(3,967 |
) |
|
|
(3,949 |
) |
Proceeds from exercise of stock options |
|
|
3 |
|
|
|
14 |
|
Excess tax benefit of stock option exercises |
|
|
|
|
|
|
3 |
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(9,669 |
) |
|
|
(11,405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
149 |
|
|
|
(51 |
) |
|
Net change in cash and cash equivalents |
|
|
(1,031 |
) |
|
|
(4,538 |
) |
Cash and cash equivalents at beginning of period |
|
|
3,582 |
|
|
|
13,860 |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
2,551 |
|
|
$ |
9,322 |
|
|
|
|
|
|
|
|
See
accompanying notes to consolidated financial statements.
6
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
1. Basis of Presentation
These unaudited consolidated financial statements of Ennis, Inc. and its subsidiaries (collectively
the Company or Ennis), for the quarter ended May 31, 2007 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 Companys Annual Report on Form 10-K for the
year ended February 28, 2007, from which the accompanying consolidated balance sheet at February
28, 2007 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.
Recent Accounting Pronouncements
FIN 48. The Company adopted the provisions of Financial Accounting Standards Board
Interpretation 48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of
FASB Statement No. 109, on March 1, 2007. As a part of the implementation of FIN 48, the Company
made a comprehensive review of its uncertain tax positions and recorded $240,000 of unrecognized
tax benefits in connection with certain state tax positions, as
non-current other liabilities
on the consolidated balance sheet, with no net impact to the consolidated statement of operations.
Of this amount, approximately $240,000 was accounted for as a reduction to the March 1, 2007
balance of retained earnings, in accordance with the adoption of FIN 48. These unrecognized tax
benefits related to uncertain tax positions would impact the effective tax rate if recognized.
Approximately $81,000 of unrecognized tax benefits relate to items that are affected by expiring
statute of limitations within the next 12 months.
The unrecognized tax benefits mentioned above, includes an aggregate $38,000 of interest expense.
Upon adoption of FIN 48, the Company has elected an accounting policy to classify interest expense
on underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the
income tax provision. Prior to the adoption of FIN 48, the Companys policy was to classify
interest expense on underpayments of income taxes as interest expense and to classify penalties as
an operating expense in arriving at pretax income.
The Company and its subsidiaries are subject to U.S. federal income tax as well as to income tax of
multiple state jurisdictions and foreign tax jurisdictions. The Company has concluded all U.S.
federal income tax matters for years through 2005. All material state and local income tax matters
have been concluded for years through 2002 and foreign tax jurisdictions through 2000.
FAS 157. In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements, (FAS 157). The provisions of
FAS 157 define fair value, establish a framework for measuring fair value in generally accepted
accounting principles, and expand disclosures about fair value measurements. The provisions of FAS
157 are effective for fiscal years beginning after November 15, 2007. The Company is currently
assessing the impact of FAS 157 on its consolidated financial position, results of operations, and
cash flows.
FAS 159. In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FAS No. 115, (FAS 159). FAS 159 allows measurement at
fair value of eligible financial assets and liabilities that are not otherwise measured at fair
value. If the fair value option for an eligible item is elected, unrealized gains and losses on
that item shall be reported in current earnings at each subsequent reporting date. FAS 159 also
7
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
1. Significant Accounting Policies and General Matters-continued
establishes presentation and disclosure requirements designed to draw comparison between the
different measurement attributes the company elects for similar types of assets and liabilities.
FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted. The Company is currently assessing the impact of FAS 159 on its consolidated financial
statements.
2. Due From Factors
Pursuant to terms of an agreement between the Company and various factors, the Company sold
approximately 47% of its trade accounts receivable of Alstyle Apparel (Alstyle) to the factors on
a non-recourse basis during the three months ended May 31, 2007 (60% for the quarter ended May 31,
2006). The price at which the accounts are sold is the invoice amount reduced by the factor
commission of between 0.25% and 1.50%. 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 accounts for receivables sold to factors with recourse as
secured borrowings.
The Company may request payment from the factor in advance of the collection date or maturity. Any
such advance payments are assessed interest charges through the collection date or maturity at the
JP Morgan Chase Prime Rate. The Companys obligations with respect to advances from the factor are
limited to the interest charges thereon. Advance payments are limited to a maximum of 90% (ninety
percent) of eligible accounts receivable.
The following table represents amounts due from factors included in accounts receivable for the
periods ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
February 28, |
|
|
|
2007 |
|
|
2007 |
|
Outstanding factored receivables |
|
|
|
|
|
|
|
|
Without recourse |
|
$ |
13,389 |
|
|
$ |
18,766 |
|
With recourse |
|
|
257 |
|
|
|
405 |
|
Advances from factors |
|
|
(11,070 |
) |
|
|
(16,088 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from factors |
|
$ |
2,576 |
|
|
$ |
3,083 |
|
|
|
|
|
|
|
|
3. Accounts Receivable and Allowance for Doubtful Receivables
Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible.
Approximately 97% of the Companys receivables are due from customers in North America. The Company
extends credit to its customers based upon its evaluation of the following factors: (i) the
customers financial condition, (ii) the amount of credit the customer requests and (iii) the
customers actual payment history (which includes disputed invoice resolution). The Company does
not typically require its customers to post a deposit or supply collateral. The Companys allowance
for doubtful receivables reserve is based on an analysis that estimates the amount of its total
customer receivable balance that is not collectible. This analysis includes assessing a default
probability to customers receivable balances, which 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.
The Company writes-off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance in the period the payment
is received. Credit losses from continuing operations have consistently been within managements
expectations.
8
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
3. Accounts Receivable and Allowance for Doubtful Receivables- continued
The following table represents the activity in the Companys allowance for doubtful receivables for
the three months ended (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
|
|
2007 |
|
|
2006 |
|
Balance at beginning of period |
|
$ |
2,698 |
|
|
$ |
3,001 |
|
Bad debt expense |
|
|
373 |
|
|
|
|
|
Recoveries |
|
|
1 |
|
|
|
91 |
|
Accounts written off |
|
|
(99 |
) |
|
|
(135 |
) |
|
|
|
|
|
|
|
Balance at end of period |
|
$ |
2,973 |
|
|
$ |
2,957 |
|
|
|
|
|
|
|
|
4. Inventories
The Company uses the lower of last-in, first-out (LIFO) cost or market to value certain of its
business forms inventories and the lower of first-in, first-out (FIFO) cost or market to value its
remaining forms and apparel inventories. The Company regularly reviews inventories on hand, using
specific aging categories, and writes down the carrying value of its inventories for excess and
potentially obsolete inventories based on historical usage and estimated future usage. In assessing
the ultimate realization of its inventories, the Company is required to make judgments as to future
demand requirements. As actual future demand or market conditions may vary from those projected by
the Company, adjustments to inventories may be required.
The following table summarizes the components of inventories at the different stages of production
as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
|
February 28, |
|
|
|
2007 |
|
|
2007 |
|
Raw material |
|
$ |
12,678 |
|
|
$ |
11,074 |
|
Work-in-process |
|
|
18,486 |
|
|
|
16,694 |
|
Finished goods |
|
|
56,674 |
|
|
|
57,928 |
|
|
|
|
|
|
|
|
|
|
$ |
87,838 |
|
|
$ |
85,696 |
|
|
|
|
|
|
|
|
5. Acquisitions
The Company purchased all of the outstanding stock of Block Graphics, Inc. (Block), a privately
held company headquartered in Portland, Oregon for $14.8 million in cash on August 8, 2006. Block
Graphics had sales of approximately $38.6 million for the year ended December 31, 2005. The
acquisition of Block continues the strategy of growth through related manufactured products to
further service the Companys existing customer base. The acquisition added additional short-run
print products (snaps, continuous forms, and cut-sheet forms) as well as the production of
envelopes, a new product for the Company.
The following is a summary of the purchase price allocation for Block, net of cash acquired (in
thousands):
|
|
|
|
|
Accounts receivable |
|
$ |
2,492 |
|
Inventories |
|
|
1,864 |
|
Property, plant & equipment |
|
|
7,398 |
|
Other assets |
|
|
152 |
|
Deferred tax asset |
|
|
2,166 |
|
Trademarks |
|
|
1,260 |
|
Accounts payable and accrued liabilities |
|
|
(2,292 |
) |
|
|
|
|
|
|
$ |
13,040 |
|
|
|
|
|
9
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
5. Acquisitions-continued
The Company purchased all of the outstanding stock of Specialized Printed Forms, Inc. (SPF), a
privately held company headquartered in Caledonia, New York and the associated land and buildings
for $4.6 million in cash on March 31, 2006. SPF had sales of $9.2 million for the twelve month
period ended July 31, 2005. The acquisition of SPF continues the strategy of growth through related
manufactured products to further service the Companys existing customer base. The acquisition
added additional short-run print products, long-run (jumbo rolls) products and solutions as well as
integrated labels and form/label combinations sold through the indirect sales (distributorship)
marketplace.
