Attached files
file | filename |
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EX-31.2 - EX-31.2 - ENNIS, INC. | d76439exv31w2.htm |
EX-31.1 - EX-31.1 - ENNIS, INC. | d76439exv31w1.htm |
EX-32.2 - EX-32.2 - ENNIS, INC. | d76439exv32w2.htm |
EX-32.1 - EX-32.1 - ENNIS, INC. | d76439exv32w1.htm |
Table of Contents
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 August 31, 2010
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 Organization) |
(I.R.S. Employer Identification No.) | |
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 has submitted electronically and posted on its
corporate web site, if any, every Interactive Date File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one).
Large accelerated Filer o | Accelerated filer þ | Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company 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 September 17, 2010, there were 25,915,589 shares of the Registrants common stock
outstanding.
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
TABLE OF CONTENTS
2
Table of Contents
PART I. FINANCIAL INFORMATION
Item 1. | FINANCIAL STATEMENTS |
August 31, | February 28, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Assets | ||||||||
Current assets |
||||||||
Cash |
$ | 16,993 | $ | 21,063 | ||||
Accounts receivable, net of allowance for doubtful receivables
of $4,900 at August 31, 2010 and $4,446 at February 28, 2010 |
55,793 | 57,249 | ||||||
Prepaid expenses |
4,431 | 6,867 | ||||||
Inventories |
83,936 | 75,137 | ||||||
Deferred income taxes |
5,319 | 5,319 | ||||||
Assets held for sale |
| 804 | ||||||
Total current assets |
166,472 | 166,439 | ||||||
Property, plant and equipment, at cost |
||||||||
Plant, machinery and equipment |
151,938 | 138,419 | ||||||
Land and buildings |
65,591 | 55,430 | ||||||
Other |
22,529 | 22,402 | ||||||
Total property, plant and equipment |
240,058 | 216,251 | ||||||
Less accumulated depreciation |
154,900 | 150,531 | ||||||
Net property, plant and equipment |
85,158 | 65,720 | ||||||
Goodwill |
117,341 | 117,341 | ||||||
Trademarks and tradenames, net |
58,831 | 58,897 | ||||||
Customer lists, net |
18,626 | 19,753 | ||||||
Deferred finance charges, net |
863 | 1,079 | ||||||
Other assets |
3,359 | 3,470 | ||||||
Total assets |
$ | 450,650 | $ | 432,699 | ||||
See accompanying notes to consolidated financial statements.
3
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for share amounts)
August 31, | February 28, | |||||||
2010 | 2010 | |||||||
(unaudited) | ||||||||
Liabilities and Shareholders Equity | ||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 24,173 | $ | 27,463 | ||||
Accrued expenses |
||||||||
Employee compensation and benefits |
14,560 | 14,374 | ||||||
Taxes other than income |
1,302 | 1,539 | ||||||
Federal and state income taxes payable |
3,230 | 705 | ||||||
Other |
7,155 | 5,720 | ||||||
Total current liabilities |
50,420 | 49,801 | ||||||
Long-term debt, less current installments |
41,272 | 41,817 | ||||||
Liability for pension benefits |
8,117 | 7,132 | ||||||
Deferred income taxes |
19,726 | 19,821 | ||||||
Other liabilities |
271 | 868 | ||||||
Total liabilities |
119,806 | 119,439 | ||||||
Commitments and contingencies |
||||||||
Shareholders equity |
||||||||
Preferred stock $10 par value,
authorized 1,000,000 shares; none issued |
| | ||||||
Common stock $2.50 par value, authorized 40,000,000 shares;
issued 30,053,443 shares at August 31 and February 28, 2010 |
75,134 | 75,134 | ||||||
Additional paid in capital |
121,370 | 121,978 | ||||||
Retained earnings |
223,208 | 206,062 | ||||||
Accumulated other comprehensive income (loss): |
||||||||
Foreign currency translation, net of taxes |
(247 | ) | 267 | |||||
Unrealized loss on derivative instruments, net of taxes |
(808 | ) | (1,154 | ) | ||||
Minimum pension liability, net of taxes |
(12,376 | ) | (12,376 | ) | ||||
(13,431 | ) | (13,263 | ) | |||||
406,281 | 389,911 | |||||||
Treasury stock |
||||||||
Cost of 4,224,137 shares at August 31, 2010 and
4,292,080 shares at February 28, 2010 |
(75,437 | ) | (76,651 | ) | ||||
Total shareholders equity |
330,844 | 313,260 | ||||||
Total liabilities and shareholders equity |
$ | 450,650 | $ | 432,699 | ||||
See accompanying notes to consolidated financial statements.
4
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except share and per share amounts)
(Unaudited)
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands except share and per share amounts)
(Unaudited)
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net sales |
$ | 143,034 | $ | 137,767 | $ | 283,775 | $ | 268,597 | ||||||||
Cost of goods sold |
103,326 | 101,945 | 201,887 | 201,791 | ||||||||||||
Gross profit margin |
39,708 | 35,822 | 81,888 | 66,806 | ||||||||||||
Selling, general and administrative |
20,276 | 19,952 | 41,523 | 39,411 | ||||||||||||
Gain from disposal of assets |
| (1 | ) | | (3 | ) | ||||||||||
Income from operations |
19,432 | 15,871 | 40,365 | 27,398 | ||||||||||||
Other income (expense) |
||||||||||||||||
Interest expense |
(321 | ) | (725 | ) | (758 | ) | (1,420 | ) | ||||||||
Other, net |
(11 | ) | 6 | 29 | (294 | ) | ||||||||||
(332 | ) | (719 | ) | (729 | ) | (1,714 | ) | |||||||||
Earnings before income taxes |
19,100 | 15,152 | 39,636 | 25,684 | ||||||||||||
Provision for income taxes |
6,971 | 5,606 | 14,467 | 9,503 | ||||||||||||
Net earnings |
$ | 12,129 | $ | 9,546 | $ | 25,169 | $ | 16,181 | ||||||||
Weighted average common shares
outstanding |
||||||||||||||||
Basic |
25,840,376 | 25,735,950 | 25,820,626 | 25,727,577 | ||||||||||||
Diluted |
25,883,449 | 25,781,298 | 25,866,869 | 25,757,226 | ||||||||||||
Per share amounts |
||||||||||||||||
Net earnings basic |
$ | 0.47 | $ | 0.37 | $ | 0.97 | $ | 0.63 | ||||||||
Net earnings diluted |
$ | 0.47 | $ | 0.37 | $ | 0.97 | $ | 0.63 | ||||||||
Cash dividends per share |
$ | 0.155 | $ | 0.155 | $ | 0.310 | $ | 0.310 | ||||||||
See accompanying notes to consolidated financial statements.
5
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Dollars in thousands)
(Unaudited)
Six months ended | ||||||||
August 31, | ||||||||
2010 | 2009 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 25,169 | $ | 16,181 | ||||
Adjustments to reconcile net earnings to net cash provided
by operating activities: |
||||||||
Depreciation |
4,152 | 4,609 | ||||||
Amortization of deferred finance charges |
216 | 224 | ||||||
Amortization of tradenames and customer lists |
1,201 | 1,202 | ||||||
Gain from disposal of assets |
| (3 | ) | |||||
Bad debt expense |
1,304 | 1,528 | ||||||
Stock based compensation |
607 | 528 | ||||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
112 | (7,883 | ) | |||||
Prepaid expenses |
2,424 | 5,094 | ||||||
Inventories |
(8,840 | ) | 23,406 | |||||
Other assets |
103 | (937 | ) | |||||
Accounts payable and accrued expenses |
671 | 5,186 | ||||||
Other liabilities |
(597 | ) | (666 | ) | ||||
Prepaid pension asset/liability for pension benefits |
985 | 1,505 | ||||||
Net cash provided by operating activities |
27,507 | 49,974 | ||||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(23,242 | ) | (5,800 | ) | ||||
Proceeds from disposal of plant and property |
4 | 8 | ||||||
Net cash used in investing activities |
(23,238 | ) | (5,792 | ) | ||||
Cash flows from financing activities: |
||||||||
Repayment of debt |
| (24,133 | ) | |||||
Dividends |
(8,023 | ) | (7,996 | ) | ||||
Purchase of treasury stock |
(1 | ) | (405 | ) | ||||
Net cash used in financing activities |
(8,024 | ) | (32,534 | ) | ||||
Effect of exchange rate changes on cash |
(315 | ) | 210 | |||||
Net change in cash |
(4,070 | ) | 11,858 | |||||
Cash at beginning of period |
21,063 | 9,286 | ||||||
Cash at end of period |
$ | 16,993 | $ | 21,144 | ||||
See accompanying notes to consolidated financial statements.
6
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
FOR THE PERIOD ENDED AUGUST 31, 2010
1. Significant Accounting Policies and General Matters
Basis of Presentation
These unaudited consolidated financial statements of Ennis, Inc. and its subsidiaries (collectively
the Company or Ennis) for the quarter and six months ended August 31, 2010 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, 2010, from which the accompanying
consolidated balance sheet at February 28, 2010 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 and are of a normal recurring nature. 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, pension plan, accrued liabilities, 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
In January 2010, the Financial Accounting Standards Board (FASB) amended authoritative
guidance for improving disclosures about fair value measurements. The updated guidance requires
new disclosures about recurring or nonrecurring fair value measurements including significant
transfers into and out of Level 1 and Level 2 fair value measurements and information on purchases,
sales, issuances, and settlements on a gross basis in the reconciliation of Level 3 fair value
measurements. The guidance also clarified existing fair value measurement disclosure guidance
about the level of disaggregation, inputs, and valuation techniques. The Company adopted this
guidance on March 1, 2010 except for the disclosures requirements regarding purchases, sales,
issuances and settlements on the roll-forward of activity for Level 3 fair value measurements.
Those disclosures will be effective for fiscal years beginning after December 15, 2010 and for
interim periods within those fiscal years. The Company does not expect that the adoption of this
guidance will have a material impact on the consolidated financial statements.
2. Accounts Receivable and Allowance for Doubtful Receivables
Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible.
Approximately 95% 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 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.
