ENNIS, INC. - Annual Report: 2009 (Form 10-K)
Table of Contents
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended February 28, 2009
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) |
(Registrant’s Telephone Number, Including Area Code) (972) 775-9801
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |
| Common Stock, par value $2.50 per share | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act.
Yes o No þ
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 Data 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
Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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
The aggregate market value of voting stock held by non-affiliates of the Registrant as of
August 31, 2008 was approximately $375 million. Shares of voting stock held by executive officers,
directors and holders of more than 10% of the outstanding voting stock have been excluded from this
calculation because such persons may be deemed to be affiliates. Exclusion of such shares should
not be construed to indicate that any of such persons possesses the power, direct or indirect, to
control the Registrant, or that any such person is controlled by or under common control with the
Registrant.
The number of shares of the Registrant’s Common Stock, par value $2.50, outstanding at April
30, 2009 was 25,882,277.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the 2009 Annual Meeting of Shareholders are
incorporated by reference into Part III of this Report.
ENNIS, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE PERIOD ENDED FEBRUARY 28, 2009
FORM 10-K
FOR THE PERIOD ENDED FEBRUARY 28, 2009
TABLE OF CONTENTS
Table of Contents
PART I
ITEM 1. BUSINESS
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,”
“we,” “us,” or “our”) print and manufacture a broad line of business forms and other business
products and also manufacture a line of activewear for distribution throughout North America.
Distribution of business products and forms throughout the United States and Canada is primarily
through independent dealers, and with respect to our activewear products, through sales
representatives. This distributor channel encompasses print distributors, stationers, quick
printers, computer software developers, activewear wholesalers, screen printers, and advertising
agencies, among others. The company’s apparel business was acquired on November 19, 2004. The
Apparel Segment produces and sells activewear, including t-shirts, fleece goods and other
wearables. We offer a 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.
On October 5, 2007, we acquired certain assets of B & D Litho, Inc. (“B & D”) headquartered in
Phoenix, Arizona, and certain assets and related real estate of Skyline Business Forms, operating
in Denver, Colorado for $12.5 million. The acquisition of B&D Litho, Inc. did not include the
acquisition of B&D Litho California, Inc., which is mainly a commercial printing operation located
in Ontario, California. No significant liabilities were assumed in the transactions. The combined
sales of the purchased operations were $25.0 million during the most recent twelve month period.
The acquisition will add additional medium and long run multi-part forms, laser cut sheets, jumbo
rolls and mailer products sold through the indirect sales (distributorship) marketplace.
On September 17, 2007, we acquired certain assets of Trade Envelope, Inc. (“Trade”) for $2.7
million. Under the terms of the purchase agreement, we have agreed to pay the former owners of
Trade under a contingent earn-out arrangement over three years for intangibles, subject to certain
set-offs. Trade is an envelope manufacturer (converter) and printer, offering high quality, 1-4
color process with lithograph and flexography capabilities with locations in Tullahoma, Tennessee
and Carol Stream, Illinois. The combined sales of Trade during the most recent twelve month period
were $11.4 million. The acquisition expanded and strengthened the envelope line of products
currently being offered by the Company.
Business Segment Overview
We operate in two business segments, the Print Segment and the Apparel Segment. For additional
financial information concerning segment reporting, please see note 16 of the notes to our
consolidated financial statements beginning on page F-28 included elsewhere herein, which
information is incorporated herein by reference.
Print Segment
The Print Segment, which has represented approximately 56% of our consolidated net sales
during each of the past 3 years, 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 39 manufacturing locations throughout the United States in 16
strategically located domestic states. Approximately 95% of the business products manufactured by
the Print Segment are custom and semi-custom products, constructed in a wide variety of sizes,
colors, and quantities on an individual job basis depending upon the customers’ specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels,
envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and
long runs under the following labels: Ennis®, Royal Business FormsSM, Block Graphics®,
Specialized Printed FormsSM, 360º Custom LabelsSM, Enfusion®, Uncompromised
Check Solutions®, Witt PrintingSM, B&D Litho of ArizonaSM,
GenformsSM and Calibrated FormsSM. The Print Segment also sells the
Adams-McClureSM 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 GFSSM (which
provide financial and security documents).
The Print Segment sells predominantly through private printers and independent distributors.
Northstar and Adams McClure also sell to a small number of direct customers. Northstar has
continued its focus with large
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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 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 other business products through a variety of
independent distributors and distributor groups. While it is not possible, because of the lack of
adequate statistical information, to determine Ennis’ share of the total business products market,
management believes Ennis is one of the largest producers of business forms in the United States
distributing primarily through independent dealers, and that its business forms offering is more
diversified than that of most companies in the business forms industry.
There are a number of competitors that operate in this segment, ranging in size from single
employee-owner operations to multi-plant organizations, such as Cenveo and their resale brand known
as: PrintXcel, Discount Label, and Printegra. We believe our strategic locations and buying power
permit us to compete on a favorable basis within the distributor market on competitive factors,
such as service, quality, and price.
Distribution of business forms and other business products throughout the United States is
primarily done through independent dealers, including business forms distributors, stationers,
printers, computer software developers, and advertising agencies.
Raw materials of the Print Segment principally consist of a wide variety of weights, widths,
colors, sizes, and qualities of paper for business products purchased from a number of major
suppliers at prevailing market prices.
Business products usage in the printing industry is generally not seasonal. General economic
conditions and contraction of the traditional business forms industry are the predominant factor in
quarterly volume fluctuations.
Apparel Segment
The Apparel Segment, which has represented approximately 44% of our consolidated net sales for
the last 3 fiscal years, operates under the name of Alstyle Apparel (“Alstyle”). Alstyle markets
high quality knit basic activewear (t-shirts, tank tops and fleece) across all market segments.
Approximately 97% of Alstyle’s revenues are derived from t-shirt sales, and 92% of those are
domestic sales. Alstyle’s branded product lines are AAA Alstyle Apparel & Activewear®, Gaziani®,
Diamond Star®, Murina®, A Classic®, Tennessee River®, D DriveSM, and Hyland® Headware.
Alstyle is headquartered in Anaheim, California, where it knits domestic cotton yarn and some
polyester fibers into tubular material. The material is dyed at that facility and then shipped to
its plants in Ensenada or Hermosillo, Mexico, where it is cut and sewn into finished goods. Alstyle
also ships their dyed and cut product to outsourced manufacturers in El Salvador and Nicaragua for
sewing. After sewing and packaging is completed, product is shipped to one of Alstyle’s eight
distribution centers located across the United States, Canada, and Mexico. The products of the
Apparel Segment are standardized shirts manufactured in a variety of sizes and colors. The Apparel
Segment operates six manufacturing facilities, one in California, and five in Mexico.