The following is a summary of the purchase price allocation for SPF (in thousands):
|
|
|
|
|
Accounts receivable |
|
$ |
826 |
|
Inventories |
|
|
579 |
|
Property, plant & equipment |
|
|
3,689 |
|
Other assets |
|
|
5 |
|
Deferred tax asset |
|
|
1,780 |
|
Noncompete |
|
|
25 |
|
Accounts payable and accrued liabilities |
|
|
(2,316 |
) |
|
|
|
|
|
|
$ |
4,588 |
|
|
|
|
|
The results of operations for Block and SPF are included in the Companys consolidated financial
statements from the dates of acquisition. The following table represents certain operating
information on a pro forma basis as though both companies had been acquired as of March 1, 2006,
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):
|
|
|
|
|
|
|
Three months ended |
|
|
May 31, |
|
|
2006 |
Pro forma net sales |
|
$ |
156,035 |
|
Pro forma net earnings |
|
|
11,050 |
|
Pro forma earnings per share diluted |
|
|
0.43 |
|
The pro forma results are not necessarily indicative of what would have occurred if the
acquisitions had been in effect for the periods presented.
6. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired
businesses and is not amortized. Goodwill and indefinite-lived intangibles are evaluated for
impairment on an annual basis, or more frequently if impairment indicators arise, using a
fair-value-based test that compares the fair value of the asset to its carrying value. Fair values
of reporting units are typically calculated using a factor of expected earnings before interest,
taxes, depreciation, and amortization. Based on this evaluation, no impairment was recorded. The
Company must make assumptions regarding 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.
The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets
with determinable lives are amortized on a straight-line basis over their estimated useful life
(between 1 and 10 years). Trademarks with indefinite lives with a net book value of $62,260,000 at
May 31, 2007 are evaluated for impairment on an annual basis. The Company assesses the
recoverability of its definite-lived intangible assets primarily based on its current and
anticipated future undiscounted cash flows
10
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
6. Goodwill and Other Intangible Assets-continued
The carrying amount and accumulated amortization of the Companys intangible assets at each
balance sheet date are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
|
|
|
|
|
|
|
Carrying |
|
|
Accumulated |
|
|
|
|
|
|
Amount |
|
|
Amortization |
|
|
Net |
|
As of May 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
$ |
1,234 |
|
|
$ |
479 |
|
|
$ |
755 |
|
Purchased customer lists |
|
|
24,057 |
|
|
|
4,189 |
|
|
|
19,868 |
|
Noncompete |
|
|
467 |
|
|
|
427 |
|
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,758 |
|
|
$ |
5,095 |
|
|
$ |
20,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of February 28, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
Tradenames |
|
$ |
1,234 |
|
|
$ |
442 |
|
|
$ |
792 |
|
Purchased customer lists |
|
|
24,057 |
|
|
|
3,770 |
|
|
|
20,287 |
|
Noncompete |
|
|
467 |
|
|
|
417 |
|
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,758 |
|
|
$ |
4,629 |
|
|
$ |
21,129 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2007 |
|
|
February 28, 2007 |
|
Unamortized intangible assets (in thousands) |
|
|
|
|
|
|
|
|
Trademarks |
|
$ |
62,260 |
|
|
$ |
62,260 |
|
|
|
|
|
|
|
|
Aggregate amortization expense for the three months ended May 31, 2007 and May 31, 2006 was
$466,000 and $497,000, respectively.
The Companys estimated amortization expense for the current and next five years is as follows:
|
|
|
|
|
2008 |
|
$ |
1,852,000 |
|
2009 |
|
|
1,827,000 |
|
2010 |
|
|
1,811,000 |
|
2011 |
|
|
1,810,000 |
|
2012 |
|
|
1,810,000 |
|
2013 |
|
|
1,766,000 |
|
Changes in the net carrying amount of goodwill are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print |
|
|
Apparel |
|
|
|
|
|
|
Segment |
|
|
Segment |
|
|
|
|
|
|
Total |
|
|
Total |
|
|
Total |
|
Balance as of March 1, 2006 |
|
$ |
40,580 |
|
|
$ |
137,700 |
|
|
$ |
178,280 |
|
Goodwill adjusted during year |
|
|
34 |
|
|
|
|
|
|
|
34 |
|
Impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of March 1, 2007 |
|
|
40,614 |
|
|
|
137,700 |
|
|
|
178,314 |
|
Goodwill adjusted during period |
|
|
74 |
|
|
|
|
|
|
|
74 |
|
Impairment losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of May 31, 2007 |
|
$ |
40,688 |
|
|
$ |
137,700 |
|
|
$ |
178,388 |
|
|
|
|
|
|
|
|
|
|
|
11
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
6. Goodwill and Other Intangible Assets-continued
During the three months ended May 31, 2007 and fiscal year ended February 28, 2007, adjustments of
$74,000 and $34,000, respectively, were added to goodwill due to revised estimates in accrued
expenses acquired.
7. Other Accrued Expenses
The following table summarizes the components of other accrued expenses as of the dates indicated
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2007 |
|
|
February 28, 2007 |
|
Accrued interest |
|
$ |
873 |
|
|
$ |
975 |
|
Accrued taxes |
|
|
362 |
|
|
|
424 |
|
Accrued legal and professional fees |
|
|
69 |
|
|
|
267 |
|
Accrued utilities |
|
|
676 |
|
|
|
786 |
|
Factored receivables with recourse |
|
|
869 |
|
|
|
772 |
|
Other accrued expenses |
|
|
2,304 |
|
|
|
2,391 |
|
|
|
|
|
|
|
|
|
|
$ |
5,153 |
|
|
$ |
5,615 |
|
|
|
|
|
|
|
|
8. Long-Term Debt
Long-term debt consisted of the following as of the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
May 31, 2007 |
|
|
February 28, 2007 |
|
Revolving credit facility |
|
$ |
83,000 |
|
|
$ |
88,500 |
|
Capital lease obligations |
|
|
681 |
|
|
|
784 |
|
Note payable to finance company |
|
|
224 |
|
|
|
314 |
|
Other |
|
|
13 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
83,918 |
|
|
|
89,623 |
|
Less current installments |
|
|
532 |
|
|
|
652 |
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
83,386 |
|
|
$ |
88,971 |
|
|
|
|
|
|
|
|
On March 31, 2006, the Company entered into an amended and restated credit agreement with a group
of lenders led by LaSalle Bank N.A. (the Facility). The Facility provides the Company access to
$150 million in revolving credit and matures on March 31, 2010. The facility bears interest at the
London Interbank Offered Rate (LIBOR) plus a spread
ranging from .50% to 1.50% (currently LIBOR + .75% 6.10%),
depending on the Companys total funded debt to EBITDA ratio, as defined. The
Facility is secured by substantially all of the Companys personal and investment property. The
Facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset
dispositions, and additional debt, as well as other customary covenants, such as total funded debt
to EBITDA ratio, as defined. The Facility is secured by substantially all of the Companys assets.
Assets under capital leases have a total gross book value of $1,392,000 and $1,092,000 and related
accumulated amortization of $346,000 and $240,000 as of May 31, 2007 and February 28, 2007,
respectively, and are included in property, plant and equipment. Amortization of assets under
capital leases is included in depreciation expense. Capital lease obligations have interest due
monthly at 4.82% to 7.86% and principal paid in equal monthly installments. The notes mature at
dates ranging from July 2007 through January 2010.
Note payable to finance company has interest due monthly at 8.41% and principal paid in equal
monthly installments. The note matures December 2007 and is collateralized by certain equipment.