7
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
2. Accounts Receivable and Allowance for Doubtful Receivables-continued
The following table represents the activity in the Companys allowance for doubtful receivables for
the three and six months ended (in thousands):
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Balance at beginning of period |
$ | 4,993 | $ | 3,593 | $ | 4,446 | $ | 3,561 | ||||||||
Bad debt expense |
315 | 989 | 1,304 | 1,528 | ||||||||||||
Recoveries |
23 | 6 | 35 | 18 | ||||||||||||
Accounts written off |
(431 | ) | (520 | ) | (885 | ) | (1,067 | ) | ||||||||
Foreign currency translation |
| | | 28 | ||||||||||||
Balance at end of period |
$ | 4,900 | $ | 4,068 | $ | 4,900 | $ | 4,068 | ||||||||
3. 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):
August 31, | February 28, | |||||||
2010 | 2010 | |||||||
Raw material |
$ | 12,343 | $ | 11,089 | ||||
Work-in-process |
18,353 | 14,280 | ||||||
Finished goods |
53,240 | 49,768 | ||||||
$ | 83,936 | $ | 75,137 | |||||
4. 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. 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 and a net book value of $58.5 million
at August 31, 2010 are evaluated for impairment on an annual basis, or more frequently if
impairment indicators arise. The Company assesses the recoverability of its definite-lived
intangible assets primarily based on its current and anticipated future undiscounted cash flows.
8
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
4. 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 August 31, 2010 |
||||||||||||
Amortized intangible assets (in thousands) |
||||||||||||
Tradenames |
$ | 1,234 | $ | 941 | $ | 293 | ||||||
Customer lists |
29,908 | 11,282 | 18,626 | |||||||||
Noncompete |
500 | 491 | 9 | |||||||||
$ | 31,642 | $ | 12,714 | $ | 18,928 | |||||||
As of February 28, 2010 |
||||||||||||
Amortized intangible assets (in thousands) |
||||||||||||
Tradenames |
$ | 1,234 | $ | 875 | $ | 359 | ||||||
Customer lists |
29,908 | 10,155 | 19,753 | |||||||||
Noncompete |
500 | 483 | 17 | |||||||||
$ | 31,642 | $ | 11,513 | $ | 20,129 | |||||||
August 31, | February 28, | |||||||
2010 | 2010 | |||||||
Non-amortizing intangible assets (in thousands) |
||||||||
Trademarks |
$ | 58,538 | $ | 58,538 | ||||
Aggregate amortization expense for the six months periods ended August 31, 2010 and August 31, 2009
was $1.2 million.
The Companys estimated amortization expense for the current and next five fiscal years is as
follows (in thousands):
2011 |
$ | 2,397 | ||
2012 |
2,391 | |||
2013 |
2,347 | |||
2014 |
2,254 | |||
2015 |
2,136 | |||
2016 |
2,078 |
Changes in the net carrying amount of goodwill are as follows (in thousands):
Apparel | ||||||||||||
Segment | Segment | |||||||||||
Total | Total | Total | ||||||||||
Balance as of March 1, 2009 |
$ | 42,792 | $ | 74,549 | $ | 117,341 | ||||||
Goodwill acquired |
| | | |||||||||
Goodwill impairment |
| | | |||||||||
Balance as of March 1, 2010 |
42,792 | 74,549 | 117,341 | |||||||||
Goodwill acquired |
| | | |||||||||
Goodwill impairment |
| | | |||||||||
Balance as of August 31, 2010 |
$ | 42,792 | $ | 74,549 | $ | 117,341 | ||||||
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
4. Goodwill and Other Intangible Assets-continued
During the six months ended August 31, 2010 and fiscal year ended 2009, there were no adjustments
to goodwill.
5. Other Accrued Expenses
The following table summarizes the components of other accrued expenses as of the dates indicated
(in thousands):
August 31, 2010 | February 28, 2010 | |||||||
Accrued taxes |
$ | 307 | $ | 265 | ||||
Accrued legal and professional fees |
406 | 392 | ||||||
Accrued interest |
126 | 114 | ||||||
Accrued utilities |
1,436 | 1,322 | ||||||
Accrued repairs and maintenance |
616 | 547 | ||||||
Accrued construction retainer |
1,235 | 582 | ||||||
Accrued phantom stock obligation |
429 | 422 | ||||||
Accrued acquisition related obligations |
507 | 594 | ||||||
Other accrued expenses |
2,093 | 1,482 | ||||||
$ | 7,155 | $ | 5,720 | |||||
6. Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments to manage its exposure to interest rate
fluctuations on its floating rate $150.0 million revolving credit facility maturing August 18,
2012. On July 7, 2008, the Company entered into a three-year Interest Rate Swap Agreement (Swap)
for a notional amount of $40.0 million. The Swap effectively fixes the LIBOR rate at 3.79%.
The Swap was designated as a
cash flow hedge, and the fair value at August 31, 2010 and February
28, 2010 was $(1.3) million, $(0.8) million net of deferred taxes and $(1.8) million, $(1.2) million
net of deferred taxes, respectively. The Swap has been reported on the Consolidated Balance Sheet
as long-term debt with a related deferred charge recorded as a component of other comprehensive
income (loss). During the three and six months ended August 31, 2010, there was a loss of
approximately $353,000 and $715,000, respectively, reclassified from accumulated other
comprehensive income to interest expense related to the Swap.
7. Fair Value Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and long-term debt approximate
fair value because of the short maturity and/or variable rates associated with these instruments.
Derivative financial instruments are recorded at fair value.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants. The hierarchy below lists three levels of fair
value based on the extent to which inputs used in measuring fair value are observable in the
market. The Company categorizes each of its fair value measurements in one of these three levels
based on the lowest level input that is significant to the fair value measurement in its entirety.
These levels are:
Level 1 | Inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. |
Level 2 | Inputs utilize data points that are observable such as quoted prices, interest rates and yield curves. |
Level 3 | Inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. |
10
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
7. Fair Value Financial Instruments-continued
Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes valuation
models with observable market data inputs to estimate the fair value of its Swap.
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of August 31, 2010 and February 28, 2010, segregated by the level of the
valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):
August 31, | Fair Value Measurements | |||||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Derivative liability (Swap) |
$ | (1,272 | ) | $ | | $ | (1,272 | ) | $ | | ||||||
$ | (1,272 | ) | $ | | $ | (1,272 | ) | $ | | |||||||
February 28, | Fair Value Measurements | |||||||||||||||
Description | 2010 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Derivative liability (Swap) |
$ | (1,817 | ) | $ | | $ | (1,817 | ) | $ | | ||||||
$ | (1,817 | ) | $ | | $ | (1,817 | ) | $ | | |||||||
8. Long-Term Debt
Long-term debt consisted of the following as of the dates indicated (in thousands):
August 31, | February 28, | |||||||
2010 | 2010 | |||||||
Revolving credit facility |
$ | 40,000 | $ | 40,000 | ||||
Interest rate swap |
1,272 | 1,817 | ||||||
Long-term debt |
$ | 41,272 | $ | 41,817 | ||||
On August 18, 2009, the Company entered into a Second Amended and Restated Credit Agreement (the
Facility) with a group of lenders led by Bank of America, N.A. (the Lenders). The Facility
provides the Company access to $150.0 million in revolving credit, which the Company may increase
to $200.0 million in certain circumstances, and matures on August 18, 2012. The Facility bears
interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 2.0% to 3.5%
(LIBOR + 2.25% or 2.5% at August 31, 2010 and 2.76% at August 31, 2009), depending on the Companys
total funded debt to EBITDA ratio, as defined. As of August 31, 2010, the Company had $40.0
million of borrowings under the revolving credit line and $2.5 million outstanding under standby
letters of credit arrangements, leaving the Company availability of approximately $107.5 million.
The Facility contains financial covenants, restrictions on capital expenditures, acquisitions,
asset dispositions, and additional debt, as well as other customary covenants, such as the total
funded debt to EBITDA ratio, as defined. The Company is in compliance with these covenants as of
August 31, 2010. The Facility is secured by substantially all of the Companys domestic assets as
well as all capital securities of each Domestic Subsidiary and 65% of all capital securities of
each direct Foreign Subsidiary.
We capitalized $400,000 and $692,000 of interest expense for the three and six months ended August
31, 2010, respectively, relating to the construction of the Agua Prieta facility. There was no
interest expense capitalized for the three and six months ended August 31, 2009.
11
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
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 | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Net earnings |
$ | 12,129 | $ | 9,546 | $ | 25,169 | $ | 16,181 | ||||||||
Foreign currency translation adjustment,
net of deferred taxes |
(354 | ) | (57 | ) | (514 | ) | 973 | |||||||||
Unrealized gain (loss) on derivative instruments,
net of deferred taxes |
101 | 134 | 346 | 94 | ||||||||||||
Comprehensive income |
$ | 11,876 | $ | 9,623 | $ | 25,001 | $ | 17,248 | ||||||||
Changes in shareholders equity accounts for the six months ended August 31, 2010 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, 2010 |
30,053,443 | $ | 75,134 | $ | 121,978 | $ | 206,062 | $ | (13,263 | ) | (4,292,080 | ) | $ | (76,651 | ) | $ | 313,260 | |||||||||||||||
Net earnings |
| | | 25,169 | | | | 25,169 | ||||||||||||||||||||||||
Foreign currency translation,
net of deferred tax
of $295 |
| | | | (514 | ) | | | (514 | ) | ||||||||||||||||||||||
Unrealized gain on
derivative instruments, net
of deferred tax
benefit of $199 |
| | | | 346 | | | 346 | ||||||||||||||||||||||||
Comprehensive income |
25,001 | |||||||||||||||||||||||||||||||
Dividends declared
($.31 per share) |
| | | (8,023 | ) | | | | (8,023 | ) | ||||||||||||||||||||||
Stock based
compensation |
| | 607 | | | | | 607 | ||||||||||||||||||||||||
Exercise of stock
options
and restricted
stock grants |
| | (1,215 | ) | | | 68,034 | 1,215 | | |||||||||||||||||||||||
Stock repurchases |
| | | | | (91 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||
Balance August 31, 2010 |
30,053,443 | $ | 75,134 | $ | 121,370 | $ | 223,208 | $ | (13,431 | ) | (4,224,137 | ) | $ | (75,437 | ) | $ | 330,844 | |||||||||||||||
On October 20, 2008, the Board of Directors authorized the repurchase of up to $5.0 million of
the common stock through a stock repurchase program. Under the board-approved repurchase program,
share purchases may be made from time to time in the open market or through privately negotiated
transactions depending on market conditions, share price, trading volume and other factors, and
such purchases, if any, will be made in accordance with applicable insider trading and other
securities laws and regulations. These repurchases may be commenced or suspended at any time or
from time to time without prior notice. While no shares have been repurchased this fiscal year
under the program, as of August 31, 2010, there have been 96,000 shares of the common stock that
have been purchased under the repurchase program at an average price per share of $10.45.