Alstyle utilizes a customer-focused internal sales team comprised of 20 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 Alstyle’s customer base, which consists
primarily of screen printers, embellishers, retailers, and mass marketers.
A majority of Alstyle’s sales are to direct customer branded products, and the remainder
relates to private label and re-labels programs. 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.
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Alstyle’s 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.
Alstyle’s 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 price and demand volatility. However, the imprinted
activewear market that Alstyle sells to is generally “event” driven. Blank t-shirts can be thought
of as “walking billboards” promoting movies, concerts, sports teams, and “image” brands. Still, the
demand for any particular product varies from time to time based largely upon changes in consumer
preferences and general economic conditions affecting the apparel industry.
The 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. Its primary competitors are Delta Apparel (“Delta”), Russell, Hanes and Gildan
Activewear (“Gildan”). While it is not possible to calculate precisely, based on public information
available, management believes that Alstyle is one of the top three providers of blank t-shirts in
North America. Alstyle competes with many branded and private label manufacturers of knit apparel
in the United States, 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. Alstyle’s strategy is to provide the best value to its customers by delivering a
consistent, high-quality product at a competitive price. Alstyle’s competitive disadvantage is that
its brand name, Alstyle Apparel, is not as well known as the brand names of its largest
competitors, such as Gildan, Delta, Hanes, and Russell.
Distribution of the Apparel Segment’s products is through Alstyle’s own staff of sales
representatives and regional distribution centers selling to local distributors who resell to
retailers, or directly to screen printers, embellishers, retailers and mass marketers.
Raw materials of the Apparel Segment principally consist of cotton and polyester yarn
purchased from a number of major suppliers at prevailing market prices, although we purchase more
than 75% of our cotton and yarn from one supplier. Reference is made to — “Risk Factors” of this
Report.
Patents, Licenses, Franchises and Concessions
We do not have any significant patents, licenses, franchises, or concessions.
Intellectual Property
We market our
products under a number of trademarks and tradenames. We have registered
trademarks in the United States for Ennis®, EnnisOnlineSM, A Alstyle Apparel, AA Alstyle
Apparel & Activewear, AAA Alstyle Apparel & Activewear®, American Diamond, Block Graphics®, Classic
by Alstyle Apparel, Diamond Star®, Enfusion®, Executive by Alstyle, Gaziani®, Gaziani Fashions,
Hyland, Hyland® Headware by Alstyle, Murina®, Tennessee River®, 360º Custom LabelsSM,
Admore®, CashManagementSupply.com, Securestar, Northstar®, MICRLink, MICR Connection,
Ennisstores.com, General Financial SupplySM,
Calibrated FormsSM, Trade
Envelopes®, Witt PrintingSM,
GenFormsSM, Royal Business Forms®, Crabar/GBF,
Adams McClureSM, Advertising Concepts, ColorWorx, Uncompromised Check Solutions®, Star
Award Ribbon, and variations of these brands as well as other trademarks. We have similar trademark
registrations internationally. The protection of our trademarks is important to our business. We
believe that our registered and common law trademarks have significant value and these trademarks
are instrumental to our ability to create and sustain demand for our products.
Customers
No single customer accounts for as much as five percent of our consolidated net sales.
Backlog
At February 28, 2009, our backlog of orders believed to be firm was approximately $29,013,000
as compared to approximately $27,134,000 at February 29, 2008.
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Research and Development
While we continuously look for new products to sell through our distribution channel, there
have been no material amounts spent on research and development in the fiscal year ended February
28, 2009.
Environment
We are subject to various federal, state, and local environment laws and regulations
concerning, among other things, wastewater discharges, air emissions and solid waste disposal. Our
manufacturing processes do not emit substantial foreign substances into the environment. We do not
believe that our compliance with federal, state, or local statutes or regulations relating to the
protection of the environment has any material effect upon capital expenditures, earnings or our
competitive position. There can be no assurance, however, that future changes in federal, state, or
local regulations, interpretations of existing regulations or the discovery of currently unknown
problems or conditions will not require substantial additional expenditures. Similarly, the extent
of our liability, if any, for past failures to comply with laws, regulations, and permits
applicable to our operations cannot be determined.
Employees
At February 28, 2009, we had approximately 5,836 employees. Approximately 2,895 of the
employees are in Mexico and approximately 19 employees are in Canada. Of the USA employees,
approximately 353 are represented by three unions, under seven separate contracts expiring at
various times. Of the employees in Mexico, two unions represent substantially all employees with
contracts expiring at various times.
Available Information
We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Securities and Exchange Act of 1934 available free of charge under the Investors Relations page on
our website, www.ennis.com, as soon as reasonably practicable after such reports are electronically
filed with, or furnished to, the Securities and Exchange Commission (“SEC”). Information on our
website is not included as a part of, or incorporated by reference into, this report. Our SEC
filings are also available through the SEC’s website,
www.sec.gov. In addition, the public may read
and copy any materials we file with the SEC at the SEC’s Public Reference Room at 450 Fifth Street,
NW. Washington, DC 20549. Information regarding the operation of the Public Reference Room may be
obtained by calling the SEC at 1-800-SEC-0330.
ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, as well as the other information
included or incorporated by reference in this 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, 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 operating and economic conditions, 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 current 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; |
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| • | 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 for more
than 12 months, due in part to the financial stresses affecting the liquidity of the banking system
and the financial markets generally. During the current quarter this volatility and disruption has
reached unprecedented levels. 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 and cash equivalents 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.
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, etc.
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 (see Risk Factors — In 2009 we were required to write down goodwill and
other intangible assets and we may have similar charges in the future, which could cause our
financial condition and results of operations to be negatively affected in the future — page 7).
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 February 28, 2009 we were in compliance with all terms and
conditions of our credit facility, which matures on March 31, 2010.
We anticipate borrowing under our credit facility to provide financing for our new 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 aren’t 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 for 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, as we saw
during this past fiscal year.
In 2009 we were required to write down goodwill and other intangible assets and we may have similar
charges in the future, 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
allocated to goodwill and other intangible assets is the excess of the purchase price over the net
identifiable assets acquired. The annual impairment test is based on several factors requiring
judgment. Principally a decline in market conditions may indicate potential impairment of
goodwill. In the fourth quarter of fiscal year 2009, we recorded a non-cash impairment charge of
$63.2 million and $4.7 million to goodwill and trademarks, respectively. At February 28, 2009, our
goodwill and other intangible assets were approximately $117.3 million and $81.1 million,
respectively.
