FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended AUGUST 31, 2004
------------------------------------------------
Commission File Number 1-5807
-------------------------------------------
ENNIS, INC.
- -----------------------------------------------------------------
(Exact name of registrant as specified in its charter)
TEXAS 75-0256410
- -----------------------------------------------------------------
(State or other Jurisdiction of (I. R. S. Employer
Incorporation or organization) Identification No.)
2441 Presidential Pkwy, Midlothian, TX 76065
- -----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(972) 775-9801
- -----------------------------------------------------------------
(Registrant's telephone number, including area code)
ENNIS BUSINESS FORMS, INC,
- -----------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report.)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Act). Yes X No
----- -----
The number of shares of the registrant's Common Stock, par value
$2.50, outstanding at September 24, 2004 was 16,430,713.
ENNIS, INC.
INDEX
Part I. Financial information - unaudited
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets --
August 31, 2004 and February 29, 2004 2 - 3
Condensed Consolidated Statements of
Earnings --
Three and Six Months Ended August 31,
2004 and 2003 4
Condensed Consolidated Statements of Cash
Flows --
Three and Six Months Ended August 31,
2004 and 2003 5
Notes to Condensed Consolidated Financial
Statements 6 - 11
Item 2 - Management's Discussion and Analysis
of Financial
Condition and Results of Operations 12 - 17
Item 3 - Quantitative and Qualitative
Disclosures of Market Risk 17
Item 4 - Controls and Procedures 18
Part II. Other Information
Item 6 - Exhibits 18
Signatures 19
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
August 31, February 29,
2004 2004
---- ----
(unaudited)
Assets
------
Current assets:
Cash and cash equivalents $ 8,530 $ 15,067
Accounts receivable, net 37,622 29,800
Prepaid expenses 3,202 2,022
Inventories, net 18,742 13,721
Other current assets 3,038 2,995
------- -------
Total current assets 71,134 63,605
------- -------
Property, plant and equipment, net 52,308 46,480
Goodwill, net 42,567 34,420
Other assets 9,476 9,538
------- -------
$175,485 $154,043
======= =======
(Continued)
2
ENNIS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(Dollars in Thousands)
August 31, February 29,
2004 2004
---- ----
(unaudited)
Liabilities and
Shareholders' Equity
--------------------
Current liabilities:
Accounts payable $ 10,006 $ 5,804
Accrued expenses:
Employee compensation and
benefits 9,872 10,237
Federal and state income tax
payable 138 --
Taxes other than income 1,996 1,427
Other 5,718 1,597
Current installments of long-
term debt 6,237 6,335
------- -------
Total current
liabilities 33,967 25,400
------- -------
Long-term debt, less current
installments 16,000 7,800
Deferred credits, principally income
taxes 9,635 10,261
Shareholders' equity:
Series A junior participating
preferred stock of $10 par
value, Authorized 1,000,000
shares;
None issued -- --
Common stock of $2.50 par value
Authorized 40,000,000
shares;
Issued 21,249,860 shares 53,125 53,125
Additional paid in capital 126 126
Retained earnings 150,200 145,653
Accumulated other comprehensive
loss (40) (114)
------- -------
203,411 198,790
Treasury stock:
Cost of 4,819,147 shares
at August 31, 2004 and
August 31, 2004 and
4,856,626 shares at
February 29, 2004 (87,528) (88,208)
------- -------
Total shareholders'
equity 115,883 110,582
------- -------
$175,485 $154,043
======= =======
See accompanying notes to condensed consolidated financial
statements.
3
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in Thousands Except Share and Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
August 31, August 31,
2004 2003 2004 2003
---- ---- ---- ----
Net sales $73,374 $65,003 $139,110 $129,877
Costs and
expenses:
Cost of sales 54,022 47,496 102,698 95,820
Selling,
general and
administrative 10,813 9,866 20,199 19,521
------ ------ ------- -------
64,835 57,362 122,897 115,341
------ ------ ------- -------
Earnings from
operations 8,539 7,641 16,213 14,536
------ ------ ------- -------
Other income
(expense):
Investment
income 137 13 142 27
Interest
expense (167) (192) (301) (479)
Other income
(expense), net 79 (208) (2) (211)
------ ------ ------- -------
49 (387) (161) (663)
------ ------ ------- -------
Earnings before
income taxes 8,588 7,254 16,052 13,873
Provision for
income taxes 3,218 2,757 6,100 5,272
------ ------ ------- -------
Net earnings $ 5,370 $ 4,497 $ 9,952 $ 8,601
====== ====== ======= =======
Weighted average
number of
common shares
outstanding -
basic 16,427,776 16,347,228 16,416,737 16,340,968
Plus
incremental
shares from
assumed
exercise
of stock
options 317,675 262,047 298,908 215,605
---------- ---------- ---------- ----------
Weighted average
number of
common shares
outstanding -
diluted 16,745,451 16,609,275 16,715,645 16,556,573
========== ========== ========== ==========
Per share amounts:
Net earnings -
basic $.33 $.28 $.61 $.53
==== ==== ==== ====
Net earnings -
diluted $.32 $.27 $.59 $.52
==== ==== ==== ====
Cash dividends
per share $.155 $.155 $.310 $.310
==== ==== ==== ====
See accompanying notes to condensed consolidated financial
statements.