Unrelated to the stock repurchase program, the Company purchased 91 shares of the common stock
during the six months ended August 31, 2010.
10. Stock Option Plan and Stock Based Compensation
The Company grants stock options and restricted stock to key executives and managerial employees
and non-employee directors. At August 31, 2010, the Company has one stock option plan: the 2004
Long-Term Incentive Plan of Ennis, Inc., as amended and restated as of May 14, 2008, formerly the
1998 Option and Restricted Stock Plan amended and restated as of June 17, 2004 (Plan). The
Company has 250,058 shares of unissued common stock reserved under the plan for issuance to
officers and directors, and supervisory employees of the Company and
12
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
10. Stock Option Plan and Stock Based Compensation-continued
its subsidiaries. The exercise price of each stock 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.
Stock options and restricted stock may be granted at different times during the year and vest
ratably over various periods, from grant date up to five years. The Company uses treasury stock to
satisfy option exercises and restricted stock awards.
The Company recognizes compensation expense for stock options and restricted stock grants on a
straight-line basis over the requisite service period. For the three months ended August 31, 2010
and 2009, the Company included in selling, general and administrative expenses, compensation
expense related to share based compensation of $191,000 ($121,000 net of tax), and $282,000
($177,000 net of tax), respectively. For the six months ended August 31, 2010 and 2009, the
Company had compensation expense related to share based compensation of $607,000 ($385,000 net of
tax), and $528,000 ($332,000 net of tax), respectively.
Stock Options
The Company had the following stock option activity for the six months ended August 31, 2010:
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, 2010 |
250,200 | $ | 12.09 | 6.0 | $ | 1,003 | ||||||||||
Granted |
62,500 | 18.46 | ||||||||||||||
Terminated |
| | ||||||||||||||
Exercised |
| | ||||||||||||||
Outstanding at August 31, 2010 |
312,700 | $ | 13.36 | 6.3 | $ | 1,007 | ||||||||||
Exercisable at August 31, 2010 |
171,450 | $ | 13.53 | 4.1 | $ | 499 | ||||||||||
(a) | Intrinsic value is measured as the excess fair market value of the Companys Common Stock as reported on the New York Stock Exchange over the applicable exercise price. |
The following is a summary of the assumptions used and the weighted average grant-date fair value
of the stock options granted during the six months ended August 31, 2010 and 2009:
August 31, | ||||||||
2010 | 2009 | |||||||
Expected volatility |
34.63 | % | 32.35 | % | ||||
Expected term (years) |
3 | 4 | ||||||
Risk free interest rate |
1.58 | % | 2.01 | % | ||||
Dividend yield |
4.24 | % | 4.74 | % | ||||
Weighted average grant-date fair value |
$ | 3.348 | $ | 1.583 |
There were no stock options exercised during the six months ended August 31, 2010 or August 31,
2009.
13
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
10. Stock Option Plan and Stock Based Compensation-continued
A summary of the status of the Companys unvested stock options at February 28, 2010, and changes
during the six months ended August 31, 2010 is presented below:
Weighted | ||||||||
Average | ||||||||
Number | Grant Date | |||||||
of Options | Fair Value | |||||||
Unvested at February 28, 2010 |
110,000 | $ | 1.64 | |||||
New grants |
62,500 | 3.35 | ||||||
Vested |
(31,250 | ) | 1.79 | |||||
Forfeited |
| | ||||||
Unvested at August 31, 2010 |
141,250 | $ | 2.36 | |||||
As of August 31, 2010, there was $288,000 of unrecognized compensation cost related to unvested
stock options granted under the Plan. The weighted average remaining requisite service period of
the unvested stock options was 2.7 years. The total fair value of shares underlying the options
vested during the six months ended August 31, 2010 was $481,000.
Restricted Stock
The Company had the following restricted stock grant activity for the six months ended August 31,
2010:
Weighted | ||||||||
Average | ||||||||
Number of | Grant Date | |||||||
Shares | Fair Value | |||||||
Outstanding at February 28, 2010 |
91,470 | $ | 15.38 | |||||
Granted |
57,655 | 17.34 | ||||||
Terminated |
| | ||||||
Vested |
(68,034 | ) | 16.79 | |||||
Outstanding at August 31, 2010 |
81,091 | $ | 15.59 | |||||
As of August 31, 2010, the total remaining unrecognized compensation cost related to unvested
restricted stock was approximately $1,035,000. The weighted average remaining requisite service
period of the unvested restricted stock awards was 2.0 years.
11. Employee Benefit Plans
The Company and certain subsidiaries have a noncontributory defined benefit retirement plan
covering approximately 12% 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 the Companys consolidated statements of earnings (in
thousands):
14
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
11. Employee Benefit Plans-continued
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Components of net periodic benefit cost |
||||||||||||||||
Service cost |
$ | 304 | $ | 285 | $ | 607 | $ | 570 | ||||||||
Interest cost |
655 | 685 | 1,309 | 1,370 | ||||||||||||
Expected return on plan assets |
(766 | ) | (606 | ) | (1,531 | ) | (1,212 | ) | ||||||||
Amortization of: |
||||||||||||||||
Prior service cost |
(36 | ) | (36 | ) | (72 | ) | (72 | ) | ||||||||
Unrecognized net loss |
336 | 425 | 672 | 849 | ||||||||||||
Net periodic benefit cost |
$ | 493 | $ | 753 | $ | 985 | $ | 1,505 | ||||||||
The Company is required to make contributions to its defined benefit pension plan. These
contributions are required under the minimum funding requirements of ERISA. For the current fiscal
year ending February 28, 2011, 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 2011. The Company contributed
$3.0 million to its pension plan during fiscal year 2010.
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.
At August 31, 2010, 95,000 shares related to stock options were not included in the diluted
earnings per share computation because their exercise price exceeded the average fair market value
of the Companys stock for the period. At February 28, 2010, 98,950 shares related to stock
options were not included in the diluted earnings per share computation because their exercise
price exceeded the average fair market value of the Companys stock for the period. The following
table sets forth the computation for basic and diluted earnings per share for the periods
indicated:
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
2010 | 2009 | 2010 | 2009 | |||||||||||||
Basic weighted average
common shares outstanding |
25,840,376 | 25,735,950 | 25,820,626 | 25,727,577 | ||||||||||||
Effect of dilutive options |
43,073 | 45,348 | 46,243 | 29,649 | ||||||||||||
Diluted weighted average
common shares outstanding |
25,883,449 | 25,781,298 | 25,866,869 | 25,757,226 | ||||||||||||
Per share amounts: |
||||||||||||||||
Net earnings basic |
$ | 0.47 | $ | 0.37 | $ | 0.97 | $ | 0.63 | ||||||||
Net earnings diluted |
$ | 0.47 | $ | 0.37 | $ | 0.97 | $ | 0.63 | ||||||||
Cash dividends |
$ | 0.155 | $ | 0.155 | $ | 0.310 | $ | 0.310 | ||||||||
13. Segment Information and Geographic Information
The Company operates in two segments the Print Segment and the Apparel Segment.
The Print Segment, which represented 48% of the Companys consolidated net sales for the three and
six months ended August 31, 2010, 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 37
15
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
13. Segment Information and Geographic Information-continued
manufacturing locations throughout the United States in 16 strategically located domestic states.
Approximately 96% 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 Business Forms®, Block Graphics®, Specialized
Printed FormsSM, 360º Custom LabelsSM, Enfusion®, Uncompromised Check
Solutions®, Witt PrintingSM, B&D Litho of ArizonaSM, Genforms® 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 & LabelSM (which provides tags and labels, promotional products and
advertising concept products); Trade Envelopes® and Block Graphics® (which provide custom and
imprinted envelopes) 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 25 banks in the United States as
customers and is actively working on other large banks within the top 25 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 52% of the Companys consolidated net
sales for the three and six months ended August 31, 2010, consists of Alstyle Apparel. 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.