12
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
9. Shareholders Equity
Comprehensive income is defined as all changes in equity during a period, except for those
resulting from investments by owners and distributions to owners. The components of comprehensive
income were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
|
2007 |
|
|
2006 |
|
Net earnings |
|
$ |
10,796 |
|
|
$ |
11,330 |
|
Interest rate hedge |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
|
434 |
|
|
|
12 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
11,230 |
|
|
$ |
11,342 |
|
|
|
|
|
|
|
|
Changes in our shareholders equity accounts for the three months ended May 31, 2007 are as follows
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury Stock |
|
|
|
|
|
|
Shares |
|
|
Amount |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Shares |
|
|
Amount |
|
|
Total |
|
Balance February 28,
2007 |
|
|
30,053,443 |
|
|
|
75,134 |
|
|
|
122,305 |
|
|
|
207,190 |
|
|
|
(7,371 |
) |
|
|
(4,475,962 |
) |
|
|
(80,855 |
) |
|
|
316,403 |
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,796 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,796 |
|
Foreign currency
translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
434 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,230 |
|
Cumulative impact
of a change
in accounting
for income tax
uncertainties
pursuant to
FIN 48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(240 |
) |
Dividends declared
($.155 per share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,967 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,967 |
) |
Stock based
compensation |
|
|
|
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
Exercise of stock
options and
restricted
stock grants |
|
|
|
|
|
|
|
|
|
|
(146 |
) |
|
|
|
|
|
|
|
|
|
|
8,220 |
|
|
|
149 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance May 31,
2007 |
|
|
30,053,443 |
|
|
$ |
75,134 |
|
|
$ |
122,283 |
|
|
$ |
213,779 |
|
|
$ |
(6,937 |
) |
|
|
(4,467,742 |
) |
|
$ |
(80,706 |
) |
|
$ |
323,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10. Stock Option Plans and Stock Based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004),
Share-Based Payment (SFAS 123R) effective July 1, 2005. SFAS 123R requires the recognition of
the fair value of stock-based compensation in earnings.
The Company has stock options granted to key executives and managerial employees and non-employee
directors. At May 31, 2007, the Company has two 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 975,140 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 Companys common
stock on the date of grant, and an options maximum term is ten years. Options may be granted at
different times during the year and vest ratably over various periods, from upon grant to five
years. The Company uses treasury stock to satisfy option exercises and restricted stock awards.
13
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
10. Stock Option Plans and Stock Based Compensation-continued
For the three months ended May 31, 2007 and 2006, the Company included in selling, general and
administrative expenses, compensation expense related to its share based compensation of $124,000
($78,000 net of tax), and $59,000 ($37,000 net of tax), respectively.
The Company had the following stock option activity for the three months ended May 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
Number |
|
Weighted |
|
Average |
|
Aggregate |
|
|
of |
|
Average |
|
Remaining |
|
Intrinsic |
|
|
Shares |
|
Exercise |
|
Contractual |
|
Value(a) |
|
|
(exact quantity) |
|
Price |
|
Life (in years) |
|
(in thousands) |
Outstanding at February 28, 2007 |
|
|
553,513 |
|
|
$ |
11.08 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Terminated |
|
|
(13,000 |
) |
|
|
14.91 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(250 |
) |
|
|
10.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2007 |
|
|
540,263 |
|
|
$ |
10.99 |
|
|
|
3.6 |
|
|
$ |
6,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2007 |
|
|
481,238 |
|
|
$ |
10.42 |
|
|
|
3.1 |
|
|
$ |
6,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Value is calculated on the basis of the difference between the market value of the Companys
Common Stock as reported on the New York Stock Exchange on May 31, 2007 ($23.90) and the
weighted average exercise price, multiplied by the number of shares indicated. |
The Company did not grant any stock options during the three months ended May 31, 2007 and 2006. A
summary of the stock options exercised is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
2007 |
|
2006 |
Total cash received |
|
$ |
3 |
|
|
$ |
15 |
|
Income tax benefits |
|
$ |
|
|
|
$ |
3 |
|
Total grant-date fair value |
|
$ |
|
|
|
$ |
2 |
|
Intrinsic value |
|
$ |
4 |
|
|
$ |
14 |
|
A summary of the status of the Companys unvested stock options at May 31, 2007, and changes during
the three months ended May 31, 2007 is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Number |
|
Grant Date |
|
|
of Options |
|
Fair Value |
Unvested at February 28, 2007 |
|
|
99,025 |
|
|
$ |
2.52 |
|
New grants |
|
|
|
|
|
|
|
|
Vested |
|
|
(27,500 |
) |
|
|
2.33 |
|
Forfeited |
|
|
(12,500 |
) |
|
|
2.48 |
|
|
|
|
|
|
|
|
|
|
Unvested at May 31, 2007 |
|
|
59,025 |
|
|
|
2.61 |
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007, there was $123,000 of unrecognized compensation cost related to nonvested stock
options granted under the Plan. The weighted average remaining requisite service period of the
unvested stock options was 2.1 years. The total fair value of shares underlying the options vested
during the three months ended May 31, 2007 was $657,000.
14
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
10. Stock Option Plans and Stock Based Compensation-continued
The Company had the following restricted stock grants activity for the three months ended May 31,
2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Average |
|
|
Number of |
|
Grant Date |
|
|
Shares |
|
Fair Value |
Outstanding at February 28, 2007 |
|
|
39,919 |
|
|
$ |
19.67 |
|
Granted |
|
|
40,600 |
|
|
|
27.71 |
|
Terminated |
|
|
|
|
|
|
|
|
Exercised |
|
|
(7,970 |
) |
|
|
19.69 |
|
|
|
|
|
|
|
|
|
|
Outstanding at May 31, 2007 |
|
|
72,549 |
|
|
$ |
24.17 |
|
|
|
|
|
|
|
|
|
|
Exercisable at May 31, 2007 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
As of May 31, 2007, the total remaining unrecognized compensation cost related to unvested
restricted stock was approximately $1.6 million. The weighted average remaining requisite service
period of the unvested restricted stock awards was 2.5 years.
11. Employee Benefit Plans
The Company and certain subsidiaries have a noncontributory defined benefit retirement plan
covering approximately 15% of their employees. Benefits are based on years of service and the
employees average compensation for the highest five compensation years preceding retirement or
termination. The Companys funding policy is to contribute annually an amount in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Pension expense is composed of the following components included in cost of good sold and selling,
general and administrative expenses in our consolidated statements of earnings (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
|
|
2007 |
|
|
2006 |
|
Components of net periodic benefit cost
Service cost |
|
$ |
358 |
|
|
$ |
360 |
|
Interest cost |
|
|
626 |
|
|
|
610 |
|
Expected return on plan assets |
|
|
(770 |
) |
|
|
(712 |
) |
Amortization of: |
|
|
|
|
|
|
|
|
Prior service cost |
|
|
(36 |
) |
|
|
(36 |
) |
Unrecognized net loss |
|
|
226 |
|
|
|
239 |
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
404 |
|
|
$ |
461 |
|
|
|
|
|
|
|
|
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, 2008,
there is not a minimum contribution requirement and no pension payments have been made so far this
fiscal year; however, the Company expects to contribute from $2.0 million to $3.0 million in the
fourth quarter of fiscal year 2008. The Company contributed $3 million to its pension plan during
fiscal year 2007.
15
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
12. Earnings per share
Basic earnings per share have been computed by dividing net earnings by the weighted average number
of common shares outstanding during the applicable period. Diluted earnings per share reflect the
potential dilution that could occur if stock options or other contracts to issue common shares were
exercised or converted into common stock. The following table sets forth the computation for basic
and diluted earnings per share for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
|
2007 |
|
|
2006 |
|
Basic weighted average common shares outstanding |
|
|
25,585,449 |
|
|
|
25,479,722 |
|
Effect of dilutive options and restricted stock |
|
|
289,340 |
|
|
|
310,965 |
|
|
|
|
|
|
|
|
Diluted weighted average common shares outstanding |
|
|
25,874,789 |
|
|
|
25,790,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share amounts: |
|
|
|
|
|
|
|
|
Net earnings basic |
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Net earnings diluted |
|
$ |
0.42 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Cash dividends |
|
$ |
0.155 |
|
|
$ |
0.155 |
|
|
|
|
|
|
|
|
13. Segment Information and Geographic Information
The Company operates in two segments the Print Segment and the Apparel Segment.
The Print Segment, which represented 56% of the Companys consolidated net sales for the three
months ended May 31, 2007, is in the business of manufacturing, designing, and selling business
forms and other printed business products primarily to distributors located in the United States.
The Print Segment operates 38 manufacturing locations throughout the United States in 16
strategically located domestic states. Approximately 95% of the business products manufactured by
the Print Segment are custom and semi-custom, constructed in a wide variety of sizes, colors, number of parts and quantities on an
individual job basis depending upon the customers specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes,
integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs
under the following labels: Ennis®, Royal, Block, Specialized Printed Forms, TBF/Avant-Garde,
360º Custom Labels, Enfusion, Witt Printing and Calibrated Forms. The Print Segment also sells
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); GenForms (which provides short-run and long-run label
production) and Northstar® and GFS (which provide financial and security documents).