4
ENNIS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
August 31,
2004 2003
---- ----
Cash flows from operating activities:
Net earnings $9,952 $8,601
Adjustments to reconcile net earnings to
net cash provided by operating
activities:
Depreciation 4,358 4,709
Amortization of trademark 66 66
Gain on the sale of equipment (188) (4)
Bad debt expense 429 440
Other -- (275)
Changes in operating assets and
liabilities (excluding the effects
of acquisitions):
Accounts receivable 933 1,824
Prepaid expenses 295 343
Inventories (958) (1,576)
Other current assets (89) 525
Accounts payable and accrued
expenses (3,217) 2,139
Other assets (11) 1,344
------ ------
Net cash provided by operating
activities 11,570 18,136
------ ------
Cash flows from investing activities:
Capital expenditures (3,581) (2,402)
Purchase of operating assets, net of
cash acquired of $133 (17,701) --
Proceeds from disposal of property 235 91
Other -- (28)
------ ------
Net cash used in investing
activities (21,047) (2,339)
------ ------
Cash flows from financing activities:
Proceeds from debt issued to finance
acquisitions 11,000 --
Repayment of debt issued to finance
acquisition (3,335) (4,037)
Dividends (5,088) (5,068)
Issuance of treasury stock, net 34,479
shares and 30,686 shares 363 330
------ ------
Net cash provided by (used in)
financing activities 2,940 (8,775)
------ ------
Net change in cash and cash equivalents (6,537) 7,022
Cash and cash equivalents at beginning of
period 15,067 13,860
------ ------
Cash and cash equivalents at end of period $ 8,530 $20,882
====== ======
See accompanying notes to condensed consolidated financial
statements.
5
ENNIS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
These unaudited condensed consolidated financial statements
of Ennis, Inc. and its subsidiaries (collectively the
"Company" or "Ennis"), for the quarter ended August 31, 2004
have been prepared in accordance with generally accepted
accounting principles for interim financial reporting.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting
principles for complete financial statements and should be
read in conjunction with the audited consolidated financial
statements and notes thereto included in the Company's Form
10-K for the year ended February 29, 2004, from which the
accompanying condensed consolidated balance sheet at February
29, 2004 was derived. All significant intercompany balances
and transactions have been eliminated in consolidation. In
the opinion of management, all adjustments considered
necessary for a fair presentation of the interim financial
information have been included. In preparing the financial
statements, the Company is required to make estimates and
assumptions that affect the disclosure and reported amounts
of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. The Company evaluates these
estimates and judgments on an ongoing basis, including those
related to bad debts, inventory valuations, property, plant
and equipment, intangible assets and income taxes. The
Company bases estimates and judgments on historical
experience and on various other factors that are believed to
be reasonable under the circumstances. The results of
operations for any interim period are not necessarily
indicative of the results of operations for a full year.
2. Stock Option Plans and Stock Based Compensation
-----------------------------------------------
The Company has stock options granted to key executive and
managerial employees and non-employee directors. At August
31, 2004, the Company has two incentive stock option plans:
the 1998 Option and Restricted Stock Plan amended and
restated as of June 17, 2004 and the 1991 Incentive Stock
Option Plan. The Company has reserved 1,254,623 shares of
unissued common stock reserved under the stock option plans
for issuance to officers and directors, and supervisory
employees of the Company and its subsidiaries. The exercise
price of each option granted equals the quoted market price
of the Company's common stock on the date of grant, and an
option's maximum term is ten years. Options may be granted
at different times during the year and vest over a five year
period.
The Company accounts for employee and director stock-based
compensation arrangements in accordance with the provisions
of Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" (APB No. 25), and related
interpretations, and complies with the disclosure provisions
of Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock-Based Compensation" and SFAS No.
148, "Accounting for Stock-Based Compensation and
Disclosure."
The following table represents the effect on net earnings and
earnings per share as if the Company had applied the fair
value based method and recognition provisions of SFAS No.
123, "Accounting for Stock-Based Compensation," to stock-
based employee compensation (in thousands, except per share
amounts):
6
2. Stock Option Plans and Stock Based Compensation (Continued)
-----------------------------------------------------------
Three Months Six Months Ended
Ended August 31, August 31,
(in thousands) 2004 2003 2004 2003
---- ---- ---- ----
Net earnings:
As reported $5,370 $4,497 $9,952 $8,601
Deduct: Stock-based
Employee compensation
expense not included
in reported income,
net of related tax 11 14 21 28
effects
----- ------ ------ ------
Pro forma $5,359 $4,483 $9,931 $8,573
====== ====== ====== ======
Net earnings per
share:
As reported - basic $.33 $.28 $.61 $.53
Pro forma - basic .33 .27 .60 .52
As reported - diluted .32 .27 .59 .52
Pro forma - diluted .32 .27 .59 .52
As required, the pro forma disclosures above include options
granted since March 1, 1996. Consequently, the effects of
applying SFAS 123 for providing pro forma disclosures may not
be representative of the effects on reported net income for
future years until all options outstanding are included in
the pro forma disclosures. For purposes of pro forma
disclosures, the estimated fair value of stock-based
compensation plans and other options is amortized to expense
over the vesting period.