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Printed business forms may be superseded over time by “paperless” business forms or otherwise
affected by technological obsolescence and changing customer preferences, which could reduce our
sales and profits.
Printed business forms and checks may eventually be superseded by “paperless” business forms,
which could have a material adverse effect on our business over time. The price and performance
capabilities of personal computers and related printers now provide a cost-competitive means to
print low-quality versions of many of our business forms on plain paper. In addition, electronic
transaction systems and off-the-shelf business software applications have been designed to automate
several of the functions performed by our business form and check products. In response to the
gradual obsolescence of our standardized forms business, we continue to develop our capability to
provide custom and full-color products. If new printing capabilities and new product introductions
do not continue to offset the obsolescence of our standardized business forms products, there is a
risk that the number of new customers we attract and existing customers we retain may diminish,
which could reduce our sales and profits. Decreases in sales of our standardized business forms and
products due to obsolescence could also reduce our gross margins. This reduction could in turn
adversely impact our profits, unless we are able to offset the reduction through the introduction
of new high margin products and services or realize cost savings in other areas.
Our distributors face increased competition from various sources, such as office supply
superstores. Increased competition may require us to reduce prices or to offer other incentives in
order to enable our distributors to attract new customers and retain existing customers.
Low price, high value office supply chain stores offer standardized business forms, checks,
and related products. Because of their size, these superstores have the buying power to offer many
of these products at competitive prices. These superstores also offer the convenience of “one-stop”
shopping for a broad array of office supplies that our distributors do not offer. In addition,
superstores have the financial strength to reduce prices or increase promotional discounts to
expand market share. This could result in us reducing our prices or offering incentives in order to
enable our distributors to attract new customers and retain existing customers.
Technological improvements may reduce our competitive advantage over some of our competitors, which
could reduce our profits.
Improvements in the cost and quality of printing technology are enabling some of our
competitors to gain access to products of complex design and functionality at competitive costs.
Increased competition from these competitors could force us to reduce our prices in order to
attract and retain customers, which could reduce our profits.
We could experience labor disputes that could disrupt our business in the future.
As of February 28, 2009, 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. There can be no assurance that any future
labor negotiations will prove successful, which may result in a significant increase in the cost of
labor, or may break down and result in the disruption of our business or operations.
We obtain our raw materials from a limited number of suppliers and any disruption in our
relationships with these suppliers, or any substantial increase in the price of raw materials,
material shortages, or an increase in transportation costs, could have a material adverse effect on
us.
Cotton yarn is the primary raw material used in Alstyle’s 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 more than 75% of Alstyle’s yarn requirements and has an entire yarn mill
dedicated to Alstyle’s production. If Alstyle’s relations with its suppliers are disrupted, Alstyle
may not be able to enter into arrangements with substitute suppliers on terms as favorable as its
current terms and our results of operations could be materially adversely affected.
Alstyle generally acquires its cotton yarn under short-term purchase orders with its
suppliers, and has exposure to swings in cotton market prices. Alstyle does not use derivative
instruments, including cotton option contracts, to manage its exposure to movements in cotton
market prices. Alstyle may use such derivative instruments in the future. We believe we are
competitive with other companies in the United States apparel industry in negotiating the price of
cotton. However, any significant increase in the price of cotton or shortages in the availability
of cotton as the result of farmers switching to alternative crops, such as corn, could have a material
adverse effect on our results of operations.
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Freight costs also represent a significant cost to our apparel company. We incur freight costs
associated with the delivery of yarn to our manufacturing facility in Anaheim, CA. We also incur
freight costs associated with transporting our knit and dyed products to Mexico and our final sewn
products from Mexico to our various distribution centers. Any significant increase in
transportation costs due to increased fuel costs, etc. could have a material impact on our reported
apparel margins.
We also purchase our paper products from a limited number of sources, which meet stringent
quality and on-time delivery standards under long-term contracts. However, fluctuations in the
quality of our paper, unexpected price increases, etc. could have a material adverse effect on our
operating results.
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 Alstyle’s products is dependent on the general demand for shirts and the
availability of alternative sources of supply. Alstyle’s strategy in this market environment is to
be a low cost producer and to differentiate itself by providing quality service 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, Nicaragua, Honduras, Pakistan, China, and Southeast
Asia. Alstyle’s foreign operations could be subject to unexpected changes in regulatory
requirements, tariffs, and other market barriers and political and economic instability in the
countries where it operates. The impact of any such events that may occur in the future could
subject Alstyle to additional costs or loss of sales, which could adversely affect 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 has been faced with
significant U.S. government import restrictions.
Foreign producers of apparel often have significant labor cost advantages. Given the number of
these foreign producers, the substantial elimination of import protections that protect domestic
apparel producers could materially adversely affect Alstyle’s business. The extent of import
protection afforded to domestic apparel producers has been, and is likely to remain, subject to
considerable political considerations.
The North American Free Trade Agreement (NAFTA) became effective on January 1, 1994 and has
created a free-trade zone among Canada, Mexico, and the United States. NAFTA contains a rule of
origin requirement that products be produced in one of the three countries in order to benefit from
the agreement. NAFTA has phased out all trade restrictions and tariffs among the three countries on
apparel products competitive with those of Alstyle. Alstyle performs substantially all of its cutting and sewing in five plants located in Mexico in order
to take advantage of the NAFTA benefits. Subsequent repeal or alteration of NAFTA could adversely
affect our business.
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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 agreement’s 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 sources approximately 20% of its sewing to a contract manufacturer 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 have been removed on knitted shirts from China.
The elimination of quotas and the reduction of tariffs under the WTO may result in increased
imports of certain apparel products into North America. In May 2005, quotas on three categories of
clothing imports, including knitted shirts, from China were re-imposed. A reduction of import
quotas and tariffs could make Alstyle’s 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 planned expansion of facilities is subject to multiple approvals and uncertainties that could
affect our ability to complete the project on schedule or at budgeted cost.
On June 26, 2008, we announced plans to build a new apparel manufacturing facility in the town
of Agua Prieta in the state of Sonora, Mexico. 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 required to be financed through internal cash flows or
alternatively additional debt, which given the current financial environment there can be no
assurances that such funds will be available. 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 financial non-performance 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
customer’s financial condition and payment history. We monitor our credit risk exposure by
periodically obtaining credit reports and updated financials on our customers. Recently we have
seen a heightened amount of bankruptcies in our customers, especially retailers, and we believe
this trend may continue given the current economic environment. We maintain an allowance for
doubtful accounts for potential credit losses based upon our historical trends and other available
information. However, 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 off-shore 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.