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 and six months ended August 31, 2010 and 2009 were as follows (in
thousands):
Apparel | Consolidated | |||||||||||||||
Segment | Segment | Corporate | Totals | |||||||||||||
Three months ended August 31, 2010: |
||||||||||||||||
Net sales |
$ | 69,146 | $ | 73,888 | $ | | $ | 143,034 | ||||||||
Depreciation |
1,412 | 486 | 187 | 2,085 | ||||||||||||
Amortization of identifiable intangibles |
234 | 366 | | 600 | ||||||||||||
Segment earnings (loss) before
income tax |
11,861 | 11,621 | (4,382 | ) | 19,100 | |||||||||||
Segment assets |
139,475 | 295,270 | 15,905 | 450,650 | ||||||||||||
Capital expenditures |
762 | 9,312 | 10 | 10,084 | ||||||||||||
Three months ended August 31, 2009: |
||||||||||||||||
Net sales |
$ | 73,915 | $ | 63,852 | $ | | $ | 137,767 | ||||||||
Depreciation |
1,488 | 548 | 217 | 2,253 | ||||||||||||
Amortization of identifiable intangibles |
234 | 366 | | 600 | ||||||||||||
Segment earnings (loss) before
income tax |
12,710 | 6,224 | (3,782 | ) | 15,152 | |||||||||||
Segment assets |
148,940 | 254,888 | 24,347 | 428,175 | ||||||||||||
Capital expenditures |
1,147 | 3,973 | 51 | 5,171 |
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
13. Segment Information and Geographic Information-continued
Apparel | Consolidated | |||||||||||||||
Segment | Segment | Corporate | Totals | |||||||||||||
Six months ended August 31, 2010: |
||||||||||||||||
Net sales |
$ | 136,936 | $ | 146,839 | $ | | $ | 283,775 | ||||||||
Depreciation |
2,788 | 987 | 377 | 4,152 | ||||||||||||
Amortization of identifiable intangibles |
468 | 733 | | 1,201 | ||||||||||||
Segment earnings (loss) before
income tax |
24,363 | 24,123 | (8,850 | ) | 39,636 | |||||||||||
Segment assets |
139,475 | 295,270 | 15,905 | 450,650 | ||||||||||||
Capital expenditures |
1,383 | 21,846 | 13 | 23,242 | ||||||||||||
Six months ended August 31, 2009: |
||||||||||||||||
Net sales |
$ | 145,625 | $ | 122,972 | $ | | $ | 268,597 | ||||||||
Depreciation |
3,042 | 1,132 | 435 | 4,609 | ||||||||||||
Amortization of identifiable intangibles |
469 | 733 | | 1,202 | ||||||||||||
Segment earnings (loss) before
income tax |
23,520 | 9,623 | (7,459 | ) | 25,684 | |||||||||||
Segment assets |
148,940 | 254,888 | 24,347 | 428,175 | ||||||||||||
Capital expenditures |
1,354 | 4,326 | 120 | 5,800 |
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 and six months ended is as follows
(in thousands):
United States | Canada | Mexico | Total | |||||||||||||
Three months ended August 31, 2010: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 69,146 | $ | | $ | | $ | 69,146 | ||||||||
Apparel Segment |
66,380 | 6,895 | 613 | 73,888 | ||||||||||||
$ | 135,526 | $ | 6,895 | $ | 613 | $ | 143,034 | |||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 37,378 | $ | | $ | | $ | 37,378 | ||||||||
Apparel Segment |
20,492 | 31 | 23,027 | 43,550 | ||||||||||||
Corporate |
4,230 | | | 4,230 | ||||||||||||
$ | 62,100 | $ | 31 | $ | 23,027 | $ | 85,158 | |||||||||
Three months ended August 31, 2009: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 73,915 | $ | | $ | | $ | 73,915 | ||||||||
Apparel Segment |
58,875 | 4,349 | 628 | 63,852 | ||||||||||||
$ | 132,790 | $ | 4,349 | $ | 628 | $ | 137,767 | |||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 39,774 | $ | | $ | | $ | 39,774 | ||||||||
Apparel Segment |
5,230 | 38 | 5,217 | 10,485 | ||||||||||||
Corporate |
5,019 | | | 5,019 | ||||||||||||
$ | 50,023 | $ | 38 | $ | 5,217 | $ | 55,278 | |||||||||
17
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED AUGUST 31, 2010
13. Segment Information and Geographic Information-continued
United States | Canada | Mexico | Total | |||||||||||||
Six months ended August 31, 2010: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 136,936 | $ | | $ | | $ | 136,936 | ||||||||
Apparel Segment |
133,322 | 12,215 | 1,302 | 146,839 | ||||||||||||
$ | 270,258 | $ | 12,215 | $ | 1,302 | $ | 283,775 | |||||||||
Six months ended August 31, 2009: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 145,625 | $ | | $ | | $ | 145,625 | ||||||||
Apparel Segment |
113,574 | 7,744 | 1,654 | 122,972 | ||||||||||||
$ | 259,199 | $ | 7,744 | $ | 1,654 | $ | 268,597 | |||||||||
14. Supplemental Cash Flow Information
Net cash flows from operating activities reflect cash payments for interest and income taxes as
follows (in thousands):
Six months ended | ||||||||
August 31, | ||||||||
2010 | 2009 | |||||||
Interest paid |
$ | 746 | $ | 1,477 | ||||
Income taxes paid |
$ | 11,984 | $ | 4,591 |
15. Concentrations of Risk
Financial instruments that potentially subject the Company to a concentration of credit risk
principally consist of cash and trade receivables. Cash is placed with high-credit quality
financial institutions. The Companys credit risk with respect to trade receivables is limited in
managements opinion due to industry and geographic diversification. As disclosed on the
Consolidated Balance Sheets, the Company maintains an allowance for doubtful receivables to cover
estimated credit losses associated with accounts receivable.
The Company, for quality and pricing reasons, purchases its paper, cotton and yarn products from a
limited number of suppliers. To maintain its high standard of color control associated with its
apparel products, the Company purchases its dyeing chemicals from limited sources. While other
sources may be available to the Company to purchase these products, they may not be available at
the cost or at the quality the Company has come to expect.
For the purposes of the consolidated statements of cash flows, the Company considers cash to
include cash on hand and in bank accounts. The Federal Deposit Insurance Corporation (FDIC)
insures accounts up to $250,000. At August 31, 2010, cash balances included $10.7 million that was
not federally insured because it represented amounts in individual accounts above the federally
insured limit for each such account. This at-risk amount is subject to fluctuation on a daily
basis. While management does not believe there is significant risk with respect to such deposits,
we cannot be assured that we will not experience losses on our deposits. At August 31, 2010, the
Company had $584,000 in Canadian and $5.1 million in Mexican bank accounts.
16. Assets Held for Sale
As of August 31, 2010, the Company re-classified certain land, building and equipment previously
classified as assets held for sale. Management concluded that sale of these assets within one year
is no longer probable.
17. Subsequent Events
On September 20, 2010, the Board of Directors of Ennis, Inc. declared a 15 1/2 cents a share
quarterly dividend to be payable on November 1, 2010 to shareholders of record on October 11, 2010.
18
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
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, Canada, and
Mexico 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 Apparel Segment produces and sells activewear,
including t-shirts, fleece goods and other wearables. We offer a great selection of high-quality
activewear apparel and hats with a wide variety of styles and colors in sizes ranging from toddler
to 6XL. The apparel line features a wide variety of tees, fleece, shorts and yoga pants, and two
headwear brands.
Business Segment Overview
We are one of the largest providers of business forms to independent distributors in the
United States and are also one of the largest providers of blank t-shirts in North America to the
activewear market. We operate in two reportable segments Print and Apparel. For additional
financial information concerning segment reporting, please see Note 13 of the Notes to the
Consolidated Financial Statements beginning on page 15 included elsewhere herein, which information
is incorporated herein by reference.
Print Segment
The Print Segment, which represented 48% of our consolidated net sales for the three and six
months ended August 31, 2010, 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 37 manufacturing locations throughout the United States in 16
strategically located domestic states. Approximately 96% 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 Business Forms®, Block Graphics®,
Specialized Printed FormsSM, 360º Custom LabelsSM, Enfusion®, Uncompromised
Check Solutions®, Witt PrintingSM, B&D Litho of ArizonaSM,
Genforms® 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 & LabelSM (which provides tags and
labels, promotional products and advertising concept products); Trade Envelopes®, and Block
Graphics® (which provide custom and imprinted envelopes) 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 25 banks in the United States as
customers and is actively working on other large banks within the top 25 tier of banks in the
United States. Adams-McClure sales are generally 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
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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. 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.
Our Print Business Challenges In our Print segment, we are engaged in an industry undergoing
significant changes. Technology advances have made electronic distribution of documents, internet
hosting, digital printing and print on demand valid, cost-effective alternatives to traditional
custom printed documents and customer communications. In addition, the downturn in the economy and
turmoil in the credit markets in 2009 and 2010 have created highly competitive conditions in an
already over-supplied, price-competitive industry. Thus, we believe we are facing the following
challenges in the Print Segment of our business:
| Transformation of our portfolio of products | ||
| Excess production capacity and price competition within our industry | ||
| Economic uncertainties |
The following is a discussion of these business challenges and our strategy for managing their
effect on our print business.
Transformation of our portfolio of products Traditional business documents are essential in order
to conduct business. However, many are being replaced or devalued with advances in digital
technologies, causing steady declines in demand for a large portion of our current product line.
The same digital advances also introduce potential new opportunities for growth for us, such as
print-on-demand services and product offerings that assist customers in their transition to digital
business environments. We currently have many innovative products, such as our recently introduced
healthcare wristbands, secure document solutions, and innovative in-mold label offerings, which
address important business needs, and we feel are positioned for growth. In addition, we will
continue to look for new market opportunities and niches, such as our addition of our envelope
offerings that provide us with an opportunity for growth and differentiate us from our competition.
Transforming our product offerings to continue to provide innovative, valuable solutions to our
customers on a proactive basis will require us to make investments in new and existing technology
and to develop key strategic business relationships.
Excess production capacity and price competition within our industry Paper mills continue to
adjust production capacity through downtime and closures to attempt to keep projected customer
demand in line with the available supply. Due to the limited number of paper mills, paper prices
have been and are expected to remain fairly volatile. In 2010, we saw our material prices
stabilize due to the depressed economic conditions. However, we would expect paper mills to
continue to increase paper prices, especially as the economy strengthens, and have already
experienced paper price increases during the first and second quarters of fiscal 2011.
Despite a competitive marketplace, we have generally been able to pass through increased paper
costs, although it can often take several quarters to push these through due to the custom nature
of our products and/or contractual
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relationships with some of our customers. We expect this trend to continue; however, weak economic
conditions may limit our ability to recover all these costs. In addition, poor economic conditions
have also resulted in increased price competition, due to an already over-supplied market, which
continues to put pressure on selling prices. We attempt to effectively manage and control our
product costs to minimize the effects of the foregoing on our operational results, primarily
through the use of forecasting models, and production and costing models. However, an inherent
risk in this process is that our assumptions are inaccurate, which could have a negative impact on
our reported profit margins.
Economic uncertainties As a result of the recessionary conditions of 2009 and 2010, the economic
climate has been volatile and challenging. Decreased demand and intense price competition resulted
in a significant decline in our revenue during the past fiscal year and continues to impact our
current year operations. Although we have seen slight improvements in some economic indicators
within our markets, unemployment rates and other leading indicators continue to be strained. A
weak job market may continue to present a challenging environment for revenue growth during the
remainder of this fiscal year and into the next. As we cannot predict the pace of the economic
recovery, we will be highly focused on customer retention, expanding our growth targeted products
and continuing to develop our new market niches. In addition, we have proven a history of managing
our costs and wouldnt expect this to change in the future.
Apparel Segment
The Apparel Segment represented 52% of our consolidated net sales for the three and six months
ended August 31, 2010, and operates under the name of Alstyle Apparel (Alstyle). Alstyle markets
high quality knitted activewear (t-shirts, tank tops, and fleece) across all market segments. The
products of Alstyle are standardized shirts manufactured in a variety of sizes and colors.
Approximately 98% of Alstyles revenues are derived from t-shirt sales, with 90% domestic sales.
Alstyles branded product lines are sold under the AAA label, Murina® and Hyland® Headwear brands.
The Apparel Segment operates six manufacturing facilities, one in California, and five in
Mexico. 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 their dyed fabric to outsourced manufacturers in El Salvador for sewing. After
sewing and packaging is completed, the product is shipped to one of Alstyles eight distribution
centers located across the United States, Canada, and Mexico.