In December 2002, the FASB issued SFAS No. 148, "Accounting
for Stock-Based Compensation and Disclosure." SFAS No. 148
amends the transition and disclosure provisions of SFAS No.
123. If the Company had adopted the prospective transition
method prescribed by SFAS 148 in the first quarter of 2004,
compensation expense of $17,000 and $34,000 would have been
recorded for the three and six months ended August 31, 2004,
respectively. After related income tax effects, this would
have reduced net earnings by $11,000 and $21,000 for the
three and six months ended August 31, 2004, respectively.
Basic earnings per share would have decreased one cent for
the six months ended August 31, 2004.
As of August 31, 2004, the Company has issued 701,325 stock
options granted under incentive stock option plans. For
the three and six month periods ended August 31, 2004, there
were no anti-dilutive stock options. For the three and six
month periods ended August 31, 2003, there were 10,000 and
73,250 stock options not included in the diluted earnings per
share computation because their exercise price exceeded the
average fair market value of the Company's stock for the
period.
7
3. Employee Benefit Plans
----------------------
The following table provides the components of net periodic
benefit cost for the three and six months ended August 31,
2004 and 2003 (in thousands):
Three Months Six Months Ended
Ended August 31, August 31,
2004 2003 2004 2003
---- ---- ---- ----
Components of net
periodic benefit
cost
Service cost $367 $334 $ 734 $ 668
Interest cost 604 589 1,208 1,178
Expected return
on assets (666) (548) (1,332) (1,096)
Amortization of:
Prior service
cost (36) (36) (72) (72)
Unrecognized net
loss 267 262 534 524
---- ---- ------ ------
Net periodic
benefit cost $536 $601 $1,072 $1,202
==== ==== ====== ======
For the current fiscal year ending February 28, 2005, there
is not a minimum contribution requirement and no pension
payments have been made; however, the Company expects to
contribute $2.5 million.
4. Inventories
-----------
The Company uses the Last-In, First-Out (LIFO) method of
pricing the raw material content of most of its business
forms inventories, and the First-In, First-Out (FIFO) method
is used to value the remainder. The following table
summarizes the components of inventories at the different
stages of production (in thousands of dollars):
August 31, February 29,
2004 2004
---- ----
Raw material $ 8,660 $ 6,911
Work-in-process 2,615 1,393
Finished goods 7,467 5,417
------ ------
$18,742 $13,721
====== ======
5. Accumulated other comprehensive income
--------------------------------------
Accumulated other comprehensive income consists of the
unrealized portion of changes in the fair value of the
Company's cash flow hedge. Comprehensive income was
approximately $10,026,000 for the six months ended August 31,
2004 and $8,698,000 for the six months ended August 31, 2003.
Amounts charged directly to Shareholders' Equity related to
the Company's interest rate swap are included in "other
comprehensive income."
8
6. Segment Data
------------
The Company operates business units aggregated into three
segments on the basis of common customers, products and
management. The Forms Solutions Group is primarily in the
business of manufacturing and selling business forms and
other printed business products to customers primarily
located in the United States. On June 30, 2004, the Company
acquired Crabar/GBF which became part of the Forms Solution
Group segment with the exception of the Cerritos, California
facility which became part of the Promotional Solutions
Group. The Promotional Solutions Group is comprised of Adams
McClure, Admore and Wolfe City and is primarily in the
business of manufacturing and selling promotional products.
The Financial Solutions Group is comprised of Northstar
Computer Forms which is a manufacturer and seller of official
bank checks, money orders, and internal bank forms.