The Print Segment sells predominantly through private printers and independent distributors.
Northstar and GFS also sell to a small number of direct customers. Northstar has continued its
focus with 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 100 banks in the United States as
customers and is actively working on other large banks within the top 100 tier of banks in the
United States. Adams-McClure sales are generally provided through advertising agencies.
The second segment, the Apparel Segment, which accounted for 44% of the Companys consolidated net
sales for the three months ended May 31, 2007, consists of Alstyle Apparel, which was acquired in
November 2004. This group 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. Substantially all of the Apparel Segment sales are
to customers in the United States.
16
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
13. Segment Information and Geographic Information-continued
Corporate information is included to reconcile segment data to the consolidated financial
statements and includes assets and expenses related to the Companys corporate headquarters and
other administrative costs.
Segment data for the three months ended May 31, 2007 and 2006 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print |
|
Apparel |
|
|
|
|
|
Consolidated |
|
|
Segment |
|
Segment |
|
Corporate |
|
Totals |
Three months ended May 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
85,135 |
|
|
$ |
67,639 |
|
|
$ |
|
|
|
$ |
152,774 |
|
Depreciation |
|
|
2,069 |
|
|
|
1,008 |
|
|
|
224 |
|
|
|
3,301 |
|
Amortization of identifiable intangibles |
|
|
99 |
|
|
|
367 |
|
|
|
|
|
|
|
466 |
|
Segment earnings (loss) before
income tax |
|
|
13,037 |
|
|
|
8,385 |
|
|
|
(4,285 |
) |
|
|
17,137 |
|
Segment assets |
|
|
148,027 |
|
|
|
324,197 |
|
|
|
10,526 |
|
|
|
482,750 |
|
Capital expenditures |
|
|
602 |
|
|
|
409 |
|
|
|
7 |
|
|
|
1,018 |
|
|
Three months ended May 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
77,096 |
|
|
$ |
68,017 |
|
|
$ |
|
|
|
$ |
145,113 |
|
Depreciation |
|
|
2,024 |
|
|
|
1,719 |
|
|
|
151 |
|
|
|
3,894 |
|
Amortization of identifiable intangibles |
|
|
93 |
|
|
|
404 |
|
|
|
|
|
|
|
497 |
|
Segment earnings (loss) before
income tax |
|
|
11,271 |
|
|
|
10,042 |
|
|
|
(3,330 |
) |
|
|
17,983 |
|
Segment assets |
|
|
159,106 |
|
|
|
320,754 |
|
|
|
18,583 |
|
|
|
498,443 |
|
Capital expenditures |
|
|
371 |
|
|
|
187 |
|
|
|
78 |
|
|
|
636 |
|
Identifiable long-lived assets by country include property, plant, and equipment, net of
accumulated depreciation. The Company attributes revenues from external customers to individual
geographic areas based on the country where the sale originated. Information about the Companys
operations in different geographic areas as of and for the three months ended is as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
Canada |
|
|
Mexico |
|
|
Total |
|
Three months ended May 31, 2007: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Segment |
|
$ |
85,135 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
85,135 |
|
Apparel Segment |
|
|
63,017 |
|
|
|
4,622 |
|
|
|
|
|
|
|
67,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,152 |
|
|
$ |
4,622 |
|
|
$ |
|
|
|
$ |
152,774 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Segment |
|
$ |
42,789 |
|
|
$ |
|
|
|
$ |
|
|
|
|
42,789 |
|
Apparel Segment |
|
|
8,612 |
|
|
|
101 |
|
|
|
2,572 |
|
|
|
11,285 |
|
Corporate |
|
|
6,725 |
|
|
|
|
|
|
|
|
|
|
|
6,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
58,126 |
|
|
$ |
101 |
|
|
$ |
2,572 |
|
|
$ |
60,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2007
13. Segment Information and Geographic Information-continued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
|
Canada |
|
|
Mexico |
|
|
Total |
|
Three months ended May 31, 2006: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales to unaffiliated customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Segment |
|
$ |
77,096 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
77,096 |
|
Apparel Segment |
|
|
62,265 |
|
|
|
5,752 |
|
|
|
|
|
|
|
68,017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
139,361 |
|
|
$ |
5,752 |
|
|
$ |
|
|
|
$ |
145,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable long-lived assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Print Segment |
|
$ |
44,683 |
|
|
$ |
|
|
|
$ |
|
|
|
|
44,683 |
|
Apparel Segment |
|
|
11,509 |
|
|
|
97 |
|
|
|
3,376 |
|
|
|
14,982 |
|
Corporate |
|
|
6,194 |
|
|
|
|
|
|
|
|
|
|
|
6,194 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
62,386 |
|
|
$ |
97 |
|
|
$ |
3,376 |
|
|
$ |
65,859 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14. Supplemental Cash Flow Information
Net cash flows from operating activities reflect cash payments for interest and income taxes as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
|
|
2007 |
|
2006 |
Interest paid |
|
$ |
1,594 |
|
|
$ |
1,300 |
|
Income taxes paid |
|
$ |
1,315 |
|
|
$ |
1,264 |
|
15. Assets Held for Sale
On September 28, 2006, the Board of Directors authorized management of the Company to sell the
Companys print manufacturing facilities located in Dallas, Texas. In conjunction therewith, land
and building with a net book value of $0.6 million and equipment with a net book value of $1.3
million is being classified as held for sale at May 31, 2007 and February 28, 2007. The Company
has entered into a contract for sale on one of the two facilities. The buyer is completing their
due diligence and closing is expected to take place on or about July 23, 2007. Based on the
contracted sales price, no loss on the transaction is expected.
16. Subsequent Event
On June 28, 2007, the Board of Directors of Ennis, Inc. declared a 15 1/2 cents a share quarterly
dividend to be payable on August 1, 2007 to shareholders of record of July 13, 2007.
18
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
|
|
|
Item 2. |
|
MANAGEMENTS 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 the Company, Registrant, Ennis,
or we, us, or our) print and manufacture a broad line of business forms and other business
products and also manufacture a line of activewear for distribution throughout North America.
Distribution of business products and forms throughout the United States and Canada is primarily
through independent dealers, and with respect to our activewear products, through sales
representatives. This distributor channel encompasses print distributors, stationers, quick
printers, computer software developers, activewear wholesalers, screen printers and advertising
agencies, among others. The Companys apparel business was acquired on November 19, 2004.
On August 8, 2006, we purchased the outstanding stock of Block Graphics, Inc., (Block) a
privately held company headquartered in Portland, Oregon for $14.8 million in cash. Block had
sales of approximately $38.6 million for the year ended December 31, 2005. The acquisition of
Block continues the strategy of growth in our print segment through related manufactured products
to further service our existing customer base. The acquisition added additional short-run print
products (snaps, continuous forms and cut-sheet forms) as well as the production of envelopes, a
new product for the Company. During the fiscal year ended February 28, 2007, we had one other
small acquisition with a total purchase price of $4.6 million in cash.
Business Segment Overview
We operate in two business segments, the Print Segment and the Apparel Segment. For
additional financial information concerning segment reporting, please see note 13 of the notes to
our consolidated financial statements beginning on page 16 included elsewhere herein, which
information is incorporated herein by reference.
Print Segment
The Print Segment, which represented 56% of our consolidated net sales for the three months
ended May 31, 2007, is in the business of manufacturing, designing and selling of business forms
and other printed business products primarily to distributors located in the United States. The
Print Segment operates 38 manufacturing locations throughout the United States in 16 strategically
located domestic states. Approximately 95% of the business products manufactured by the Print
Segment are custom and semi-custom products, constructed in a wide variety of sizes, colors, and
quantities on an individual job basis depending upon the customers specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels,
envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and
long runs under the following labels: Ennis®, Royal, Block, Specialized Printed Forms,
TBF/Avant-Garde, 360º Custom Labels, Enfusion, Witt Printing and Calibrated Forms. The Print
Segment also sells 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); GenForms (which provides short-run
and long-run label production) and Northstar® and GFS (which provide financial and security
documents).
The Print Segment sells predominantly through private printers and independent distributors.
Northstar and GFS also sell to a small number of direct customers. Northstar has continued its
focus with 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 100 banks in the United States as
customers and is actively working on other large banks within the top 100 tier of banks in the
United States. Adams-McClure sales are generally provided through advertising agencies.