Alstyle utilizes a customer-focused internal sales team comprised of 21 sales representatives
assigned to specific geographic territories in the United States, Canada, and Mexico. 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 60% of 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.
The majority of Alstyles sales are branded products, with the remainder customer private
label products. Generally, sales to screen printers and mass marketers are driven by price and the
availability of products, which directly impacts inventory level requirements. 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.
Alstyles sales are seasonal, with sales in the first and second quarters generally being the
highest. The apparel industry is characterized by rapid shifts in fashion, consumer demand and
competitive pressures, resulting in both
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price and demand volatility. However, the imprinted activewear market to which 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 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, and
outsources such products as fleece, hats, shorts, pants and other such activewear apparel from
China, Thailand, Pakistan, and other foreign sources to sell to its customers through its sales
representatives. Alstyle competes with many branded and private label manufacturers of knit apparel
in the United States, Canada, and Mexico, 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. 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.
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 70% of
our cotton and yarn from one supplier.
Our Apparel Business Challenges In our Apparel segment, our market niche is highly competitive,
commodity driven and is generally dominated by a limited number of players. The downturn in the
economy and turmoil in the credit markets in 2009 and 2010 created an over-supply situation which
further increased competitive pressures in this market. Cotton, which represents 40% of our costs,
is a commodity product and subject to volatile fluctuations in price, due to general market
conditions, domestic and international demand, perceived availability, international actions, etc.
As such, our operational costs are subject to significant swings, which may or may not be passed on
to the marketplace due to competitive or economic conditions, competitors pricing strategies, etc.
Thus, we believe we are facing the following challenges in our Apparel Segment business in fiscal
2011:
| Cotton prices | ||
| Completion of our new manufacturing facility | ||
| Economic uncertainties |
Cotton prices Due to shortage of supply and other international factors, domestic cotton prices
are at high levels not seen in years. Whether or not prices will stay at this level for a
sustained period of time is unknown. However, as most manufacturers have already locked in a
significant portion of their cotton buys for this year, a decline in spot cotton prices later this
year would only have a marginal impact on overall calendar year 2010 blended costs. We believe we
are competitive with other companies in the United States apparel industry in negotiating the price
of cotton and as such we do not feel we are at a competitive disadvantage from a cotton cost
perspective. However, it is unknown at this time whether the market will allow the manufacturers
to pass these costs through to customers and whether our competitors will in fact attempt to pass
through these costs.
Completion of our new manufacturing facility We are building a state-of-the art manufacturing
facility in Agua Prieta, Mexico (the Project) and expect operations to begin at this facility
over the next couple of quarters. After the successful implementation of Phase 1 of the Project,
this facility will be able to process 1 million pounds of fabric per week, with the eventual
capacity, after Phase 2 implementation, being between 2.6 million to 2.8 million pounds per week,
as compared to our current capacity of approximately 1.6 million to 1.8 million pounds per week.
During the initial ramp up of this facility, there will be considerable duplicate costs,
inefficiencies, moving costs, etc. that will have a negative impact on the apparel segments fiscal
year 2011 operating results. Although the majority of these costs have not been incurred to date,
our plan is to try to contain these costs in fiscal year 2011, to
the extent possible, through an accelerated ramp up schedule. We expect the negative impact of the
start-up and ramp up costs of this facility will be approximately $6.0 million to $8.0 million.
However, the success of our plan is dependent on meeting key targets and a delayed
start-up/wind-down schedule could add significantly to these costs. Once fully operational, with
sell-through levels of 2.6 million pounds to 2.8 million pounds per week, and with
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anticipated manufacturing efficiency factors being realized, this facility is expected to generate
between $10.0 million to $15.0 million in annualized cost savings per year.
Economic uncertainties As a result of the recessionary conditions of 2009 and 2010, the economic
climate has been volatile and challenging. Decreased demand and intense price competition resulted
in significant declines in our revenue during the past fiscal year. Although we have seen an
increase in our apparel revenues over the past three quarters, and would expect such to continue,
high unemployment, continued housing sector weakness and international instability all could
potentially undermine the fragile state of the current economic recovery which could have a
negative impact on our revenues. As we cannot predict the pace of the economic recovery, we will be
highly focused on customer retention, expanding our growth targeted markets and managing our costs
(both start-up and operational costs).
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.
Our results and financial condition are affected by global and local market conditions, and
competitors pricing strategies, which can adversely affect our sales, margins, and net income.
Our results of operations are substantially affected not only by global economic conditions,
but also by local market conditions, and competitors pricing strategies, which can vary
substantially by market. Unfavorable conditions can depress sales in a given market and may prompt
promotional or other actions that adversely affect our margins, constrain our operating flexibility
or result in charges. Certain macroeconomic events, such as the recent crisis in the financial
markets, could have a more wide-ranging and prolonged impact on the general business environment,
which could also adversely affect us. Whether we can manage these risks effectively depends mainly
on the following:
| Our ability to manage upward pressure on commodity prices and the impact of government actions to manage national economic conditions such as consumer spending, inflation rates and unemployment levels, particularly given the current volatility in the global financial markets; | ||
| The impact on our margins of labor costs given our labor-intensive business model, the trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our manufacturing facilities. |
Declining economic conditions could negatively impact our business.
Our operations are affected by local, national and worldwide economic conditions. Markets in
the United States and elsewhere have been experiencing extreme volatility and disruption due in
part to the financial stresses affecting the liquidity of the banking system and the financial
markets generally. The consequences of a potential or prolonged recession may include a lower level
of economic activity and uncertainty regarding energy prices and the capital and commodity markets.
A lower level of economic activity might result in a decline in demand for our products, which may
adversely affect our revenues and future growth. Instability in the financial markets, as a result
of recession or otherwise, also may affect our cost of capital and our ability to raise capital.
We have significant amounts of cash that are in excess of federally insured limits. With the
current financial environment and the instability of financial institutions, we cannot be assured
that we will not experience losses on our deposits.
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The terms and conditions of our credit facility impose certain restrictions on our operations. We
may not be able to raise additional capital, if needed, for proposed expansion projects.
The terms and conditions of our credit facility impose certain restrictions on our ability to
incur additional debt, make capital expenditures, acquisitions, asset dispositions, as well as
other customary covenants, such as minimum equity level and total funded debt to EBITDA, as
defined. Our ability to comply with the covenants may be affected by events beyond our control,
such as distressed and volatile financial markets which could trigger an impairment charge to our
recorded intangible assets. A breach of any of these covenants could result in a default under our
credit facility. In the event of a default, the bank could elect to declare the outstanding
principal amount of our credit facility, all interest thereon, and all other amounts payable under
our credit facility to be immediately due and payable. As of August 31, 2010, we were in
compliance with all terms and conditions of our credit facility, which matures on August 18, 2012.
We may be required to borrow under our credit facility to provide financing for our new
manufacturing facility in Agua Prieta in the state of Sonora, Mexico. Our ability to access this
facility for these funds will depend upon our future operating performance, which will be affected
by prevailing economic, financial and business conditions and other factors, some of which are
beyond our control. In the event that we arent able to access the facility for the funds needed
and require additional capital, there can be no assurance that we will be able to raise such
capital when needed or at all.
Declining financial market conditions could adversely impact the funding status of our pension
plan.
We maintain a defined-benefit pension plan covering approximately 12% of our employees.
Included in our financial results are pension costs that are measured using actuarial valuations.
The actuarial assumptions used may differ from actual results. In addition, as our pension assets
are invested in marketable securities, severe fluctuations in market values could potentially
negatively impact our funding status, recorded pension liability, and future required minimum
contribution levels.
We may be required to write down goodwill and other intangible assets which could cause our
financial condition and results of operations to be negatively affected in the future.
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. The annual impairment test is based on several
factors requiring judgment. A decline in market conditions may indicate potential impairment of
goodwill. An impairment test was completed for our fiscal year ended February 28, 2010, and we
concluded that no impairment charge was necessary. At August 31, 2010, our goodwill and other
intangible assets were approximately $117.3 million and $77.5 million, respectively.
Digital technologies will continue to erode the demand for our printed business documents.
The increasing sophistication of software, internet technologies, and digital equipment
combined with our customers general preference, as well as governmental influences, for paperless
business environments will continue to reduce the number of printed documents sold. Moreover, the
documents that will continue to coexist with software applications will likely contain less
value-added print content.
Many of our custom-printed documents help companies control their internal business processes
and facilitate the flow of information. These applications will increasingly be conducted over the
internet or through other electronic payment systems. The predominant method of our clients
communication to their customers is by printed information. As their customers become more
accepting of internet communications, our clients may increasingly opt for the less costly
electronic option, which would reduce our revenue. The pace of these trends is
difficult to predict. These factors will tend to reduce the industry-wide demand for printed
documents and require us to gain market share to maintain or increase our current level of
print-based revenue.
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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, and we arent able to increase our market share, our sales and profits will be
affected. 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 August 31, 2010, approximately 12% 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. While we feel we have a good working
relationship with all the unions, 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 or
material shortages 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
three major sources that meet stringent quality and on-time delivery requirements. The largest
supplier provides 70% of Alstyles yarn requirements and has an entire yarn mill dedicated to
Alstyles production. To maintain our high standard of color control associated with our apparel
products, we purchase our dyeing chemicals from limited sources. 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.
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 price increases or other factors that relate to our paper products
could have a material adverse effect on our operating results.
Both cotton and paper are commodities that are subject to periodic increases or decreases in
price, sometimes quite significant. There is no effective market to cost-effectively insulate us
against unexpected changes in price of paper, and corporate negotiated purchase contracts provide
only limited protection against price increases. We generally acquire our cotton yarn under
short-term purchase contracts with our suppliers. While we generally do not
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use derivative instruments, including cotton option contracts, to manage our exposure to movements
in cotton market prices, we believe we are competitive with other companies in the United States
apparel industry in negotiating the price of cotton. When cotton or paper prices are increased, we
attempt to recover the higher costs by raising the prices of our products to our customers. In the
price-competitive marketplaces in which we operate, we may not always be able to pass through any
or all of the higher costs. As such, any significant increase in the price of paper or cotton or
shortages in the availability of either, could have a material adverse effect on our results of
operations.