Corporate information is included to reconcile segment data
to the consolidated financial statements and includes assets
and expenses related to the Company's corporate headquarters
and other administrative costs. Segment data for the three
and six months ended August 31, 2004 and 2003 were as follows
(in thousands):
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Corporate Totals
----- ----- ----- --------- ------
Three months ended
August 31, 2004:
Net sales $43,227 $19,183 $10,964 $ -- $73,374
Deprecia-
tion 841 614 562 132 2,149
Amortiza-
tion of
trademark 33 -- -- -- 33
Segment
earnings
(loss)
before
income
tax 6,377 2,723 1,508 (2,020) 8,588
Segment
assets 100,085 35,390 31,860 8,150 175,485
Capital
expendi-
tures 348 471 54 569 1,442
Three months ended
August 31, 2003:
Net sales $35,784 $17,082 $12,137 $ -- $65,003
Deprecia-
tion 802 616 736 178 2,332
Amortiza- 33 -- -- -- 33
tion of
trademark
Segment
earnings
(loss)
before
income
tax 5,830 1,856 1,511 (1,943) 7,254
Segment
assets 75,720 34,231 40,461 5,066 155,478
Capital
expendi-
tures 428 281 621 230 1,560
Six months ended
August 31, 2004:
Net sales $77,790 $38,644 $22,676 $ -- $139,110
Deprecia-
tion 1,609 1,241 1,268 240 4,358
Amortiza-
tion of
trademark 66 -- -- -- 66
Segment
earnings
(loss)
before
income
tax 11,913 4,886 2,994 (3,741) 16,052
Segment
assets 100,085 35,390 31,860 8,150 175,485
Capital
expendi-
tures 615 712 154 2,100 3,581
9
Six months ended
August 31, 2003:
Net sales $70,549 $35,211 $24,117 $ -- $129,877
Deprecia-
tion 1,616 1,232 1,499 362 4,709
Amortiza-
tion of
trademark 66 -- -- -- 66
Segment
earnings
(loss)
before
income
tax 11,148 3,560 2,739 (3,574) 13,873
Segment
assets 75,720 34,231 40,461 5,066 155,478
Capital
expendi-
tures 998 435 721 248 2,402
7. Purchase of Crabar/GBF
----------------------
Effective June 30, 2004, the Company completed its acquisition
of all the outstanding stock of Crabar/GBF for approximately
$18 million, with consideration in the form of debt assumed
and cash. The primary reason for the acquisition was to
increase Ennis' market share. However, Crabar/GBF will add
high-quality long and medium run print production, along with
pressure sensitive label and form-label combinations to Ennis'
current line of medium and short run print products and
solutions. The results of operations for Crabar/GBF are
included in the Company's condensed consolidated financial
statements from the date of acquisition. The following table
represents certain operating information on a pro forma basis
as though Crabar/GBF had been acquired as of March 1, 2003,
after the estimated impact of adjustments such as amortization
of intangible assets, interest expense, reduced interest
income and related tax effects (in thousands except per share
amounts):
For the Three Months Ended August 31, 2003 2004
---- ----
Pro forma net sales $ 81,903 $78,914
Pro forma net earnings 4,640 5,431
Pro forma earnings per share - .28 .32
diluted
For the Six Months Ended August 31, 2003 2004
---- ----
Pro forma net sales $167,680 $160,881
Pro forma net earnings 9,001 11,547
Pro forma earnings per share - .54 .69
diluted
The pro forma results are not necessarily indicative of what
would have occurred if the acquisition had been in effect for
the period presented.
The transaction was accounted for under the purchase method of
accounting and was financed with $11,000,000 in bank loans
with the balance being provided by internal cash resources.
The purchase price has been allocated to assets acquired and
liabilities assumed based on estimated fair market value at
the date of the acquisition. The Company has temporarily
recorded the excess purchase price as goodwill as ongoing
valuation efforts are completed to determine the allocation to
the identifiable intangible assets, if any.
10
8. Agreement to Merge with Alstyle Apparel
---------------------------------------
Ennis signed a definitive agreement to merge in a tax free
exchange of stock with Alstyle Apparel, a privately held
manufacturer of t-shirts and fleece goods based in Anaheim,
California. This transaction will make Ennis a full-service
provider of printed business products and promotional apparel
(t-shirts and fleece goods) with over $525,000,000 in annual
revenues and approximately 6,000 employees in North America.
This merger continues the Ennis strategy of growth through
acquiring growing product lines (promotional apparel) for the
Company's existing customer base.
In the merger, Centrum stockholders will receive a combination
of cash and the Company's common stock in exchange for their
Centrum shares. At least three business days prior to the
closing of the merger, Ennis will notify the Centrum
stockholders of the amount of cash that Ennis elects to pay
the Centrum stockholders at closing. This amount will not be
less than $12,500,000 and not more than $20,000,000. This
transaction is subject to SEC and shareholder approval.
9. Derivative Financial Instruments and Hedging Activities
-------------------------------------------------------
The Company's interest rate swaps are held for purposes other
than trading. The Company utilized swap agreements related to
its term and revolving loans to effectively fix the interest
rate for a specified principal amount of the loans. Amounts
receivable or payable under interest rate swap agreements are
recorded as adjustments to interest expense. This swap has
been designated as a cash flow hedge and the after-tax effect
of the mark-to-market valuation that relates to the effective
amount of derivative financial instrument is recorded as an
adjustment to accumulated other comprehensive income with the
offset included in accrued expenses.
The Company utilized swap agreements related to the term loan
and revolving credit facility to effectively fix the interest
rate at 3.2% for a pre-set principal amount of the loans. The
pre-set principal amount of the loans covered by the swap
agreements declines quarterly in connection with expected
principal reductions and totaled $9,000,000 at August 31,
2004. The fair value of the swap at August 31, 2004 was
approximately ($64,000) and the change in the fair value of
the loss from March 1, 2004, net of tax, has been added to
accumulated other comprehensive income.
11
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
- --------
Ennis, Inc. was organized under the laws of Texas in 1909. Ennis,
Inc. and its subsidiaries (collectively "Ennis" or the "Company")
prints and constructs a broad line of business forms and other
business products for national distribution. Distribution of
business forms and other business products throughout the United
States is primarily through independent dealers. These include
business forms distributors, stationers, printers, computer
software developers and advertising agencies, among others.