The printing industry generally sells its products in two ways. One market direction is to
sell predominately to end users, and is dominated by a few large manufacturers, such as Moore
Wallace (a subsidiary of R.R. Donnelly), Standard Register, and Cenveo. The other market direction,
which the Company primarily serves, sells forms and
19
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
other business products through a variety of independent distributors and distributor groups.
While it is not possible, because of the lack of adequate statistical information, to determine
Ennis share of the total business products market, management believes Ennis is one of the largest
producers of business forms in the United States distributing primarily through independent
dealers, and that its business forms offering is more diversified than that of most companies in
the business forms industry.
There are a number of competitors that operate in this segment, ranging in size from single
employee-owner operations to multi-plant organizations, such as Cenveo and their resale brand known
as: PrintXcel, Discount Label and Printegra. We believe our strategic locations and buying power
permit us to compete on a favorable basis within the distributor market on competitive factors,
such as service, quality, and price.
Distribution of business forms and other business products throughout the United States is
primarily done through independent dealers; including business forms distributors, stationers,
printers, computer software developers, and advertising agencies.
Raw materials of the Print Segment principally consist of a wide variety of weights, widths,
colors, sizes, and qualities of paper for business products purchased from a number of major
suppliers at prevailing market prices.
Business products usage in the printing industry is generally not seasonal. General economic
conditions and contraction of the traditional business forms industry are the predominant factor in
quarterly volume fluctuations.
Apparel Segment
The Apparel Segment represented 44% of our consolidated net sales for the three months ended
May 31, 2007. This segment operates under the name of Alstyle Apparel (Alstyle). Alstyle markets
high quality knit basic activewear (t-shirts, tank tops and fleece) across all market segments.
Approximately 95% of Alstyles revenues are derived from t-shirt
sales, and 93% of those are
domestic sales. Alstyles branded product lines are AAA Alstyle Apparel & Activewear®, Gaziani®,
Diamond Star®, Murina®, A Classic, Tennessee River®, D Drive, and Hyland® Headware.
Alstyle is headquartered in Anaheim, California, where it knits domestic cotton yarn and some
polyester fibers into tubular material. The material is dyed at that facility and then shipped to
its plants in Ensenada or Hermosillo, Mexico, where it is cut and sewn into finished goods. Alstyle
also ships a small amount of their dyed and cut product to El Salvador for sewing. After sewing and
packaging is completed, product is shipped to one of Alstyles seven distribution centers located
across the United States and in Canada.
Alstyle utilizes a customer-focused internal sales team comprised of 20 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 objectives. Sales representatives are responsible for
developing business with large accounts and spend approximately half their time in the field.
Alstyle employs a staff of customer service representatives that handle call-in orders from
smaller customers. Sales personnel sell directly to Alstyles customer base, which consists
primarily of screen printers, embellishers, retailers, and mass marketers.
A majority of Alstyles sales are to direct customer branded products, and the remainder
relates 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, which
drive our requirements for inventory levels of our various products, while sales in the private
label business are characterized by slightly higher customer loyalty.
Alstyles most popular styles are produced based on demand management 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.
20
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
Alstyles 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 generally 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.
The products of the Apparel Segment are standardized shirts manufactured in a variety of sizes
and colors. The Apparel Segment operates six manufacturing facilities, one in California and five
in Mexico.
The apparel industry is comprised of numerous companies who manufacture and sell a wide range
of products. Alstyle is primarily involved in the activewear market and produces t-shirts, fleece
items, and outsources such products as hats, shorts, pants and other such activewear apparel from
China, Thailand, Pakistan, India, Indonesia and other foreign sources to sell to its customers
through its sales representatives. Its primary competitors are Delta Apparel (Delta), Russell,
Hanes and Gildan Activewear (Gildan). While it is not possible to calculate precisely, based on
public information available, management believes that Alstyle is one of the top three providers of
blank t-shirts in North America. Alstyle competes with many branded and private label manufacturers
of knit apparel in the United States and Canada, some of which are larger in size and have greater
financial resources than Alstyle. Alstyle competes on the basis of price, quality, service and
delivery. Alstyles strategy is to provide the best value to its customers by delivering a
consistent, high-quality product at a competitive price. Alstyles competitive disadvantage is that
its brand name, Alstyle Apparel, is not as well known as the brand names of its largest
competitors, such as Gildan, Delta, Hanes and Russell.
Distribution of the Apparel Segments products is through Alstyles own staff of sales
representatives and regional distribution centers selling to local distributors who resell to
retailers, or directly to screen printers, embellishers, retailers and mass marketers.
Raw materials of the Apparel Segment principally consist of cotton and polyester yarn
purchased from a number of major suppliers at prevailing market prices, although we purchase more
than 70% of our cotton and yarn from one supplier. Reference is made to Risk Factors of this
Report.
Risk Factors
You should carefully consider the risks described below, as well as the other information
included or incorporated by reference in the Annual Report on Form 10-K, before making an
investment in our 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.
We may be required to write down goodwill and other intangible assets in the future, which could
cause our financial condition and results of operations to be negatively affected
When we acquire a business, a portion of the purchase price of the acquisition may be
allocated to goodwill and other identifiable intangible assets. The amount of the purchase price
which is allocated to goodwill and other intangible assets is the excess of the purchase price over
the net identifiable tangible assets acquired. At May 31, 2007, our goodwill and other intangible
assets were approximately $178.4 million and $82.9 million, respectively. Under current accounting
standards, if we determine goodwill or intangible assets are impaired, we would be required to
write down the value of these assets. Annually, we have conducted a review of our goodwill and
other identifiable intangible assets to determine whether there has been impairment. Such a review
was completed for our fiscal year ended February 28, 2007, and we concluded that no impairment
charge was necessary. We cannot provide assurance that we will not be required to take an
impairment charge in the future. Any impairment charge would have a negative effect on our
shareholders equity and financial results and may cause a decline in our stock price.
21
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
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 our 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. 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 us to reduce prices or to offer other incentives in
order to enable our 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 us 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.
We could experience labor disputes that could disrupt our business in the future.
As of May 31, 2007, approximately 14% of our domestic employees are represented by labor
unions under collective bargaining agreements, which are subject to periodic renegotiations. Two
unions represent all of our hourly employees in Mexico. There can be no assurance that any future
labor negotiations will prove successful, which may result in a significant increase in the cost of
labor, or may break down and result in the disruption of our business or operations.
We obtain our raw materials from a limited number of suppliers and any disruption in our
relationships with these suppliers, or any substantial increase in the price of raw materials,
material shortages, or an increase in transportation costs, could have a material adverse effect on
us.
Cotton yarn is the primary raw material used in Alstyles 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 70% of Alstyles yarn requirements and has an entire yarn mill dedicated to
Alstyles production. If Alstyles 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
22
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
future. We believe we are competitive with other companies in the United States apparel
industry in negotiating the price of cotton. However, any significant increase in the price of
cotton or shortages in the availability of cotton as the result of farmers switching to
alternative crops, such as corn, could have a material adverse effect on our results of operations.
Freight costs also represent a significant cost to our apparel company. We incur freight
costs associated with the delivery of yarn to our manufacturing facility in Anaheim, California.
We also incur freight costs associated with transporting our knit and dyed products to Mexico and
our final sewn products from Mexico to our various distribution centers. Any significant increase
in transportation costs due to increased fuel costs, etc. could have a material impact on our
reported apparel margins.
We also purchase our paper products from a limited number of sources, which meet stringent
quality and on-time delivery standards under long-term contracts. However, fluctuations in the
quality of our paper, unexpected prices increases, etc. could have a material adverse effect on our
operating results.
Alstyle faces intense competition to gain market share, which may lead some competitors to sell
substantial amounts of goods at prices against which we cannot profitably compete.
Demand for Alstyles products is dependent on the general demand for shirts and the
availability of alternative sources of supply. Alstyles 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 business is subject to cyclical trends.
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.
Our apparel 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, which could negatively impact our operating results.
Alstyle operates cutting and sewing facilities in Mexico, and sources certain product
manufacturing and purchases in El Salvador, Pakistan, China and Southeast Asia. Alstyles 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 our 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 governments of Mexico and the United States 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.
Our apparel products are subject to foreign competition, which in the past have 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 Alstyles 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
23
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
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 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 agreements 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 12% of its sewing to a contract
manufacturer in El Salvador, and we do not anticipate that challenges to CAFTA would have a
material effect on our 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. A reduction of import
quotas and tariffs could make Alstyles products less competitive against low cost imports from
developing countries.
Environmental regulations may impact our future operating results.
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 whom would
be difficult to replace.