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Transportation costs have increased significantly during fiscal year 2008 and 2009, and, accordingly, had an unfavorable impact on our
results of operations. Further 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. Energy costs significantly increased
during fiscal year 2008 and 2009, and thus had an unfavorable impact on our results of operations.
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. However, further
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.
We rely on independent contract production for a portion of our apparel production.
We have historically relied on third party suppliers to provide a portion of our 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, Chief Financial Officer, and our Chief Technology Officer/Vice President Apparel
Division, could have a material adverse effect on our business, financial condition and results of
operations. Although we maintain employment agreements with these individuals, it cannot be assured
that the services of such individuals will continue.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable
ITEM 2. PROPERTIES
Our corporate headquarters are located in Midlothian, Texas. We operate manufacturing and
distribution facilities throughout the United States and in Mexico and Canada. See the table below
for additional information on our locations.
All of the Print Segment properties are used for the production, warehousing and shipping of
the following: business forms, flexographic printing, advertising specialties and
Post-it® Notes (Wolfe City, Texas); presentation products (Macomb, Michigan and Anaheim,
California); and printed and electronic promotional media (Denver, Colorado); envelopes (Portland,
Oregon; Columbus, Kansas; Tullahoma, Tennessee and Carol Stream, Illinois); financial forms
(Minneapolis/St. Paul, Minnesota; Nevada, Iowa and Bridgewater, Virginia) and other business
products. The Apparel Segment properties are used for the manufacturing or distribution of T-shirts
and other activewear apparel.
The plants are being operated at normal production capacity. Capacity fluctuates with market
demands and depends upon the product mix at any given point in time. Equipment is added as existing
machinery becomes obsolete or not repairable, and as new equipment becomes necessary to meet market
demands; however, at any given time, these additions and replacements are not considered to be
material additions to property, plant and equipment, although such additions or replacements may
increase a plant’s efficiency or capacity.
All of the foregoing facilities are considered to be in good condition. The Company does not
anticipate that substantial expansion, refurbishing, or re-equipping will be required in the near
future.
All of the rented property is held under leases with original terms of one or more years,
expiring at various times from March 2009 through March 2014. No difficulties are presently
foreseen in maintaining or renewing such leases as they expire.
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The accompanying list contains each of our owned and leased locations:
| Approximate Square Footage | ||||||||||
| Location | General Use | Owned | Leased | |||||||
Print Segment |
||||||||||
Ennis, Texas
|
Three Manufacturing Facilities | 325,118 | — | |||||||
Chatham, Virginia
|
Two Manufacturing Facilities | 127,956 | — | |||||||
Paso Robles, California
|
Manufacturing | 94,120 | — | |||||||
DeWitt, Iowa
|
Two Manufacturing Facilities | 95,000 | — | |||||||
Knoxville, Tennessee
|
Manufacturing | 48,057 | — | |||||||
Ft, Scott, Kansas
|
Manufacturing | 86,660 | — | |||||||
Portland, Oregon
|
Manufacturing | — | 139,330 | |||||||
Wolfe City, Texas
|
Two Manufacturing Facilities | 119,259 | — | |||||||
Moultrie, Georgia
|
Manufacturing | 25,000 | — | |||||||
Coshocton, Ohio
|
Manufacturing | 24,750 | — | |||||||
Macomb, Michigan
|
Manufacturing | 56,350 | — | |||||||
Anaheim, California
|
Three Manufacturing Operations | — | 63,750 | |||||||
Bellville, Texas
|
Manufacturing | 70,196 | — | |||||||
Denver, Colorado
|
Four Manufacturing Facilities & Warehouse | 60,000 | 105,200 | |||||||
Oklahoma City. Oklahoma
|
Sales Office | — | 460 | |||||||
San Antonio, Texas
|
Manufacturing | 47,426 | — | |||||||
Brooklyn Park, Minnesota
|
Manufacturing | 94,800 | — | |||||||
Roseville, Minnesota
|
Manufacturing | — | 42,500 | |||||||
Arden Hills, Minnesota
|
Warehouse | — | 31,684 | |||||||
Nevada, Iowa
|
Manufacturing | 232,000 | — | |||||||
Bridgewater, Virginia
|
Manufacturing | — | 27,000 | |||||||
Columbus, Kansas
|
Manufacturing | 201,000 | — | |||||||
Leipsic, Ohio
|
Manufacturing | 83,216 | — | |||||||
El Dorado Springs, Missouri
|
Manufacturing | 70,894 | — | |||||||
Princeton, Illinois
|
Manufacturing | — | 74,340 | |||||||
Arlington, Texas
|
Manufacturing | 69,935 | ||||||||
Mechanicsburg, Pennsylvania
|
Warehouse | — | 7,500 | |||||||
Rancho Cordova, California
|
Administrative Offices | — | 108 | |||||||
Tullahoma, Tennessee
|
Manufacturing | 24,950 | ||||||||
Caledonia, New York
|
Manufacturing | 138,730 | — | |||||||
Sun City, California
|
Manufacturing | 52,617 | — | |||||||
Sparks, Nevada
|
Subleased | — | 18,589 | |||||||
Carol Stream, Illinois
|
Manufacturing | 14,400 | ||||||||
Phoenix, Arizona
|
Manufacturing and Warehouse | 82,800 | ||||||||
| 2,148,034 | 607,661 | |||||||||
Apparel Segment |
||||||||||
Anaheim, California
|
Office and Distribution Center | — | 200,000 | |||||||
Anaheim, California
|
Manufacturing* | — | 450,315 | |||||||
Chicago, Illinois
|
Distribution Center | — | 120,000 | |||||||
Atlanta, Georgia
|
Distribution Center | — | 31,958 | |||||||
Carrollton, Texas
|
Distribution Center | — | 26,136 | |||||||
Bensalem, Pennsylvania
|
Distribution Center | — | 60,848 | |||||||
Mississauga, Canada
|
Distribution Center | — | 53,982 | |||||||
Los Angeles, California
|
Distribution Center | — | 31,600 | |||||||
Ensenada, Mexico
|
Two Manufacturing Facilities | 112,622 | 53,820 | |||||||
Ensenada, Mexico
|
Car Parking | — | 22,000 | |||||||
Ensenada, Mexico
|
Warehouse | — | 2,583 | |||||||
Hermosillo, Mexico
|
Administrative Offices | — | 215 | |||||||
Hermosillo, Mexico
|
Three Manufacturing Facilities | — | 126,263 | |||||||
Hermosillo, Mexico
|
Yard Space | — | 19,685 | |||||||
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| Approximate Square Footage | ||||||||||
| Location | General Use | Owned | Leased | |||||||
Hermosillo, Mexico
|
Vacant | — | 8,432 | |||||||
Hermosillo, Mexico
|
Storage for Machines | — | 1,640 | |||||||
| 112,622 | 1,209,477 | |||||||||
Corporate Offices |
||||||||||
Ennis, Texas
|
Administrative Offices | 9,300 | — | |||||||
Midlothian, Texas
|
Executive and Administrative Offices | 28,000 | — | |||||||
| 37,300 | — | |||||||||
| Totals | 2,297,956 | 1,817,138 | ||||||||
| * | Apparel Segment — 146,100 square feet of the manufacturing facilities in Anaheim, California is subleased. Our lease expired in March 2009. Lease negotiations currently envision landlord dealing directly with subleased space of 146,100 square feet and remaining 304,215 square fee being subject to two year lease. |
ITEM 3. LEGAL PROCEEDINGS
From time to time we are involved in various litigation matters arising in the ordinary course
of our business. We do not believe the disposition of any current matter will have a material
adverse effect on our consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth quarter of fiscal
2009.