On June 30, 2004, the Company completed the acquisition of the
outstanding stock of Dayton, Ohio based Crabar/GBF for
approximately $18 million, with consideration in the form of debt
assumed and cash. The purchase was financed with $11,000,000 in
bank loans with the balance being provided by internal cash
resources. Crabar/GBF produces high-quality long and medium run
printing, pressure sensitive labels and form-label combinations
in facilities located in Cerritos, California; Bellville, Texas;
Princeton, Illinois; Medfield Massachusetts; Edison, New Jersey;
El Dorado, Missouri; and Leipsic, Ohio. Crabar/GBF also has an
administrative center in Dayton, Ohio. The Carbar/GBF
facilities, except the Cerritos, California location, became part
of the Forms Solution Group. The Cerritos, California operation
became part of the Promotional Solutions Group.
The Company operates in three business segments. The first
segment, the Forms Solutions Group is primarily in the business
of manufacturing and selling business forms and other printed
business products primarily to distributors located in the United
States. The second segment, the Promotional Solutions Group, is
comprised of Adams McClure, Admore and Wolfe City and is
primarily in the business of manufacturing and selling
promotional products. The third segment, the Financial
Solutions Group designs, manufactures and markets printed forms
and specializes in internal bank forms, secure and negotiable
documents and custom products.
Economic pressure and the contraction of the traditional business
forms industry continue to impact each segment of the Company.
As a result, the Company continues to concentrate on reducing
other costs where sales are declining. The installation of the
Company's Enterprise Resource Planning Software (ERP) System has
decreased the waste in materials and improved labor utilization
in the plants which have the system. The Company is continuing
to install the ERP System throughout the organization. The
Company is also focusing on increasing sales where the market is
expanding. In addition, the Company will continue to search for
acquisition opportunities that will expand our mix of products
away from traditional forms, as well as strategic acquisitions
within the traditional forms industry.
Liquidity and Capital Resources
- -------------------------------
Cash Flow
Cash provided by operating activities for the six months ended
August 31, 2004 was $11,568,000 and represented a decrease of
$6,568,000 from the $18,136,000 provided in the comparable period
last year. This decrease in cash provided by operating activities
was due to the payments of outstanding accounts payable of
Crabar/GBF after acquisition. Cash flows used in investing
activities for the six months ended August 31, 2004 was
$21,047,000 and represented an increase use of $18,708,000 from
the $2,339,000 used in the comparable period last year.
12
This increase in cash used was primarily the result of the
acquisition of Crabar/GBF. Cash flows provided by financing
activities for the six months ended August 31, 2004 was
$2,940,000 and represented an increase of $11,715,000 from the
$(8,775,000) used in the comparable period last year. The
increase in financing activities was primarily the result of the
debt issued to finance the acquisition of Crabar/GBF.
Working Capital
The Company has maintained a strong financial position with
working capital at August 31, 2004, of $37,167,000, remaining
relatively constant with a slight decrease of 2.7% from the
beginning of the year, and a current ratio of 2.1 to 1. The
Company has $8,530,000 in cash and cash equivalents.
Credit Facility
The Company has $22,237,000 in total long-term debt of which
$11,000,000 was recently borrowed to finance the Crabar/GBF
acquisition. This transaction resulted in the Fourth Amendment
to the Original Credit Agreement dated June 6, 2000. The Company
made payments of $3,335,000 for the six months ended August 31,
2004. The Company anticipates repaying the long-term debt at
$1,500,000 per quarter with a final payment of $12,800,000 in
January 2006. The available line of credit at August 31, 2004
was approximately $8,163,000.
Pension
The Company is required to make contributions to its defined
benefit pension plan. These contributions are required under the
minimum funding requirements of the Employee Retirement Pension
Plan Income Security Act (ERISA). For the current fiscal year
ending February 28, 2005, there is not a minimum contribution
requirement and no pension payments have been made; however, the
Company anticipates it will pay $2,500,000.
Inventories
The Company believes current inventory levels are sufficient to
satisfy customer demand and anticipates having adequate sources
of supply of raw materials to meet future business requirements.
Capital Expenditures
Capital expenditures for the three and six months totaled
$1,442,000 and $3,581,000, respectively. For the full fiscal
year, capital expenditures are expected to be between $5,000,000
and $6,000,000, which are expected to be financed through
internally generated funds. The Company expects to generate
sufficient cash flow from its operating activities to more than
cover its operating and capital requirements for the foreseeable
future. These amounts do not take into consideration the pending
merger with Alstyle apparel as referred to in the financial
statements.
Commitments
There have been no material changes in our contractual
obligations since fiscal year-end 2004 outside the normal course
of business.
13
Accounting Standards
- --------------------
On May 19, 2004, the Financial Accounting Standards Board (FASB)
issued an FSP regarding SFAS No. 106. FSP 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription
Drug, Improvement and Modernization Act of 2003" discusses the
effect of the Act. FSP 162-2 considers the effect of the two
new features introduced in the Act in determining APBO and
net periodic postretirement benefit cost. The adoption of FSP
106-2 is required in the Company's third quarter of fiscal
2005 and is not expected to have a material impact on the
Company's financial position or results of operations.
In December 2002, the (FASB) issued Statements of Financial
Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an Amendment to FASB
Statement No. 123" (SFAS 148). SFAS 148 provides alternate
methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation.