The loss or interruption of the services of our Chief Executive Officer, Executive Vice
President, Chief Financial Officer and Vice President Apparel Division, could have a material
adverse effect on our business, financial condition and results of operations. Although we maintain
employment agreements with these individuals, it cannot be assured that the services of such
individuals will continue.
Cautionary Statements
You should read this discussion and analysis in conjunction with our Consolidated Financial
Statements and the related notes appearing elsewhere in this Report. In addition, certain
statements in this report, and in particular, statements found in Managements 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
24
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
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 an
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 may prove to be inaccurate and 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.
Result of Operations
Consolidated Statements of Earnings Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, |
|
|
|
2007 |
|
|
2006 |
|
Net sales |
|
$ |
152,774 |
|
|
|
100.0 |
% |
|
$ |
145,113 |
|
|
|
100.0 |
% |
Cost of goods sold |
|
|
114,207 |
|
|
|
74.8 |
|
|
|
107,298 |
|
|
|
73.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
38,567 |
|
|
|
25.2 |
|
|
|
37,815 |
|
|
|
26.1 |
|
Selling, general and administrative |
|
|
18,987 |
|
|
|
12.4 |
|
|
|
18,078 |
|
|
|
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations |
|
|
19,580 |
|
|
|
12.8 |
|
|
|
19,737 |
|
|
|
13.6 |
|
Other expense |
|
|
(2,443 |
) |
|
|
(1.6 |
) |
|
|
(1,754 |
) |
|
|
(1.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
17,137 |
|
|
|
11.2 |
|
|
|
17,983 |
|
|
|
12.4 |
|
Provision for income taxes |
|
|
6,341 |
|
|
|
4.1 |
|
|
|
6,653 |
|
|
|
4.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
10,796 |
|
|
|
7.1 |
% |
|
$ |
11,330 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
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 receivables, inventory valuations, property, plant and equipment,
intangible assets, pension plan, 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. We believe the following accounting policies are the most critical due
to their affect on our more significant estimates and judgments used in preparation of our
consolidated financial statements.
We maintain 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.
Amounts allocated to intangibles are determined based on independent valuations for our
acquisitions and are amortized over their expected useful lives. We evaluate these amounts
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. We assess the impairment
of long-lived assets that include other intangible assets, goodwill, and property, plant, and
equipment annually or whenever events
or changes in circumstances indicate that the carrying value may not be recoverable. In performing
tests of
25
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
impairment, we 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 our
goodwill and other intangibles. If these estimates or the related assumptions change, we 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.
We cannot predict the occurrence of future impairment triggering events nor the impact such events
might have on our 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, Ennis prints and stores custom print product for customer
specified future delivery, generally within twelve 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 $5.1 million of revenue were recognized
under these agreements during the three months ended May 31, 2007 as compared to $5.6 million
during the three months ended May 31, 2006. Sales in foreign countries were not significant for the
three months ended May 31, 2007 or May 31, 2006.
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. When
utilized, interest rate swaps are held for purposes other than trading. In the past, the Company
utilized swap agreements related to its term and revolving loans to effectively fix the interest
rate for a specified principal amount. The swaps were designated as cash flow hedges, and the
after-tax effect of the mark-to-market valuation that relates to the effective amount of derivative
financial instrument was recorded as an adjustment to accumulated other comprehensive income with
the offset included in accrued expenses. There were no derivatives, swaps or deferred gains or
losses at the end of May 31, 2007 or February 28, 2007.
We maintain an allowance for doubtful receivables to reflect estimated losses resulting from
the inability of customers to make required payments. On an on-going basis, we evaluate the
collectability of accounts receivable based upon historical collection trends, current economic
factors, and the assessment of the collectability of specific accounts. We evaluate the
collectability of specific accounts using a combination of factors, including the age of the
outstanding balances, evaluation of customers current and past financial condition and credit
scores, recent payment history, current economic environment, discussions with our project
managers, and discussions with the customers directly.
Our inventories are valued at the lower of cost or market. We regularly review inventory
values on hand, using specific aging categories, and write down inventory deemed obsolete and/or
slow-moving based on historical usage and estimated future usage to its estimated market value. As
actual future demand or market conditions may vary from those projected by management, adjustments
to inventory valuations may be required.
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 sheets. We must
then assess the likelihood that our deferred tax assets will be recovered from future taxable
income. 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 earnings. In the event that actual results differ
from these estimates, our provision for income taxes could be materially impacted.
In addition to the above, we also have to make assessments as to the adequacy of our accrued
liabilities, more specifically our liabilities recorded in connection with our workers compensation
and health insurance, as these
plans are self funded. To help us in this evaluation process, we routinely get outside third
party assessments of our potential liabilities under each plan.
26
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
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.
Results of Operations Consolidated
Net Sales. Net sales for the three months ended May 31, 2007 were $152.8 million compared to
$145.1 million for the three months ended May 31, 2006, an increase of $7.7 million, or 5.3%. The
increase in our sales for the quarter related primarily to an increase in our Print Segment sales
which increased $8.0 million during the quarter, or 10.4%. Our Apparel Segment sales for the
quarter remained relatively flat at $67.6 million for the three months ended May 31, 2007 and $68.0
million for the three months ended May 31, 2006. See Results of Operation Segments of this
Report for further discussion on our Segment sales.
Gross profit. Our gross profit for the three months ended May 31, 2007 was $38.6 million, or
25.2% of sales, compared to $37.8 million, or 26.1% of sales for the three months ended May 31,
2006. Our gross margins increased in our Print Segment from 25.1% to 26.5% for the three months
ended May 31, 2006 and 2007, respectively. Our Apparel Segment margin decreased from 27.1% to 23.7%
for the three months ended May 31, 2006 and 2007, respectively. See Results of Operations
Segments of this Report for further discussion on the fluctuations in our Segment margins.
Selling, general and administrative expenses. For the three months ended May 31, 2007, our
selling, general and administrative expenses were $19.0 million, or 12.4% of sales, compared to
$18.1 million, or 12.5% of sales, for the three months ended May 31, 2006. The dollar increase in
our selling, general and administrative expenses during the period related primarily to our
acquisition of Block which was acquired on August 8, 2006 and therefore was not included in our
first quarter results last year. Blocks selling, general and administrative expenses during the
current quarter amounted to approximately $900,000.
Income from operations. As a result of the above factors, our income from operations was $19.6
million, or 12.8% of sales compared to $19.7 million, or 13.6% of sales for the three months ended
May 31, 2007 and 2006, respectively. The decrease in our income from operations as a percent of
sales related primarily to the decrease in our Apparel gross margins during the quarter. See
Results of Operations Gross Profit by Segment of this Report for further discussion.
Other income and expense. For the three months ended May 31, 2007, our interest expense
decreased from $1.8 million for the three months ended May 31, 2006 to $1.5 million for the three
months ended May 31, 2007 due to less debt on average being outstanding. Our other income
(expense) items increased from income of $38,000 to expense of $951,000 for the three months ended
May 31, 2006 and 2007, respectively. During the current period we incurred increased bank fees of
approximately $182,000, penalties and interest fees for taxes of $186,000 and a decrease in
interest income and miscellaneous income of approximately $460,000.
Provision for income taxes. Our effective tax rate was 37.0% for both the three months ended
May 31, 2007 and 2006.
Net earnings. Our net earnings for the three months ended May 31, 2007 was $10.8 million, or
7.1% of sales, compared to $11.3 million, or 7.8% of sales for the three months ended May 31, 2006.
Our basic earnings per share for the three months ended May 31, 2007 was $0.42 per share compared
to $0.44 per share for the three months ended May 31, 2006. Our diluted earnings per share was
$0.42 per share for the three months ended May 31, 2007 compared to $0.44 per share for the three
months ended May 31, 2006. This decrease related primarily to the reduction in our Apparel gross
profit margin during the period. See Results of Operation Segments of this Report for
further discussion.
.
27
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
Results of Operations Segments
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
Net Sales by Segment (in thousands) |
|
2007 |
|
|
2006 |
|
Print |
|
$ |
85,135 |
|
|
$ |
77,096 |
|
Apparel |
|
|
67,639 |
|
|
|
68,017 |
|
|
|
|
|
|
|
|
Total |
|
$ |
152,774 |
|
|
$ |
145,113 |
|
|
|
|
|
|
|
|
Print Segment. Our net sales for our Print Segment, which represented 55.7% of our
consolidated sales during the three months ended May 31, 2007, were approximately $85.1 million for
the same period, compared to approximately $77.1 million for the three months ended May 31, 2006,
an increase of $8.0 million, or 10.4%. The increase in the Print Segments net sales for the
three months ended May 31, 2007 related primarily to our acquisition of Block, which was acquired
August 8, 2006. Net sales for Block Graphics during the period ended May 31, 2007 were $10.0
million. The impact of the increase in sales from our Block acquisition was partially offset by
the loss of a large promotional customer with sales of approximately $2.4 million during the same
quarter last year. Our Print Segments sales for the quarter, without the impact of these two
items, were relatively flat when compared to the same quarter last year.