PART II
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Our common stock is traded on the New York Stock Exchange (“NYSE”) under the trading symbol
“EBF”. The following table sets forth for the periods indicated: the high and low sales prices, the
common stock trading volume as reported by the New York Stock Exchange and dividends per share paid
by the Company.
| Common Stock | Dividends | |||||||||||||||
| Trading Volume | per share of | |||||||||||||||
| Common Stock Price Range | (number of shares | Common | ||||||||||||||
| High | Low | in thousands) | Stock | |||||||||||||
Fiscal Year Ended February 28, 2009 |
||||||||||||||||
First Quarter |
$ | 19.18 | $ | 14.31 | 5,173 | $ | 0.155 | |||||||||
Second Quarter |
19.92 | 13.55 | 4,324 | $ | 0.155 | |||||||||||
Third Quarter |
18.16 | 8.54 | 5,357 | $ | 0.155 | |||||||||||
Fourth Quarter |
13.37 | 8.01 | 4,412 | $ | 0.155 | |||||||||||
Fiscal Year Ended February 29, 2008 |
||||||||||||||||
First Quarter |
$ | 28.12 | $ | 22.41 | 6,700 | $ | 0.155 | |||||||||
Second Quarter |
25.53 | 18.36 | 8,183 | $ | 0.155 | |||||||||||
Third Quarter |
22.92 | 16.46 | 5,442 | $ | 0.155 | |||||||||||
Fourth Quarter |
20.28 | 14.93 | 6,018 | $ | 0.155 | |||||||||||
The last reported sale price of our common stock on NYSE on April 30, 2009 was $9.00. As of that
date, there were approximately 1,133 shareholders of record of our common stock. Cash dividends may
be paid or repurchases of our common stock may be made from time-to-time, as our Board of Directors
deems appropriate, after considering our growth rate, operating results, financial condition, cash
requirements, restrictive lending covenants, and such other factors as the Board of Directors may
deem appropriate. On October 20, 2008, our Board of Directors authorized the repurchase of up to
$5.0 million of our 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
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regulations. These repurchases may be commenced or
suspended at any time or from time to time without prior notice. As of February 28, 2009, there
were 52,700 shares of our common stock that had been purchased under the repurchase program at an
average price per share of $11.36.
See Item 12 — “Security Ownership of Beneficial Owners and Management and Related Stockholder
Matters” section of this Report for information relating to our equity compensation plans.
Stock Performance Graph
The graph below matches our cumulative 5-year total shareholder return on common stock with
the cumulative total returns of the S & P 500 index and the Russell 2000 index. The graph tracks
the performance of a $100 investment in the our common stock and in each of the indexes (with the
reinvestment of all dividends) from February 29, 2004 to February 28, 2009.
COMPARISON
OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Ennis, Inc., The S&P 500 Index
And The Russell 2000 Index
Among Ennis, Inc., The S&P 500 Index
And The Russell 2000 Index
| * | $100 Invested on 2/29/04 in stock or index, including reinvestment of dividends. Fiscal year ending February 28 or February 29. | |
| Copyright© 2009 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. |
| 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | |||||||||||||||||||
Ennis, Inc. |
100.00 | 104.90 | 125.47 | 169.02 | 107.63 | 57.76 | ||||||||||||||||||
S&P 500 |
100.00 | 106.98 | 115.96 | 129.84 | 125.17 | 70.95 | ||||||||||||||||||
Russell 2000 |
100.00 | 109.53 | 127.70 | 140.30 | 122.85 | 70.78 | ||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future
stock price performance.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data has been derived from our audited consolidated financial
statements. Our consolidated financial statements and notes thereto as of February 28, 2009 and
February 29, 2008, and for the three years in the period ended February 28, 2009, and the reports
of Grant Thornton LLP are included in Item 15 of this Report. The selected financial data should be
read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and the consolidated financial statements and notes thereto included in Item
15 of this Report.