In addition, SFAS 148 amends the disclosure requirements of
"Accounting for Stock-Based Compensation" (SFAS 123) to require
prominent disclosures in both annual and interim financial
statements about the method of accounting used in reporting
results. To date, the Company has not adopted SFAS 123 utilizing
any of the transition methods of SFAS 148 but does apply the
disclosure requirements. The FASB recently issued an exposure
for public comment and a final standard is expected in the second
half of 2004. Tentative decisions by the FASB indicate that
expensing of stock options will be required for fiscal years
beginning after December 15, 2004.
Results of Operations 2004
- --------------------------
Net sales for the three months ended August 31, 2004 increased
12.9% from the corresponding period in the prior year. This
increase is the result of the inclusion of Crabar/GBF, Inc.
(Crabar/GBF) for July and August which increased sales 15.5% and
1.2% increase from the remaining portion of the Promotional
Solutions Group, offset by decreases in the remaining Forms
Solutions Group 2.0% and the Financial Solutions Group 1.8%. The
Promotional Solutions Group added new customers resulting in
increased sales volume. The Forms Solutions Group and the
Financial Solutions Group continue to be impacted by the general
economy and industry decline. The declines are primarily caused
by decreased volume. For the six months ended August 31, 2004,
net sales increased 7.1% from the corresponding period in the
prior year. This increase is attributed to the inclusion of
Crabar/GBF which increased sales 7.7%, and 1.6% increase from the
remaining portion of the Promotional Solutions Group, offset by a
decrease of 1.2% from the remaining portion of the Forms Solution
Group and a 1.1% decrease in the Financial Solutions Group. The
Promotional Solutions Group added new customers resulting in
increased sales volume. The Forms Solutions Group and the
Financial Solutions Group continue to be impacted by the general
economy and industry decline. The declines are primarily caused
by decreased volume.
14
Forms Promotional Financial
Solutions Solutions Solutions Consolidated
Group Group Group Totals
----- ----- ----- ------
Three months ended
August 31, 2004:
Net sales without $34,475 $17,872 $10,964 $63,311
Crabar/GBF
Net sales
Crabar/GBF 8,752 1,311 -- 10,063
------- ------- ------- --------
Total net Sales $43,227 $19,183 $10,964 $ 73,374
======= ======= ======= ========
Three months ended
August 31, 2003
Total net Sales $35,784 $17,082 $12,137 $ 65,003
======= ======= ======= ========
Six months ended
August 31, 2004:
Net sales without $69,038 $37,333 $22,676 $129,047
Crabar/GBF
Net sales
Crabar/GBF 8,752 1,311 -- 10,063
------- ------- ------- --------
Total net Sales $77,790 $38,644 $22,676 $139,110
======= ======= ======= ========
Six months ended
August 31, 2003
Total net Sales $70,549 $35,211 $24,117 $129,877
======= ======= ======= ========
Gross profit margins decreased from 26.9% in the three months
ended August 31, 2003 to 26.4% in the three months ended August
31, 2004 and remained flat at 26.2% for the six months ended
August 31, 2003 and August 31, 2004. The decrease in the three
months ended August 31, 2004 is the result of a combination of
factors. The Forms Solutions Group gross profit margin decreased
from 27.8% in the three months ended August 31, 2003 to 26.3% in
the three months ended August 31, 2004. While the general
weakness in the economy and the decline in the forms industry
contributed to decreased volume, prices were able to be increased
in the Forms Solutions Group by controlling variable costs and
maintaining efficient fixed cost absorption. The Financial
Solutions Group and the Promotional Solutions Group had
relatively consistent gross profit margins for the three months
ended August 31, 2004 and 2003.
Selling, general and administrative expenses increased 9.6% for
the three months ended August 31, 2004 and 3.5% for the six
months ended August 31, 2004 when compared to the corresponding
periods in the prior year. The acquisition of Carbar/GBF
accounted for the increase in administrative personnel in the
Forms Solutions Group.
Interest expense decreased from $192,000 in the three months
ended August 31, 2003 to $167,000 in the three months ended
August 31, 2004 and from $479,000 for the six months ended August
31, 2003 to $301,000 for the six months ended August 31, 2004
primarily as a result of the reduction of long-term financial
debt, prior to the acquisition of Crabar/GBF.
The Company's effective federal and state income tax rate
remained relatively constant at 38% for the six months ended
August 31, 2004 and August 31, 2003.
15
Critical Accounting Policies and Judgments
- ------------------------------------------
In preparing our 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
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 bad
debts, inventory valuations, property, plant and equipment,
intangible assets 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 from these estimates under different
assumptions or conditions. The Company believes the following
accounting policies are the most critical due to their affect on
the Company's more significant estimates and judgments used in
preparation of its consolidated financial statements.
The Company maintains a defined-benefit pension plan for
employees. Included in our financial results are pension costs
which are measured using actuarial valuations. The actuarial
assumptions used may differ from actual results.
We exercise judgment in evaluating our long-lived assets for
impairment. The Company assesses the impairment of long-lived
assets, which include other intangible assets, goodwill and plant
and equipment, whenever events or changes in circumstances
indicate that the carrying value may not be recoverable. The
Company assesses the impairment of goodwill annually. In
performing tests of impairment, the Company estimates future cash
flows that are expected to result from the operating segments.