Apparel Segment. Our net sales for the Apparel Segment, which represented 44.3% of our
consolidated sales for the three months ended May 31, 2007, were approximately $67.6 million for
the current period, as compared to approximately $68.0 million for the three months ended May 31,
2006, or a slight decrease of $0.4 million, or 0.6%. Management believes that the Apparel sales
during the quarter were negatively impacted by their pre-quarter inventory position, which hindered
their ability to capture certain opportunity sales during this period. Traditionally, the Apparel
group rebuilds their inventory levels in the last half of the fiscal year for the upcoming summer
buying season due to the normal falloff of demand during the winter season. However, during the
second half of last fiscal year demand was at or above forecasted sales levels. As a result,
production levels were only able to stay abreast of then current sales levels, which resulted in
their inventory position not being as robust in the fourth quarter of fiscal year 2007 as it was
during the same period last fiscal year. Consequently, several initiatives were implemented during
the current quarter to improve their inventory position and to meet their forecasted demand. Some
of these initiatives in turn had a negative impact on their margin during the period (see
discussion on Apparel margins following).
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
Gross Profit Margin by Segment (in thousands) |
|
2007 |
|
|
2006 |
|
Print |
|
$ |
22,529 |
|
|
$ |
19,366 |
|
Apparel |
|
|
16,038 |
|
|
|
18,449 |
|
|
|
|
|
|
|
|
Total |
|
$ |
38,567 |
|
|
$ |
37,815 |
|
|
|
|
|
|
|
|
Print Segment. Our Print gross profit margin increased approximately $3.1 million, or 16.3%
from $19.4 million for the three months ended May 31, 2006 to $22.5 million for the three months
ended May 31, 2007. As a percentage of sales, our Print margin was 26.5% for the three months
ended May 31, 2007, as compared to 25.1% for the three months ended May 31, 2006. Our Print
margin, as a percentage of sales, increased primarily as a result of improved operational
efficiencies.
Apparel Segment. Our Apparel gross profit margin decreased approximately $2.4 million, or 13.1%
from $18.4 million for the three months ended May 31, 2006 to $16.0 million for the three months
ended May 31, 2007. As a percent of sales, our Apparel margins were 23.7%, compared to 27.1% for
the same quarter last year. During the quarter our Apparel margin was impacted slightly by
increased yarn and cut/sew costs and reduced selling margins, due to changes in product mix.
However, the main impact on our Apparel margin during the quarter related to our
initiative to increase our cut/sew capacity in our Mexican facilities to meet our forecasted
demand. We feel that the training costs associated with this program, which negatively impacted
our Apparel margin during the period, was in excess of $1.0 million, or approximately 1.5% of
sales. Overall our cut/sew costs increased by approximately $1.7
28
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
million, or 2.7% of sales during
the period. We feel that the increase in our cut/sew capacity is a critical step and one that must
be undertaken to meet our forecasted sales projections and inventory demand levels. We are
however, looking for ways to minimize the cost of this initiative going forward.
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
May 31, |
|
Profit by Segment (in thousands) |
|
2007 |
|
|
2006 |
|
Print |
|
$ |
13,037 |
|
|
$ |
11,271 |
|
Apparel |
|
|
8,385 |
|
|
|
10,042 |
|
|
|
|
|
|
|
|
Total |
|
|
21,422 |
|
|
|
21,313 |
|
Less corporate expenses |
|
|
4,285 |
|
|
|
3,330 |
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
$ |
17,137 |
|
|
$ |
17,983 |
|
|
|
|
|
|
|
|
Print Segment. Our Print profit increased approximately $1.7 million, or 15.7%, from $11.3
million for the three months ended May 31, 2006, to $13.0 million for the three months ended May
31, 2007. As a percent of sales, our Print profits were 15.3% for the three months ended May 31,
2007, as compared to 14.6% for the three months ended May 31, 2006. The increase in our Print
profit, as a percent of sales is directly related to the increase in their gross profit margin -
see Gross Profit by Segment above for further discussion.
Apparel Segment. Our Apparel profit decreased approximately $1.6 million, or 16.5%, from $10.0
million for the three months ended May 31, 2006, to $8.4 million for the three months ended May 31,
2007. As a percent of sales, our Apparel profit decreased from 14.8% for the three months ended May
31, 2006 to 12.4% for the three months ended May 31, 2007. The decrease in our Apparel profit
during the current period is primarily due to the decrease in their gross profit margin see
Gross Profit by Segment above for further discussion.
Liquidity and Capital Resources
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, |
|
February 28, |
|
|
(Dollars in thousands) |
|
2007 |
|
2007 |
|
Change |
Working Capital |
|
$ |
106,991 |
|
|
$ |
102,269 |
|
|
|
4.6 |
% |
Cash and cash equivalents |
|
$ |
2,551 |
|
|
$ |
3,582 |
|
|
|
-28.8 |
% |
Working Capital. Our working capital increased by approximately $4.7 million, or 4.6% from
$102.3 million at February 28, 2007 to $107.0 million at May 31, 2007. The increase in our working
capital during the period related primarily to an increase in our receivables and inventories of
$8.9 million offset by an increase in income taxes payable of $4.4 million. Our current ratio,
calculated by dividing our current assets by our current liabilities remained at 3.1-to-1.0 at May
31, 2007 and February 28, 2007.
Cash and cash equivalents. Cash and cash equivalents consists of highly liquid investments,
such as time deposits held at major banks, commercial paper, United States government agency
discounts notes, money market mutual funds and other money market securities with original
maturities of 90 days or less. We used cash during the period to pay down our debt.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended May 31, |
(Dollars in thousands) |
|
2007 |
|
2006 |
|
Change |
Net Cash provided by operating activities |
|
$ |
9,484 |
|
|
$ |
12,178 |
|
|
|
-22.1 |
% |
Net Cash used in investing activities |
|
$ |
(995 |
) |
|
$ |
(5,260 |
) |
|
|
-81.1 |
% |
Net Cash used in financing activities |
|
$ |
(9,669 |
) |
|
$ |
(11,405 |
) |
|
|
-15.2 |
% |
Cash flows from operating activities. Cash provided by our operating activities decreased by
$2.7 million, or 22.1% to $9.5 million for the three months ending May 31, 2007 as compared to
$12.2 million for the three months ended May 31, 2006. During the quarter, approximately 39% of
our Apparel sales were factored compared to 48%
29
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
for the same quarter last year. As a result, we
used approximately $6.0 million of operational cash during the period to fund the transition of
these previously factored sales to in-house credit.
Cash flows from investing activities. Cash used for our investing activities decreased by
$4.3 million, or 81.1% to $1.0 million for the three months ended May 31, 2007 as compared to $5.3
million for the three months ended May 31, 2006. During the first quarter of last fiscal year we
completed our purchase of Specialized Printed Forms, Inc. for $4.6 million.
Cash flows from financing activities. We used $1.7 million less in cash associated with our
financing activities this period when compared to the same period last year. We repaid debt in the
amount of $5.7 million during the three months ended May 31, 2007 as compared to $7.4 million
during the same period of 2006.
Credit Facility On March 31, 2006, we entered into an amended and restated credit agreement
with a group of lenders led by LaSalle Bank N.A. (the Facility). The Facility provides us access
to $150 million in revolving credit and matures on March 31, 2010. The facility bears interest at
the London Interbank Offered Rate (LIBOR) plus a spread ranging from .50% to 1.50% (currently
LIBOR + .75% 6.10%), depending on our total funded debt to EBITDA ratio, as defined. The
Facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset
dispositions, and additional debt, as well as other customary covenants. As of May 31, 2007, we had
$83.0 million of borrowings under the revolver and $4.0 million outstanding under standby letters
of credit arrangements, leaving us availability of approximately $63.0 million. The Facility is
secured by substantially all of our personal and investment property.
During the three months ended in May 31, 2007, we repaid $5.5 million on the revolver and $0.2
million on 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.