| Fiscal Years Ended | ||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||
| (Dollars and shares in thousands, except per share amounts) | ||||||||||||||||||||
Operating results: |
||||||||||||||||||||
Net sales |
$ | 584,029 | $ | 610,610 | $ | 584,713 | $ | 559,397 | $ | 365,353 | ||||||||||
Gross profit |
143,476 | 163,874 | 156,322 | 151,961 | 93,217 | |||||||||||||||
SG&A expenses |
86,217 | 88,851 | 83,121 | 79,824 | 53,560 | |||||||||||||||
Impairment of goodwill and trademarks |
67,851 | — | — | — | — | |||||||||||||||
Net earnings (loss) |
(32,768 | ) | 44,590 | 41,601 | 40,537 | 22,959 | ||||||||||||||
Earnings (loss) and dividends per share: |
||||||||||||||||||||
Basic |
$ | (1.27 | ) | $ | 1.74 | $ | 1.63 | $ | 1.59 | $ | 1.21 | |||||||||
Diluted |
(1.27 | ) | 1.72 | 1.62 | 1.58 | 1.19 | ||||||||||||||
Dividends |
0.62 | 0.62 | 0.62 | 0.62 | 0.62 | |||||||||||||||
Weighted average shares outstanding: |
||||||||||||||||||||
Basic |
25,707 | 25,623 | 25,531 | 25,453 | 18,936 | |||||||||||||||
Diluted |
25,790 | 25,860 | 25,759 | 25,728 | 19,260 | |||||||||||||||
Financial Position: |
||||||||||||||||||||
Working capital |
$ | 138,374 | $ | 133,993 | $ | 102,269 | $ | 94,494 | $ | 70,247 | ||||||||||
Current assets |
182,254 | 185,819 | 151,516 | 158,455 | 151,630 | |||||||||||||||
Total assets |
436,380 | 513,131 | 478,228 | 494,401 | 497,246 | |||||||||||||||
Current liabilities |
43,880 | 51,826 | 49,247 | 63,961 | 81,383 | |||||||||||||||
Long-term debt |
76,185 | 90,710 | 88,971 | 102,916 | 112,342 | |||||||||||||||
Total liabilities |
144,374 | 164,652 | 161,825 | 197,066 | 225,515 | |||||||||||||||
Equity |
292,006 | 348,479 | 316,403 | 297,335 | 271,731 | |||||||||||||||
Current ratio |
4.15 to 1.0 | 3.59 to 1.0 | 3.08 to 1.0 | 2.48 to 1.0 | 1.86 to 1.0 | |||||||||||||||
Long-term debt to equity |
.26 to 1.0 | .26 to 1.0 | .28 to 1.0 | .35 to 1.0 | .41 to 1.0 | |||||||||||||||
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 Management’s Discussion and
Analysis of Financial Condition and Results of Operations, constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995. We believe these
forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge
of Ennis. All such statements involve risks and uncertainties, and as a result, actual results
could differ materially from those projected, anticipated, or implied by these statements. Such
forward-looking statements involve known and unknown risks, including but not limited to, general
economic, business and labor conditions; the ability to implement our strategic initiatives; the
ability to be profitable on a consistent basis; dependence on sales that are not subject to
long-term contracts; dependence on suppliers; the ability to recover the rising cost of key raw
materials in markets that are highly price competitive; the ability to meet customer demand for
additional value-added products and services; the ability to timely or adequately respond to
technological changes in the industry; the impact of the Internet and other electronic media on the
demand for forms and printed materials; postage rates; the ability to manage operating expenses;
the ability to manage financing costs and interest rate risk; a decline in business volume and
profitability could result in 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.
Results of Operations
| Consolidated | Fiscal Years Ended | |||||||||||||||||||||||
| Statements of Earnings – Data | 2009 | 2008 | 2007 | |||||||||||||||||||||
Net sales |
$ | 584,029 | 100.0 | % | $ | 610,610 | 100.0 | % | $ | 584,713 | 100.0 | % | ||||||||||||
Cost of goods sold |
440,553 | 75.4 | 446,736 | 73.2 | 428,391 | 73.3 | ||||||||||||||||||
Gross profit |
143,476 | 24.6 | 163,874 | 26.8 | 156,322 | 26.7 | ||||||||||||||||||
Selling, general and administrative |
86,217 | 14.8 | 88,851 | 14.5 | 83,121 | 14.2 | ||||||||||||||||||
Impairment of goodwill and
trademarks |
67,851 | 11.6 | — | 0.0 | — | 0.0 | ||||||||||||||||||
Gain from disposal of assets |
(514 | ) | (0.1 | ) | (757 | ) | (0.1 | ) | (258 | ) | 0.0 | |||||||||||||
Income (loss) from operations |
(10,078 | ) | (1.7 | ) | 75,780 | 12.4 | 73,459 | 12.5 | ||||||||||||||||
Other expense, net |
(2,981 | ) | (0.5 | ) | (5,995 | ) | (1.0 | ) | (7,094 | ) | (1.2 | ) | ||||||||||||
Earnings (loss) before income taxes |
(13,059 | ) | (2.2 | ) | 69,785 | 11.4 | 66,365 | 11.3 | ||||||||||||||||
Provision for income taxes |
19,709 | 3.4 | 25,195 | 4.1 | 24,764 | 4.2 | ||||||||||||||||||
Net earnings (loss) |
$ | (32,768 | ) | -5.6 | % | $ | 44,590 | 7.3 | % | $ | 41,601 | 7.1 | % | |||||||||||
Critical Accounting Policies and Judgments
In preparing our consolidated financial statements, we are required to make estimates and
assumptions that affect the disclosures and reported amounts of assets and liabilities at the date
of the consolidated financial statements and the reported amounts of revenues and expenses during
the reporting period. We evaluate our estimates and judgments on an ongoing basis, including those
related to allowance for doubtful receivables, inventory valuations, property, plant and equipment,
intangible assets, pension plan, accrued liabilities and income taxes. We base our
estimates and judgments on historical experience and on various other factors that we believe
to be reasonable under the circumstances. Actual results may differ materially from these estimates
under different assumptions or conditions. We believe the following accounting policies are the
most critical due to their affect on our more significant estimates and judgments used in
preparation of our consolidated financial statements.
We maintain a defined-benefit pension plan for employees. Included in our financial results
are pension costs that are measured using actuarial valuations. The actuarial assumptions used may
differ from actual results. 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 intangibles 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 the value has been impaired by events
occurring during the fiscal year.
We exercise judgment in evaluating our long-lived assets for impairment. We assess the
impairment of long-lived assets that include other intangible assets, goodwill, and property,
plant, and equipment annually or whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. In performing tests of 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. In the fourth quarter
of fiscal year 2009, we recorded a non-cash impairment charge of $63.2 million and $4.7 million of
goodwill and trademarks, respectively. We believe our businesses will generate sufficient
undiscounted cash flow to 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 impairment triggering events nor the impact such events might have on our reported asset values.
See Risk Factor - “In 2009 we were required to write down goodwill and other
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intangible assets and we may have similar charges in the future, which could cause our financial
condition and results of operations to be negatively affected in the future” on page 7 of the
Report for further discussion.
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 $18.3 million, $20.2 million, and $20.1
million of revenue were recognized under these agreements during fiscal years ended February 28,
2009, February 29, 2008, and February 28, 2007 respectively.