Actual results could differ from assumptions made by management.
We believe our businesses will generate sufficient undiscounted
cash flow to more than recover the investments we have made in
property, plant and equipment, as well as the goodwill and other
intangibles recorded as a result of our acquisitions. The
Company cannot predict the occurrence of future impairment
triggering events nor the impact such events might have on its
reported asset values.
Revenue is recognized upon shipment for all printed products.
Derivative instruments are recognized on the balance sheet at
fair value. Changes in fair values of derivatives are accounted
for based upon their intended use and designation. The Company's
interest rate swaps are held for purposes other than trading.
The Company utilized swap agreements related to its term and
revolving loans to effectively fix the interest rate for a
specified principal amount of the loans. Amounts receivable or
payable under interest rate swap agreements are recorded as
adjustments to interest expense. This swap has been designated
as a cash flow hedge and the after tax effect of the mark-to-
market valuation that relates to the effective amount of
derivative financial instrument is recorded as an adjustment to
accumulated other comprehensive income with the offset included
in accrued expenses.
As part of the process of preparing our consolidated financial
statements, we are required to estimate our income taxes in each
jurisdiction in which we operate that imposes a tax on income.
This process involves estimating our actual current tax exposure
together with assessing temporary differences resulting from
different treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities,
which are included in our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will
16
be recovered from future taxable income and to the extent we
believe that recovery is more likely than not, we must establish
a valuation allowance. To the extent we establish a valuation
allowance, we must include an expense within the tax provision in
the consolidated statements of income. In the event that actual
results differ from these estimates, our provision for income
taxes could be materially impacted.
Certain Factors That May Affect Future Results
- ----------------------------------------------
The Forms Solutions Group sells a mature product line of business
forms and other printed business products. The demand for this
product line may decrease with increasing electronic and
paperless forms and filings.
The Promotional and Financial Solutions Groups are dependent upon
certain major customers. The loss of such customers may affect
the revenue and earnings of the Groups.
The Company has various contracts with suppliers that are subject
to change upon renewal and may not provide the same cost ratios
for future periods.
Forward looking statement
- -------------------------
Management's result of operations contains forward-looking
statements that reflect the Company's current view with respect
to future revenues and earnings. These statements are subject to
numerous uncertainties, including (but not limited to) the rate
at which the business forms market is contracting, the
application of technology to the production of business forms,
demand for the Company's products in the context of a contracting
market, variability in the prices of paper and other raw
materials, and competitive conditions in the business forms
market. Because of such uncertainties, readers are cautioned not
to place undue reliance on such forward-looking statements, which
speak only as of September 28, 2004.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES OF MARKET RISK
Market Risk
- -----------
The Company is exposed to market risk from changes in interest
rates on debt. A discussion of the Company's accounting policies
for derivative instruments is included in the Notes to the
Consolidated Financial Statements for the period ended August 31,
2004.
The Company's net exposure to interest rate risk consists of a
floating rate debt instrument that is benchmarked to U.S. and
European short-term interest rates. The Company may from time to
time utilize interest rate swaps to manage overall borrowing
costs and reduce exposure to adverse fluctuations in interest
rates. The Company does not use derivative instruments for
trading purposes. The Company is exposed to interest rate risk
on short-term and long-term financial instruments carrying
variable interest rates. The Company's variable rate financial
instruments, including the outstanding credit facilities, totaled
$9,000,000 at August 31, 2004. The impact on the Company's
statement of earnings of a one-point interest rate change on the
outstanding balance of the variable rate financial instruments as
of August 31, 2004 would be immaterial. 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.
17
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures. Our Chief
Executive Officer and our Chief Financial Officer, after
evaluating the effectiveness of the Company's "disclosure
controls and procedures" (as defined in the Securities Exchange
Act of 1934 (Exchange Act) Rules 13a-15(e) or 15d-15(e)) as of
the end of the period covered by this quarterly report, have
concluded that our disclosure controls and procedures are
effective based on their evaluation of these controls and
procedures required by paragraph (b) of Exchange Act Rules 13a-15
or 15d-15.
(b) Changes in Internal Control Over Financial Reporting. 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. The Company is
continuing to integrate the operations of the newly acquired
operations of Crabar/GBF into its current internal control
environment and procedures that are currently in place at the
Company. It is expected this integration will be completed by
the end of the Company's fiscal year and will result in changes
in changes to virtually all areas of the Company's internal
controls in order to provide effective monitoring and control of
the newly integrated operations.
PART II. OTHER INFORMATION
Item 6. EXHIBITS
Exhibits
The exhibits as listed on the accompanying index to
exhibits on page 20 are filed as part of this Form
10-Q.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
ENNIS, INC.
Date September 28, 2004 /s/Harve Cathey
------------------- -------------------------------
Harve Cathey
Vice President - Finance and
CFO, Secretary and Principal
Financial and Accounting Officer
19
INDEX TO EXHIBITS
Exhibit 2.1 Agreement and Plan of Merger dated as of June
25, 2004 by and among Ennis Inc., Midlothian
Holdings LLC, and Centrum Acquisition, Inc.,
incorporated herein by reference to Exhibit Q
to the Registrant's Form S-4 filed on
September 3, 2004.