We face 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 and quality
products to its customers. Even if this strategy is successful, its results may be offset by
reductions in demand or price declines due to competitors pricing strategies. Our Print Segment
also faces the risk of our competition following a strategy of selling their products at or below
cost in order to cover some amount of fixed costs, especially in distressed economic times.
The apparel industry is heavily influenced by general economic cycles.
The apparel industry is cyclical and dependent upon the overall level of discretionary
consumer spending, which changes as regional, domestic and international economic conditions
change. These include, but are not limited to, employment levels, energy costs, interest rates,
tax rates, personal debt levels, and uncertainty about the future. Any deterioration in general
economic conditions that creates uncertainty or alters discretionary consumer spending habits could
reduce our sales, increase our costs of goods sold or require us to significantly modify our
current business practices, and consequently negatively impact our results of operations.
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, Thailand, India, Pakistan and China. 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 trade restrictions and tariffs among the three countries on apparel
products competitive with those of Alstyle. Alstyle
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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 are 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 gives duty-free
benefits to some apparel made in Central America that contains certain fabrics from NAFTA partners
Mexico and Canada. Alstyle outsourced approximately 17% of its sewing to contract manufacturers in
El Salvador, and we do not anticipate that alteration or subsequent repeal of 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 United States 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 were 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.
Our construction of a new apparel manufacturing facility in Mexico is subject to multiple approvals
and uncertainties that could affect our ability to complete the project on schedule or at budgeted
cost.
The construction of our new apparel manufacturing facility in the town of Agua Prieta in the
state of Sonora, Mexico is expected to be completed during fiscal year 2011. The construction of
this new facility will involve numerous regulatory, environmental, political, and legal
uncertainties beyond our control. The cost of the facility and the equipment required for the
facility will require the expenditure of significant amounts of capital that will be financed
through internal cash flows or alternatively through borrowings under our credit facility which are
contingent on us continuing to meet certain financial covenants. Moreover, this facility is being
built to capture anticipated future growth in demand and anticipated savings in production costs.
Should such growth or production savings not materialize, or should the timeline for our transition
be delayed, we may be unable to achieve our expected investment return, which could adversely
affect our results of operations and financial condition.
We are exposed to the risk of non-payment by our customers on a significant amount of our sales.
Our extension of credit involves considerable judgment and is based on an evaluation of each
customers financial condition and payment history. We monitor our credit risk exposure by
periodically obtaining credit reports and updated financials on our customers. We saw a heightened
amount of bankruptcies by our customers,
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especially retailers, during the recent economic downturn. While we maintain an allowance for
doubtful receivables for potential credit losses based upon our historical trends and other
available information, in times of economic turmoil, there is heightened risk that our historical
indicators may prove to be inaccurate. The inability to collect on sales to significant customers
or a group of customers could have a material adverse effect on our results of operations.
Our business incurs significant freight and transportation costs.
We incur significant freight costs to transport our goods, especially as it relates to our
Apparel Segment where we transport our product from our domestic textile plant to foreign sewing
facilities and then to bring our goods back into the United States. In addition, we incur
transportation expenses to ship our products to our customers. Significant increases in the costs
of freight and transportation could have a material adverse effect on our results of operations, as
there can be no assurance that we could pass these increased costs to our customers.
The price of energy is prone to significant fluctuations and volatility.
Our apparel manufacturing operations require high inputs of energy, and therefore changes in
energy prices directly impact our gross profit margins. We are focusing on manufacturing methods
that will reduce the amount of energy used in the production of our apparel products to mitigate
the rising costs of energy. Significant increases in energy prices could have a material adverse
effect on our results of operations, as there can be no assurance that we could pass these
increased costs to our customers given the competitive environment in which our Apparel segment
operates.
We rely on independent contract production for a portion of our apparel production.
We have historically relied on third party suppliers to provide approximately 10% of our cut
and sew apparel production. Any shortage of supply, production disruptions, shipping delays,
regulatory changes, significant price increases from our suppliers, could adversely affect our
apparel operating results.
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, Vice President of Apparel or Chief Financial Officer could have a material adverse
effect on our business, financial condition or 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 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
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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.
Critical Accounting Policies and Estimates
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 obligations, 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 effect 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. As our pension assets are invested in marketable securities,
fluctuations in market values could potentially impact our funding status and associated liability
recorded.
Amounts allocated to amortizable intangible assets are determined based on valuation analysis
for our acquisitions and are amortized over their expected useful lives. We evaluate these amounts
periodically (at least once a year) to determine whether a triggering event has occurred during the
year that would indicate potential impairment.
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 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 long lived assets. 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. At August 31, 2010,
our goodwill and other intangible assets were approximately $117.3 million and $77.5 million,
respectively. 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. However, we cannot predict the
occurrence of future impairments or specific 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, we print and store 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 $2.5 million and $6.0 million of revenue
were recognized under these agreements during the three and six months ended August 31, 2010,
respectively, as compared to $3.4 million and $6.8 during the three and six months ended August 31,
2009.
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
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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.
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.
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Result of Operations
The discussion that follows provides information which we believe is relevant to an
understanding of our results of operations and financial condition. The discussion and analysis
should be read in conjunction with the accompanying consolidated financial statements and notes
thereto. This analysis is presented in the following sections:
| Consolidated Summary this section provides an overview of our consolidated results of operations for the three and six months ended August 31, 2010 and 2009. | ||
| Segment Operating Results this section provides an analysis of our net sales, gross profit margin and operating income by segment. |
Consolidated Summary
Consolidated | Three Months Ended August 31, | Six Months Ended August 31, | ||||||||||||||||||||||||||||||
Statements of Earnings - Data | 2010 | 2009 | 2010 | 2009 | ||||||||||||||||||||||||||||
Net sales |
$ | 143,034 | 100.0 | % | $ | 137,767 | 100.0 | % | $ | 283,775 | 100.0 | % | $ | 268,597 | 100.0 | % | ||||||||||||||||
Cost of goods sold |
103,326 | 72.2 | 101,945 | 74.0 | 201,887 | 71.1 | 201,791 | 75.1 | ||||||||||||||||||||||||
Gross profit margin |
39,708 | 27.8 | 35,822 | 26.0 | 81,888 | 28.9 | 66,806 | 24.9 | ||||||||||||||||||||||||
Selling, general and administrative |
20,276 | 14.2 | 19,952 | 14.5 | 41,523 | 14.7 | 39,411 | 14.7 | ||||||||||||||||||||||||
Gain from disposal of assets |
| | (1 | ) | | | | (3 | ) | | ||||||||||||||||||||||
Income from operations |
19,432 | 13.6 | 15,871 | 11.5 | 40,365 | 14.2 | 27,398 | 10.2 | ||||||||||||||||||||||||
Other expense, net |
(332 | ) | (0.2 | ) | (719 | ) | (0.5 | ) | (729 | ) | (0.2 | ) | (1,714 | ) | (0.6 | ) | ||||||||||||||||
Earnings before income taxes |
19,100 | 13.4 | 15,152 | 11.0 | 39,636 | 14.0 | 25,684 | 9.6 | ||||||||||||||||||||||||
Provision for income taxes |
6,971 | 4.9 | 5,606 | 4.1 | 14,467 | 5.1 | 9,503 | 3.6 | ||||||||||||||||||||||||
Net earnings |
$ | 12,129 | 8.5 | % | $ | 9,546 | 6.9 | % | $ | 25,169 | 8.9 | % | $ | 16,181 | 6.0 | % | ||||||||||||||||
Three Months ended August 31, 2010 compared to Three Months ended August 31, 2009
Net Sales. On a comparable basis our sales increased $5.2 million from $137.8 million for the
three months ended August 31, 2009 to $143.0 million for the current quarter, or 3.8%. Our Print
Segment sales for the quarter decreased $4.8 million, or 6.5%, from $73.9 million for the same
quarter last year to $69.1 million for the current quarter. Our Apparel Segment sales increased
$10.0 million, or 15.6%, from $63.9 million for the same quarter last year to $73.9 million for the
current quarter.
Cost of Goods Sold. Our manufacturing costs increased by $1.4 million or 1.4% over the same
quarter last year while our sales increased over that same period by $5.2 million. Our cost of
goods sold for the three months ended August 31, 2010 was $103.3 million, or 72.2% of sales,
compared to $101.9 million, or 74.0% of sales for the three months ended August 31, 2009. Due to
continued operational improvements, we saw our gross profit margin improve 180 basis points during
the quarter from 26.0% for the three months ended August 31, 2009 to 27.8% for the three months
ended August 31, 2010.
Selling, general and administrative expense. For the three months ended August 31, 2010, our
selling, general and administrative expenses were $20.3 million, or 14.2% of sales, compared to
$20.0 million, or 14.5% of sales for the three months ended August 31, 2009, or an increase of
approximately $0.3 million, or 1.5%. Selling expenses increased generally as a result of increased
sales and related expenses.
Gain/Loss from disposal of assets. The gain from disposal of assets of $1,000 for the three
months ended August 31, 2009 resulted primarily from the sale of manufacturing equipment. There
was no gain or loss from the disposal of assets for the three months ended August 31, 2010.
Income from operations. Our income from operations for the three months ended August 31, 2010
was $19.4 million or 13.6% of sales, compared to $15.9 million, or 11.5% of sales for the three
months ended August 31, 2009,
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an increase of 3.5 million, or 22.0%. The increase in our operational earnings during the current
period was primarily related to our increased sales and gross profit margin.
Other income and expense. Interest expense decreased from $0.7 million for the three months
ended August 31, 2009 to $0.3 million for the three months ended August 31, 2010. During the
current period, we capitalized $0.4 million in interest expense relating to our Agua Prieta, Mexico
construction project. In addition, while we had less debt on average outstanding during the
current period ($52.0 million for the quarter ended August 31, 2009 versus $41.0 million for the
current quarter), this was partially offset by a higher effective borrowing rate due to an increase
in our LIBOR spread rate from 75 bps to 225 bps, which occurred when we renewed our credit facility
last August 2009.
Provision for income taxes. Our effective tax rate was 36.5% for the three months ended August
31, 2010 compared to 37.0% for the three months ended August 31, 2009. The decrease in our
effective tax rate from the prior year primarily is a result of increased benefits associated with
our expected Domestic Production Activities Deduction.