Derivative instruments are recognized on the balance sheet at fair value as determined under
Financial Accounting Standard No. 157, “Fair Value Measurements”. Changes in fair values of
derivatives are accounted for based upon their intended use and designation. When utilized,
interest rate swaps are held for purposes other than trading. The Company utilized swap agreements
related to its term and revolving loans to effectively fix the interest rate for a specified
principal amount. The swaps were designated as cash flow hedges, and the after-tax effect of the
mark-to-market valuation that relates to the effective amount of derivative financial instruments
was recorded as an adjustment to accumulated other comprehensive income with the offset included in
long-term debt. We entered into a $40.0 million interest rate swap designated as a cash flow hedge
related to our variable rate financial instruments. The fair value of the interest rate swap
agreement recorded in the consolidated balance sheet, excluding accrued interest, at February 28,
2009, was a liability of approximately $2.2 million. There were no derivatives, swaps or deferred
gains or losses at February 29, 2008.
We maintain an allowance for doubtful receivables to reflect estimated losses resulting from
the inability of customers to make required payments. On an on-going basis, we evaluate the
collectability of accounts receivable based upon historical collection trends, current economic
factors, and the assessment of the collectability of specific accounts. We evaluate the
collectability of specific accounts using a combination of factors, including the age of the
outstanding balances, evaluation of customers’ current and past financial condition and credit
scores, recent payment history, current economic environment, discussions with our project
managers, and discussions with the customers directly.
Our inventories are valued at the lower of cost or market. We regularly review inventory
values on hand, using specific aging categories, and write down inventory deemed obsolete and/or
slow-moving based on historical usage and estimated future usage to its estimated market value. As
actual future demand or market conditions may vary from those projected by management, adjustments
to inventory valuations may be required.
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each jurisdiction in which we operate. This process involves
estimating our actual current tax exposure together with assessing temporary differences resulting
from different treatment of items for tax and accounting purposes. These differences result in
deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must
then assess the likelihood that our deferred tax assets will be recovered from future taxable
income. To the extent we believe that recovery is not likely, we must establish a valuation
allowance. To the extent we establish a valuation allowance we must include an expense within the
tax provision in the consolidated statements of earnings. In the event that actual results differ
from these estimates, our provision for income taxes could be materially impacted.
In addition to the above, we also have to make assessments as to the adequacy of our accrued
liabilities, more specifically our liabilities recorded in connection with our workers compensation
and health insurance, as these plans are self funded. To help us in this evaluation process, we
routinely get outside third party assessments of our potential liabilities under each plan.
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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Results of Operations — Consolidated
Overview. Our results of operations for the second half of fiscal year ended 2009 was
significantly affected by the recent economic downturn. Both our Print Segment and Apparel Segment
saw double digit volume declines during the final quarter of the year which placed extreme pressure
on each Segment’s operating margins. Our apparel sector continues to be impacted by the sluggish
retail landscape which, along with a reduction in retail inventory levels, has contributed to what
we believed to be a temporary increase in inventory at the manufacturer level. This resulted in
intensified pricing pressures in the marketplace, from both domestic and international competitors.
During the fourth quarter of fiscal year 2009, we commenced cost reduction initiatives in both our
Segments and will continue to adjust our costs to coincide with projected volume levels. These
steps help to mitigate, but not fully offset, the negative impacts associated with this economic
downturn during the fourth quarter. In addition, due to the significant stock market devaluation
experienced this fiscal year, we were required to take a non-cash impairment charge of $63.2
million and $4.7 million to goodwill and trademarks, respectively during the fourth quarter of
fiscal 2009.
Net Sales. Our net sales for fiscal year 2009 were $584.0 million, compared to $610.6 million
for fiscal year 2008, a decrease of $26.6 million, or 4.4.%. Our Print Segment sales decreased by
approximately $18.0 million, or 5.2% during the period while our Apparel Segment sales decreased
$8.6 million, or 3.2%. Our sales for the period were impacted by the significant economic downturn
experienced during the past quarter, as our sales for the nine months ended November 30, 2008 were
up $5.6 million, or 1.2%. During the quarter, both the Apparel and Print Segments saw double digit
declines, with apparel being down 29.6% and print being down 15.8%. See “Results of Operations —
Segments” of this Report for further discussion.
Net sales for fiscal year 2008 were $610.6 million, compared to $584.7 million for fiscal year
2007, an increase of $25.9 million, or 4.4%. The increase in our sales during fiscal year 2008
related primarily to an increase in our Print Segment sales, which increased $19.3 million during
the fiscal year 2008, or 5.9%. Our Apparel Segment sales increased by approximately $6.6 million,
or 2.5% during fiscal year 2008. See “Results of Operations — Segments” of this Report for
further discussion.
Cost of Goods Sold. Our cost of goods sold for fiscal year 2009 was approximately $440.6
million, or 75.4% of sales, compared to $446.7 million, or 73.2% of sales for fiscal year 2008. The
decrease in our cost of sales, on a dollar-basis relates primarily to our decreased sales volume
during the period. The increase in our cost of sales, as a percentage of sales, related primarily
to our Apparel Segment, which experienced significant cost side pressures relating to material,
freight, chemical and utilities during the period, as well as sell side pressures due to retail
inventory strategies and excess inventory levels at manufacturers. As a result, our overall gross
profit margin (net sales less cost of goods sold), as a percentage of sales, decreased from 26.8 %
in fiscal year 2008 to 24.6% in fiscal year 2009. Our apparel margins decreased from 26.4% to
22.6%, while our print margins decreased from 27.2% to 26.1%, for fiscal years 2008 and 2009,
respectively. Our apparel margins were especially impacted during the fourth quarter, by the
abrupt turndown in the economy which throttled demand at the retail level creating excess inventory
at the manufacturing level which put further pricing pressures in the marketplace. See “Results of
Operations — Segments” of this Report for further discussion.
Our cost of goods sold for fiscal year 2008 was approximately $446.7 million, or 73.2% of
sales, compared to $428.4 million, or 73.3% of sales for fiscal year 2007. The increase in our
cost of sales during fiscal year 2008, on a dollar-basis relates primarily to our increased sales
volume as previously discussed. Our gross profit margins, as a percentage of sales, was 26.8% for
fiscal year ending February 29, 2008, a slight increase over 26.7% for fiscal year ended February
28, 2007. Our gross profit margins increased in our Print Segment from 25.2% to 27.2%, while our
Apparel Segment margins decreased from 28.7% to 26.4% for fiscal year 2007 and 2008, respectively.
See “Results of Operations — Segments” of this Report for further discussion.