Exhibit 2.2 First Amendment to Agreement and Plan of
Merger dated as of August 23, 2004 by and
among Ennis, Inc., Midlothian Holdings LLC,
and Centrum Acquisition, Inc., incorporated
herein by reference to Exhibit Q to the
Registrant's Form S-4 filed on September 3,
2004.
Exhibit 3.1 Restated Articles of Incorporation as amended
through June 23, 1983 with attached
amendments dated June 20, 1985, July 31, 1985
and June 16, 1988 incorporated herein by
reference to Exhibit 5 to the Registrant's
Form 10-K Annual Report for the fiscal year
ended February 28, 1993.
Exhibit 3.2 Bylaws of the Registrant as amended through
October 15, 1997 incorporated herein by
reference to Exhibit 3(ii) to the
registrant's Form 10-Q Quarterly Report for
the quarter ended November 30, 1997.
Exhibit 10.1 Employee Agreement between Ennis, Inc. and
Keith S. Walters dated May 1, 2003
incorporated herein by reference to Exhibit
10.1 to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 29,
2004.
Exhibit 10.2 Employee Agreement between Ennis, Inc. and
Ronald M. Graham dated May 1, 2003
incorporated herein by reference to Exhibit
10.2 to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 29,
2004.
Exhibit 10.3 Employee Agreement between Ennis, Inc. and
Michael D. Magill dated October 7, 2003
incorporated herein by reference to Exhibit
10.3 to the Registrant's Form 10-K Annual
Report for the fiscal year ended February 29,
2004.
Exhibit 10.4 2004 Long-Term Incentive Plan incorporated
herein by reference to Appendix C to the
Registrant's Definitive Proxy Statement on
Schedule 14A filed on May 17, 2004.
Exhibit 10.5 Stock Purchase Agreement dated as of June 25,
2004, among Crabar/GBF, Inc. the shareholders
of Crabar/GBF, Inc. and Ennis, Inc.
incorporated herein by reference to Exhibit 2
to the Registrant's Current Report on Form 8-
K filed on July 15, 2004.
Exhibit 10.6 First Amendment Agreement dated as of June
25, 2004, by and among Amin Amdani, Rauf
Gajiani, Centrum Acquisition, Inc., Ennis,
Inc. and Midlothian Holdings LLC incorporated
herein by reference to the Registrant's Form
S-4 filed on September 3, 2004.
20
Exhibit 10.7 Indemnity Agreement dated as of June 25,
2004, by and among Laurence Ashkin, Roger
Brown, John McLinden, Arthur Slaven, Ennis,
Inc. and Midlothian Holdings LLC
incorporated herein by reference to the
Registrant's Form S-4 filed on September 3,
2004.
Exhibit 10.8 Indemnity Agreement dated as of June 25,
2004, by and among Laurence Ashkin, Roger
Brown, John McLinden, Arthur Slaven, Ennis,
Inc. and Midlothian Holdings LLC
incorporated herein by reference to the
Registrant's Form S-4 filed on September 3,
2004.
Exhibit 10.9 UPS Ground, Air Hundredweight and Sonicair
Incentive Program Carrier Agreement
incorporated herein by reference to Exhibit
10 to the Registrant's Form 10-K Annual
Report for the fiscal year ended February
29, 2003.
Exhibit 10.10 Addendum to UPS Ground, Air and Sonicair
Incentive Program Carrier Agreement dated as
of August 9, 2004, between Ennis, Inc. and
United Parcel Service, Inc. incorporated
herein by reference to the Registrant's Form
S-4 filed on September 3, 2004.*
Exhibit 10.11 Carbonless Paper Agreement dated as of July
13, 2004 between Ennis, Inc & MeadWestvaco
Corporation incorporated herein by reference
to the Registrant's Form S-4 filed on
September 3, 2004.*
Exhibit 10.12 Fourth Amendment to Credit Agreement dated
as of June 25, 2004, between Ennis, Inc. and
Bank One, NA incorporated herein by
reference to the Registrant's Form S-4 filed
on September 3, 2004.
Exhibit 10.13 Assignment Agreement dated as of June 30,
2004, between U.S. Bank National Association
and Compass Bank incorporated herein by
reference to the Registrant's Form S-4 filed
on September 3, 2004.
Exhibit 31.1 Certification Pursuant to Rule 13a-14(a)/15d-
14(a) (Chief Executive Officer)
Exhibit 31.2 Certification Pursuant to Rule 13a-14(a)/15d-
14(a) (Chief Financial Officer)
Exhibit 32 Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
Exhibit 99 Charter of the Audit Committee of The Board
of Directors of Ennis Business Forms, Inc.
as amended June 21, 2001 incorporated herein
by refere3nce to exhibit 99 to the
Registrant's Form 10-Q Quarterly Report for
the quarter ended May 31, 2001.
* Portions of Exhibit have been omitted pursuant to a request
for confidential treatment filed with the Securities and
Exchange Commission.
21