Net earnings. Due to the above factors, our net earnings for the three months ended August
31, 2010 was $12.1 million, or 8.5% of sales, compared to $9.5 million, or 6.9% of sales for the
three months ended August 31, 2009. Our basic earnings per share were $0.47 per share for the
three months ended August 31, 2010 compared to $0.37 per share for the three months ended August
31, 2009. Our diluted earnings per share were $0.47 per share for the three months ended August
31, 2010 compared to $0.37 per share for the three months ended August 31, 2009.
Six Months ended August 31, 2010 compared to Six Months ended August 31, 2009
Net Sales. Net sales for the six months ended August 31, 2010 were $283.8 million compared to
$268.6 million for the six months ended August 31, 2009, an increase of $15.2 million, or 5.7%.
Our Print Segment sales for the period decreased $8.7 million or 6.0% from $145.6 million to $136.9
million for the six months ended August 31, 2009 and 2010, respectively. Our Apparel Segment sales
for the period increased $23.8 million or 19.4% from $123.0 million to $146.8 million for the six
months ended August 31, 2009 and 2010, respectively.
Cost of Goods Sold. Due to continued operational efficiencies, our manufacturing costs only
slightly increased by $0.1 million while our sales increased by $15.2 million as described above.
Our cost of goods sold for the period ended August 31, 2010 was $201.9 million, or 71.1% of sales,
compared to $201.8 million, or 75.1% of sales for the comparable period last year. As a result of
the slight increase in our manufacturing costs during the period as compared to the $15.2 million
increase in our sales, our gross margins, as a percentage of sales, increased from 24.9% for the
six months ended August 31, 2009 to 28.9% for the six months ended August 31, 2010.
Selling, general and administrative expense. For the six months ended August 31, 2010, our
selling, general and administrative expenses were $41.5 million compared to $39.4 million for the
six months ended August 31, 2009, or an increase of approximately $2.1 million or 5.3%. As a
percentage of sales, these expenses remained level at 14.7% for the periods ended August 31, 2009
and 2010.
Gain from disposal of assets. The gain from disposal of assets of $3,000 for the six months
ended August 31, 2009 resulted primarily from the sale of manufacturing equipment. There was no
gain or loss from the disposal of assets for the six months ended August 31, 2010.
Income from operations. Our income from operations for the six months ended August 31, 2010
was $40.4 million, or 14.2% of sales compared to $27.4 million, or 10.2% of sales for the same
period last year, or an increase of $13.0 million, or 47.4%. The increase in our operational
earnings during the current period was primarily related to our increased sales and gross profit
while keeping our selling, general and administrative expenses level on a percentage basis of our
sales.
Other income and expense. Our interest expense decreased from $1.4 million for the six
months ended August 31, 2009 to $0.8 million for the six months ended August 31, 2010. During the
current period, we capitalized $0.7 million in interest expense relating to our Agua Prieta, Mexico
construction project. In addition, while we had less
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debt on average outstanding during the current period ($52.0 million for the six months ended
August 31, 2009 versus $41.0 million for the six months ended August 31, 2010), this was partially
offset by a higher effective borrowing rate due to an increase in our LIBOR spread rate from 75 bps
to 225 bps, which occurred when we renewed our credit facility last August 2009.
Provision for income taxes. Our effective tax rate was 36.5% for the six months ended August
31, 2010 compared to 37.0% for the six months ended August 31, 2008. The decrease in our effective
tax rate from the prior year primarily is a result of increased benefits associated with our
expected Domestic Production Activities Deduction.
Net earnings. Due to the above factors, our net earnings for the six months ended August 31,
2010 was $25.2 million, or 8.9% of sales, compared to $16.2 million, or 6.0% of sales for the six
months ended August 31, 2009. Our basic earnings per share for the six months ended August 31,
2010 was $0.97 per share compared to $0.63 per share for the six months ended August 31, 2009. Our
diluted earnings per share for the six months ended August 31, 2010 was $0.97 per share compared to
$0.63 for the six months ended August 31, 2009.
Segment Operating Results
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
Net Sales by Segment (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Print |
$ | 69,146 | $ | 73,915 | $ | 136,936 | $ | 145,625 | ||||||||
Apparel |
73,888 | 63,852 | 146,839 | 122,972 | ||||||||||||
Total |
$ | 143,034 | $ | 137,767 | $ | 283,775 | $ | 268,597 | ||||||||
Print Segment. Our net sales for our Print Segment, which represented 48% of our consolidated
sales during the three and six months ended August 31, 2010, were approximately $69.1 million and
$136.9 million, respectively, compared to $73.9 million and $145.6 million for the three and six
months ended August 31, 2009, a decrease of $4.8 million and $8.7 million, or 6.5% and 6.0%,
respectively. While we are seeing signs of improvement in the print market, our print sales
continue to be impacted by general economic conditions and the continued contraction of the
traditional business forms market which occurs as customers continue to migrate away from
traditional printed business form products due to technological advancements. The evolution to
digital technology has been transpiring for some time now, and we would expect this to continue
into the future. The turbulent economy has also lead to increased pricing pressures in an already
competitive market. We would expect the print market will continue to improve as the general
economy and domestic unemployment improves.
Apparel Segment. Our net sales for the Apparel Segment, which represented 52% of our
consolidated sales for the three and six months ended August 31, 2010, were approximately $73.9
million and $146.8 million for the same period, compared to approximately $63.9 million and $123.0
million for the three and six months ended August 31, 2009, or an increase of $10.0 million and
$23.8 million, or 15.6% and 19.4%, respectively. The increase in the Apparel Segments net sales
during the period was due to a unit volume sales increase to new and existing customers of
approximately 7.8% (12.3% for the six month period) and an increase in our average unit selling
price of approximately 7.8% (7.1% for the six month period).
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
Gross Profit by Segment (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Print |
$ | 19,475 | $ | 21,205 | $ | 40,011 | $ | 40,106 | ||||||||
Apparel |
20,233 | 14,617 | 41,877 | 26,700 | ||||||||||||
Total |
$ | 39,708 | $ | 35,822 | $ | 81,888 | $ | 66,806 | ||||||||
Print Segment. Our Print gross profit margin (margin) as a percentage of sales was 28.2%
for the three months ended August 31, 2010, as compared to 28.7% for the three months ended August
31, 2009. Even with operational efficiencies and cost control measures in place we had a slight
decrease in our Print margin primarily as
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a result of recent paper price increases a portion of
which we were unable to pass along to our customers. However, for the six months ended August 31,
2010, through our operational improvements, we were able to increase our Print margin, as a
percentage of sales, from 27.5% for the six months ended August 31, 2009 to 29.2% for the six
months ended August 31, 2010.
Apparel Segment. Our Apparel gross profit margin (margin) as a percentage of sales, were
27.4% and 28.5% for the three and six months ended August 31, 2010, as compared to 22.9% and 21.7%
for the three and six months ended August 31, 2009, respectively. Our Apparel Segment margin
increased due to the following: 1) product mix changes, 2) the unit selling price increase
previously discussed and 3) continued operational efficiencies. Due to shortage of supply and
other international factors, current domestic cotton prices are at high levels not seen in years.
Whether or not prices will stay at this level for a sustained period of time is unknown. The
higher cost of cotton may start to impact our operational results next quarter and will continue at
least through the end of this calendar year depending on our ability or inability to pass these
costs through to the market. As we have entered into contracts for the majority of our anticipated
cotton requirements for this calendar year, any decline in spot cotton prices later this year would
only have a marginal impact on our overall calendar year 2010 blended costs. We believe we are
competitive with other companies in the United States apparel industry in negotiating the price of
cotton and as such we do not feel we are at a competitive disadvantage from a cotton perspective.
However, it is unknown at this time whether the market will allow the manufacturers to pass these
costs through and whether our competitors will in fact attempt to pass through these costs.
Three months ended | Six months ended | |||||||||||||||
August 31, | August 31, | |||||||||||||||
Profit by Segment (in thousands) | 2010 | 2009 | 2010 | 2009 | ||||||||||||
Print |
$ | 11,861 | $ | 12,709 | $ | 24,363 | $ | 23,520 | ||||||||
Apparel |
11,621 | 6,224 | 24,123 | 9,623 | ||||||||||||
Total |
23,482 | 18,933 | 48,486 | 33,143 | ||||||||||||
Less corporate expenses |
4,382 | 3,781 | 8,850 | 7,459 | ||||||||||||
Earnings before income taxes |
$ | 19,100 | $ | 15,152 | $ | 39,636 | $ | 25,684 | ||||||||
Print Segment. Our Print profit decreased approximately $0.8 million, or 6.3% from $12.7
million for the three months ended August 31, 2009 to $11.9 million for the three months ended
August 31, 2010 primarily as a result of increased paper prices. As a percent of sales, our Print
profits remained flat at 17.2% for the three month periods then ended. Our Print profit increased
approximately $0.9 million, or 3.8%, from $23.5 million for the six months ended August 31, 2009,
to $24.4 million for the six months ended August 31, 2010. As a percent of sales, our Print
profits were 17.8% for the six months ended August 31, 2010, as compared to 16.2% for the six
months ended August 31, 2009. This increase in profit despite sales decline is primarily a result
of improved margins due to continual operational efficiency improvements.
Apparel Segment. Our Apparel profit increased approximately $5.4 million, or 87.1%, from $6.2
million for the three months ended August 31, 2009 to $11.6 million for the three months ended
August 31, 2010. Our Apparel profit increased approximately $14.5 million, or 151.0%, from $9.6
million for the six months ended August 31, 2009 to $24.1 million for the six months ended August
31, 2010. As a percent of sales, our Apparel profits were 15.7% and 16.4% for the three and six
months ended August 31, 2010, compared to 9.7% and 7.8% for the comparable periods last year. Our
Apparel profit increased primarily as a result of increased sales and improved margins realized
during the period due to the factors previously discussed.
Liquidity and Capital Resources
August 31, | February 28, | |||||||||||
(Dollars in thousands) | 2010 | 2010 | Change | |||||||||
Working Capital |
$ | 116,052 | $ | 116,638 | -0.5 | % | ||||||
Cash |
$ | 16,993 | $ | 21,063 | -19.3 | % |
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Working Capital. Our working capital decreased slightly from $116.6 million at February 28,
2010 to $116.1 million at August 31, 2010. Our current ratio, calculated by dividing our current
assets by our current liabilities remained level at 3.3 to 1.0 at February 28, 2010 and at August
31, 2010.