Our Apparel group continues to sell a portion of their accounts receivable to factors (for the
three months ended May 31, 2007 47% versus 60% for the three months ended May 31, 2006) based
upon agreements in place with these factors. As previous discussed, due to potential cost savings,
we are continuing with our plans to reduce the amount of receivables we factor each year through
the utilization of our existing bank line or from working capital generated by our Apparel Group
over the next couple years.
Pension We are required to make contributions to our defined benefit pension plan. These
contributions are required under the minimum funding requirements of the Employee Retirement
Pension Plan Income Security Act (ERISA). We anticipate that we will contribute from $2.0 million
to $3.0 million during our current fiscal year. We made contributions of $3 million to our pension
plan during fiscal year 2007.
Inventories We believe our current inventory levels are sufficient to satisfy our customer
demands and we anticipate having adequate sources of raw materials to meet future business
requirements. The previously reported long-term contracts (that govern prices, but do not require
minimum volume) with paper and yarn suppliers continue to be in effect.
Capital Expenditures We expect our capital requirements for the fiscal year, exclusive of
capital required for possible acquisitions, will be in-line with our historical levels of between
$5.0 million and $7.0 million. We would expect to fund these expenditures through existing cash
flows. We would expect to generate sufficient cash flows from our operating activities in order to
cover our operating and other capital requirements for our foreseeable future.
Contractual Obligations & Off-Balance Sheet Arrangements There have been no significant
changes in our contractual obligations since February 28, 2007 that have, or are reasonably likely
to have, a material impact on our results of operations or financial condition. We had no
off-balance sheet arrangements in place as of May 31, 2007.
30
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
Recent Accounting Pronouncements
FIN 48. We adopted the provisions of Financial Accounting Standards Board Interpretation
48 (FIN 48), Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement
No. 109, on March 1, 2007. As a part of the implementation of FIN 48, we made a comprehensive
review of its uncertain tax positions and recorded $240,000 of unrecognized tax benefits in
connection with certain state tax positions, as non-current other
liabilities on the
consolidated balance sheet, with no net impact to the consolidated statement of operations. Of
this amount, approximately $240,000 was accounted for as a reduction to the March 1, 2007 balance
of retained earnings, in accordance with the adoption of FIN 48. These unrecognized tax benefits
related to uncertain tax positions would impact the effective tax rate if recognized.
Approximately $81,000 of unrecognized tax benefits relate to items that are affected by expiring
statute of limitations within the next 12 months.
The unrecognized tax benefits mentioned above, includes an aggregate $38,000 of interest expense.
Upon adoption of FIN 48, we elected an accounting policy to classify interest expense on
underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the
income tax provision. Prior to the adoption of FIN 48, our policy was to classify interest
expense on underpayments of income taxes as interest expense and to classify penalties as an
operating expense in arriving at pretax income.
We are subject to U.S. federal income tax as well as to income tax of multiple state
jurisdictions and foreign tax jurisdictions. We have concluded all U.S. federal income tax
matters for years through 2005. All material state and local income tax matters have been
concluded for years through 2002 and foreign tax jurisdictions through 2000.
FAS 157. In September 2006, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 157, Fair Value Measurements (FAS 157). The provisions of
FAS 157 define fair value, establish a framework for measuring fair value in generally accepted
accounting principles, and expand disclosures about fair value measurements. The provisions of
FAS 157 are effective for fiscal years beginning after November 15, 2007. We are currently
assessing the impact of FAS 157 on our consolidated financial position, results of operations,
and cash flows.
FAS 159. In February 2007, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial
Liabilities Including an amendment of FAS No. 115, (FAS 159). FAS 159 allows measurement at
fair value of eligible financial assets and liabilities that are not otherwise measured at fair
value. If the fair value option for an eligible item is elected, unrealized gains and losses on
that item shall be reported in current earnings at each subsequent reporting date. FAS 159 also
establishes presentation and disclosure requirements designed to draw comparison between the
different measurement attributes the company elects for similar types of assets and liabilities.
FAS 159 is effective for fiscal years beginning after November 15, 2007. Early adoption is
permitted. We are currently assessing the impact of FAS 159 on our consolidated financial
statements.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Interest Rates
We are exposed to market risk from changes in interest rates on debt. We may from time to
time utilize interest rate swaps to manage overall borrowing costs and reduce exposure to adverse
fluctuations in interest rates. We do not use derivative instruments for trading purposes. We are
exposed to interest rate risk on short-term and long-term financial instruments carrying variable
interest rates. Our variable rate financial instruments, including the outstanding credit
facilities, totaled $83.0 million at May 31, 2007. The impact on our results of operations of a
one-point interest rate change on the outstanding balance of the variable rate financial
instruments as of May 31, 2007 would be approximately $0.8 million.
31
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
Foreign Exchange
We have global operations and thus make investments and enter into transactions in various
foreign currencies. The value of our consolidated assets and liabilities located outside the
United States (translated at period end exchange rates) and income and expenses (translated using
average rates prevailing during the period), generally denominated in Pesos and Canadian Dollars,
are affected by the translation into our reporting currency (the U.S. Dollar). Such translation
adjustments are reported as a separate component of shareholders equity. In future periods,
foreign exchange rate fluctuations could have an increased impact on our reported results of
operations. However, due to the self-sustaining nature of our foreign operations, we believe we
can effectively manage the effect of these currency fluctuations.
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
Evaluation of Disclosure Controls and Procedures. An evaluation was carried out under the
supervision and with the participation of our management, including our Chief Executive Officer and
our Chief Financial Officer, of the effectiveness of the design of our disclosure controls and
procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of
the end of the period covered by this quarterly report, pursuant to Exchange Act Rule 13a-15. Based
upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded
that our disclosure controls and procedures as of May 31, 2007 are effective to ensure that
information required to be disclosed by us in the reports filed or submitted by us under the
Exchange Act is recorded, processed, summarized, and reported within the time periods specified in
the SECs rules and forms and include controls and procedures designed to ensure that information
required to be disclosed by us in such reports is accumulated and communicated to our management,
including our principal executive and financial officers as appropriate to allow timely decisions
regarding required disclosure. Due to the inherent limitations of control systems, not all
misstatements may be detected. Those inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes.
Additionally, controls could be circumvented by the individual acts of some persons or by collusion
of two or more people. Our controls and procedures can only provide reasonable, not absolute,
assurance that the above objectives have been met.
There were no changes in our internal control over financial reporting identified in
connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15
that occurred during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
32
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are involved in various litigation matters arising in the ordinary course
of our business. We do not believe the disposition of any current matter will have a material
adverse effect on our consolidated financial position or our results of operations.
Item 1A. Risk Factors
Reference is made to page 21 of this Report on Form 10-Q. There have been no material changes
in our Risk Factors as previously discussed in our Annual Report on Form 10-K for the year ended
February 28, 2007.
Items 2, 3 and 5 are not applicable and have been omitted
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to security holders for a vote during the quarter.
Item 6. Exhibits
The following exhibits are filed as part of this report.
|
|
|
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 Registrants 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 registrants 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 registrants Form 10-Q Quarterly Report for the quarter ended
November 30, 2004. |
|
Exhibit 31.1
|
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Chief Executive Officer.* |
|
Exhibit 31.2
|
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Chief Financial Officer.* |
|
Exhibit 32.1
|
|
Section 1350 Certification of Chief Executive Officer.** |
|
Exhibit 32.2
|
|
Section 1350 Certification of Chief Financial Officer.** |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
33
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
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: July 3, 2007 |
/s/ Keith S. Walters
|
|
|
Keith S. Walters |
|
|
Chairman, Chief Executive Officer and
President |
|
|
|
|
|
Date: July 3, 2007 |
/s/ Richard L. Travis, Jr.
|
|
|
Richard L. Travis, Jr. |
|
|
V.P. Finance and CFO, Secretary and
Principal Financial and Accounting Officer |
|
34
ENNIS, INC. AND SUBSIDIARIES
FORM 10Q
FOR THE PERIOD ENDED MAY 31, 2007
INDEX TO EXHIBITS
|
|
|
Exhibit Number |
|
Description |
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 Registrants 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 registrants 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 registrants Form 10-Q Quarterly Report for the quarter ended
November 30, 2004. |
|
Exhibit 31.1
|
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Chief Executive Officer.* |
|
Exhibit 31.2
|
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) of Chief Financial Officer.* |
|
Exhibit 32.1
|
|
Section 1350 Certification of Chief Executive Officer.** |
|
Exhibit 32.2
|
|
Section 1350 Certification of Chief Financial Officer.** |
|
|
|
* |
|
Filed herewith |
|
** |
|
Furnished herewith |
35