Six months ended August 31, | ||||||||||||
(Dollars in thousands) | 2010 | 2009 | Change | |||||||||
Net Cash provided by operating activities |
$ | 27,507 | $ | 49,974 | -45.0 | % | ||||||
Net Cash used in investing activities |
$ | (23,238 | ) | $ | (5,792 | ) | 301.2 | % | ||||
Net Cash used in financing activities |
$ | (8,024 | ) | $ | (32,534 | ) | -75.3 | % |
Cash flows from operating activities. Cash provided by operating activities decreased by
$22.5 million from $50.0 million for the six months ended August 31, 2009 to $27.5 million for the
six months ended August 31, 2010. We generated $9.0 million more in cash through our improved
earnings, but used cash during the period to increase our Apparel inventory level by $8.8 million
to coincide with their increased sales. Last year we generated $23.4 million in cash through
reducing our Apparel inventory levels.
Cash flows from investing activities. Cash used for investing activities, which related to
capital expenditures, increased by $17.4 million, from $5.8 million for the six months ended August
31, 2009 to $23.2 million for the six months ended August 31, 2010. The increase in our capital
expenditures relates primarily to our new Apparel manufacturing facility located in Agua Prieta,
Mexico.
Cash flows from financing activities. We used $24.5 million less in cash associated with our
financing activities this period when compared to the same period last year. We repaid debt of
approximately $24.1 million and repurchased $0.4 million of our common stock during the six months
ended August 31, 2009. We did not repay any additional debt during the six months ended August 31,
2010.
Credit Facility. On August 18, 2009, we entered into a Second Amended and Restated Credit
Agreement (the Facility) with a group of lenders led by Bank of America, N.A. (the Lenders).
The Facility provides us access to $150.0 million in revolving credit, which we may increase to
$200.0 million in certain circumstances, and matures on August 18, 2012. The Facility bears
interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 2.0% to 3.5%
(LIBOR + 2.25% or 2.5% at August 31, 2010 and 2.76% at August 31, 2009), depending on our total
funded debt to EBITDA ratio, as defined. As of August 31, 2010, we had $40.0 million of borrowings
under the revolving credit line and $2.5 million outstanding under standby letters of credit
arrangements, leaving us availability of approximately $107.5 million. 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. We are in compliance with all these covenants as of August 31, 2010. The Facility is
secured by substantially all of our domestic assets as well as all capital securities of each
Domestic Subsidiary and 65% of all capital securities of each direct Foreign Subsidiary.
During the six months ended August 31, 2010, we did not pay any additional amounts on other
debt. It is anticipated that the available line of credit is sufficient to cover working capital
requirements for the foreseeable future should it be required.
We use derivative financial instruments to manage our exposures to interest rate fluctuations
on our floating rate $150.0 million revolving credit maturing August 18, 2012. We account for our
derivatives as cash flow hedges and record them as either assets or liabilities in the balance
sheet, measure those instruments at fair value and recognize changes in the fair value of
derivatives in earnings in the period of change, unless the derivative qualifies as an effective
hedge that offsets certain exposures.
On July 7, 2008, we entered into a three-year Interest Rate Swap Agreement (Swap) for a
notional amount of $40.0 million. The Swap effectively fixes the LIBOR rate at 3.79%. The Swap
was designated as a cash flow
hedge, and the fair value at August 31, 2010 was $(1.3) million, $(0.8) million net of
deferred taxes. The Swap was reported on the Consolidated Balance Sheet in long-term debt with a
related deferred charge recorded as a component of other comprehensive income.
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
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 of 1974 (ERISA). We anticipate that we will contribute from $2.0
million to $3.0 million during our current fiscal year. We made contributions of $3.0 million to
our pension plan during fiscal year 2010.
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. Certain of our rebate
programs do, however, require minimum purchase volumes. Management anticipates meeting the
required volumes.
Capital Expenditures We expect our capital requirements for 2011, exclusive of capital
required for possible acquisitions and the construction of our new manufacturing facility in Agua
Prieta, Mexico will be in line with our historical levels of between $4.0 million and $8.0 million.
We would expect to fund these expenditures through existing cash flows. We would expect to
generate sufficient cash flows from our operating activities to cover our operating and other
normal capital requirements for our foreseeable future.
Consistent with previously announced plans to build a new manufacturing facility in the town
of Agua Prieta in the state of Sonora, Mexico, we continue to estimate that the total capital
expenditures associated with this project will be in the range of $45 million to $50 million ($20
million $25 million for building and $20 million $25 million for machinery and equipment). To
date we have spent approximately $39.3 million. We continue to expect that the remaining funding
for this project will be provided by internal cash flow and, as required, by our existing credit
facilities. The facility is expected to commence operations over the next couple of quarters.
Contractual Obligations & Off-Balance Sheet Arrangements There have been no significant
changes in our contractual obligations since February 28, 2010 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 August 31, 2010.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Cash
We have significant amounts of cash at financial institutions that are in excess of federally
insured limits. With the current financial environment and the instability of financial
institutions, we cannot be assured that we will not experience losses on our deposits.
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
facility, totaled $40.0 million at August 31, 2010. We entered into a $40.0 million interest rate
swap designated as a cash flow hedge related to this debt. The LIBOR rate on $40.0 million of debt
is effectively fixed through this interest rate swap agreement. There would be no 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 August 31, 2010.
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
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
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.
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 August 31, 2010 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.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
There are no material pending proceedings, other than ordinary routine litigation incidental
to the business, to which the Company or any of its subsidiaries is a party or of which any of
their property is subject.
Item 1A. Risk Factors
Reference is made to page 23 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, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under the stock repurchase plan which was approved by the Board in October 20, 2008, the
Company was authorized to repurchase up to $5.0 million of the common stock. As of September 24,
2010, the Company repurchased 96,000 shares for an aggregate consideration of approximately $1.0
million. There is a maximum amount of approximately $4.0 million that may yet be used to purchase
shares under the program. Unrelated to the stock repurchase program, the Company purchased 91
shares of the common stock during the six months ended August 31, 2010.
Items 3, 4 and 5 are not applicable and have been omitted
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
Item 6. Exhibits
The following exhibits are filed as part of this report.
Exhibit Number | Description | |
Exhibit 3.1(a)
|
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 3.1(b)
|
Amendment to Articles of Incorporation dated June 17, 2004 incorporated herein by reference to Exhibit 3.1(b) to the Registrants Form 10-K Annual Report for the fiscal year ended February 28, 2007. | |
Exhibit 3.2(a)
|
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 3.2(b)
|
First amendment to Bylaws of the Registrant dated December 20, 2007 incorporated herein by reference to Exhibit 3.1 to the Registrants Form 8-K Current Report filed on December 20, 2007. | |
Exhibit 10.1
|
Employee Agreement between Ennis, Inc. and Keith S. Walters dated December 19, 2008 incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.2
|
Employee Agreement between Ennis, Inc. and Michael D. Magill dated December 19, 2008 incorporated herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.3
|
Employee Agreement between Ennis, Inc. and Ronald M. Graham dated December 19, 2008 incorporated herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.4
|
Employee Agreement between Ennis, Inc. and Richard L. Travis, Jr. dated December 19, 2008 incorporated herein by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.5
|
Employee Agreement between Ennis, Inc. and Irshad Ahmad, Vice President-Apparel Group and CTO dated December 19, 2008 incorporated herein by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.6
|
2004 Long-Term Incentive Plan as amended and restated effective May 14, 2008 incorporated herein by reference to Appendix A of the Registrants Form DEF 14A filed on May 23, 2008. | |
Exhibit 10.7
|
Second Amended and Restated Credit Agreement between Ennis, Inc., each of the other co-borrowers who are parties, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Compass Bank, as Syndication Agent, Wells Fargo Bank, N.A., as Documentation Agent, the other lenders who are parties and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, dated as of August 18, 2009 herein incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on August 20, 2009. | |
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 |
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
FORM 10-Q
FOR THE PERIOD ENDED AUGUST 31, 2010
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 24, 2010 | /s/ Keith S. Walters | |||
Keith S. Walters | ||||
Chairman, Chief Executive Officer and President | ||||
Date: September 24, 2010 | /s/ Richard L. Travis, Jr. | |||
Richard L. Travis, Jr. | ||||
V.P. Finance and CFO, Secretary and Principal Financial and Accounting Officer |
39
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INDEX TO EXHIBITS
Exhibit Number | Description | |
Exhibit 3.1(a)
|
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 3.1(b)
|
Amendment to Articles of Incorporation dated June 17, 2004 incorporated herein by reference to Exhibit 3.1(b) to the Registrants Form 10-K Annual Report for the fiscal year ended February 28, 2007. | |
Exhibit 3.2(a)
|
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 3.2(b)
|
First amendment to Bylaws of the Registrant dated December 20, 2007 incorporated herein by reference to Exhibit 3.1 to the Registrants Form 8-K Current Report filed on December 20, 2007. | |
Exhibit 10.1
|
Employee Agreement between Ennis, Inc. and Keith S. Walters dated December 19, 2008 incorporated herein by reference to Exhibit 10.1 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.2
|
Employee Agreement between Ennis, Inc. and Michael D. Magill dated December 19, 2008 incorporated herein by reference to Exhibit 10.2 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.3
|
Employee Agreement between Ennis, Inc. and Ronald M. Graham dated December 19, 2008 incorporated herein by reference to Exhibit 10.3 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.4
|
Employee Agreement between Ennis, Inc. and Richard L. Travis, Jr. dated December 19, 2008 incorporated herein by reference to Exhibit 10.4 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.5
|
Employee Agreement between Ennis, Inc. and Irshad Ahmad, Vice President-Apparel Group and CTO dated December 19, 2008 incorporated herein by reference to Exhibit 10.5 to the Registrants Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.6
|
2004 Long-Term Incentive Plan as amended and restated effective May 14, 2008 incorporated herein by reference to Appendix A of the Registrants Form DEF 14A filed on May 23, 2008. | |
Exhibit 10.7
|
Second Amended and Restated Credit Agreement between Ennis, Inc., each of the other co-borrowers who are parties, Bank of America, N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, Compass Bank, as Syndication Agent, Wells Fargo Bank, N.A., as Documentation Agent, the other lenders who are parties and Banc of America Securities, LLC, as Sole Lead Arranger and Sole Book Manager, dated as of August 18, 2009 herein incorporated by reference to Exhibit 10.1 to the Registrants Form 8-K filed on August 20, 2009. | |
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 |