Selling, general, and administrative expenses. For fiscal year 2009, our selling, general and
administrative expenses decreased approximately $2.7 million, or 3.0% from $88.9 million, or 14.6%
of sales for fiscal year 2008 to $86.2 million, or 14.8% of sales for fiscal year 2009. On a dollar
basis, these expenses decreased primarily as a result of our cost reduction initiatives, lower
employment and factoring expenses, offset by higher bad debt expense, associated with the
bankruptcy filing of a large apparel customer and higher health insurance expense. On a percentage
basis, these expenses increased primarily as a result of our decline in sales during the period.
For fiscal year 2008, our selling, general and administrative expenses were $88.9 million, or
14.6% of sales, compared to $83.1 million, or 14.2% of sales for fiscal year 2007, or an increase
of $5.8 million, or 7.0%. On a dollar and percentage basis, these expenses increased primarily as
a result of our acquisitions and the increase in our
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miscellaneous expenses, which was attributable
to a significant increase in our credit card fees due to increased usage of credit/purchase cards
by our customers.
Gain from disposal of assets. The gain from disposal of assets of $514,000 for fiscal year
ended February 28, 2009 resulted from $334,000 gain from sale of vacant facilities and $180,000
gain from sale of equipment. The gain
from disposal of assets of $757,000 for the fiscal year ended February 29, 2008 resulted
primarily from the sale of two print manufacturing facilities located in Dallas, Texas.
Impairment of goodwill and trademarks. After conducting our annual impairment testing, we
determined $63.2 million of goodwill and $4.7 million trademarks associated with our Apparel
Segment was impaired. The impairment charge is primarily the result of the current adverse
economic conditions and the resulting impact on the financial market valuation multiples.
Income from operations. Our income from operations for fiscal year 2009 decreased from
operational earnings of $75.8 million, or 12.4% of sales for fiscal year 2008, to an operational
loss of $10.1 million, or —1.7% of sales for fiscal year 2009. The dollar decrease in our
operational earnings during fiscal year 2009, related primarily to the non-cash impairment charge
of $67.9 million and decrease in sales as discussed previously.
Our earnings from operations for fiscal year 2008 increased by approximately $2.3 million, or
3.1%, from operational earnings of $73.5 million in fiscal year 2007 to operational earnings of
$75.8 million in fiscal year 2008. As a percentage of sales, our operational earnings were 12.4%
for fiscal year 2008 and 12.6% for fiscal year 2007, respectively. The increase in our operational
earnings, on a dollar basis, during fiscal year 2008 related primarily to the increase in sales due
to our acquisitions of Trade and B&D in fiscal year 2008 and full year revenue associated with our
fiscal year 2007 acquisition of Block. The slight decrease in our operational earnings, as a
percentage of sales, related primarily to the increase of selling, general and administrative
expenses during fiscal year 2008 as previously discussed.
Other income and expense Our interest expense was $3.4 million, $5.7 million and $6.9 million
for fiscal years 2009, 2008 and 2007, respectively. Our interest expense decreased in fiscal year
2009 and 2008 due to less debt on average being outstanding for each prior fiscal year and a lower
effective borrowing rate during fiscal year 2008.
Provision for income taxes. Our effective tax rates for fiscal years 2009, 2008 and 2007 were
-150.9%, 36.1 % and 37.3%, respectively. The increase in the effective tax rate for 2009 was due to
a non-deductible goodwill impairment charge of $63.2 million. The decrease in our effective tax
rate during 2008 over the comparable prior year related primarily to an increase in our Domestic
Production Activities Deduction and State Income Tax Credit. The increase in our overall effective
tax rate during fiscal year 2007 related primarily to an increase in our effective foreign and
state income tax rates.
Net earnings. Our net earnings decreased from approximately $44.6 million, or 7.3% of sales
for fiscal year 2008 to a loss of $32.8 million, or -5.6% of sales for fiscal year 2009. Basic
earnings per share decreased from earnings of $1.74 per share for fiscal year 2008 to a loss of
$1.27 per share for fiscal year 2009. Diluted earnings per share decreased from earnings of $1.72
per share for fiscal year 2008 to a loss of $1.27 per share for fiscal year 2009. The decrease in
net earnings during the period related primarily to our decrease in sales and non-cash impairment
charge of $67.9 million, as previously discussed. Without the impairment charge and certain other
unusual items (bankruptcy of large apparel customer and higher than normal inventory reserve
charge), our diluted earnings per share for the current year would have been $1.46 per share.
Our net earnings increased from earnings of $41.6 million, or 7.1% of sales in fiscal year
2007 to $44.6 million, or 7.3% of sales in fiscal year 2008. Basic earnings per share increased
from earnings of $1.63 per share to $1.74 per share in fiscal years 2007 and 2008, respectively.
Diluted earnings per share increased from earnings of $1.62 per share to $1.72 per share in fiscal
years 2007 and 2008, respectively. The increase in our net earnings during the period related
primarily to our increased sales volume and our lower effective tax rate.
Results of Operations — Segments
| Fiscal Years Ended | ||||||||||||
| Net Sales by Segment (in thousands) | 2009 | 2008 | 2007 | |||||||||
Print |
$ | 327,034 | $ | 345,042 | $ | 325,679 | ||||||
Apparel |
256,995 | 265,568 | 259,034 | |||||||||
Total |
$ | 584,029 | $ | 610,610 | $ | 584,713 | ||||||
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Print Segment. The print segment net sales represented 56.0%, 56.5%, and 55.7% of our
consolidated net sales for fiscal years 2009, 2008, and 2007, respectively.
Our net sales for the Print Segment were approximately $327.0 million for fiscal year 2009
compared to approximately $345.0 million for fiscal year 2008, or a decrease of $18.0 million, or
5.2%. The decline in our Print Segment’s sales for the period occurred primarily during the last
quarter, where sales were down $13.8 million or 15.8% over the comparable period last year, and was
due to the significant decline in the economy during the quarter. The decrease was partially
offset by increased sales from our acquisition of B&D, Skyline and Trade which
were acquired October 5, 2007 and September 17, 2007, respectively. The positive impact of
these acquired entities on sales was $17.4 million for the fiscal year ended February 28, 2009.
Sales from our traditional print plants continue to be impacted by the general economic conditions
and the continued contraction of traditional business forms which occurs as customers continue to
migrate away from traditional printed business form products due to technological advancements.
Our net sales for the Print Segment were approximately $345.0 million for fiscal year 2008
compared to approximately $325.7 million for fiscal year 2007, or an increase of $19.3 million, or
5.9%. The increase in the Print Segment’s net sales for the fiscal year 2008 related primarily to
our acquisition of B&D and Trade and the full year impact of our acquisition of Block Graphics,
Inc. (“Block”) which was acquired on August 8, 2006. Net sales for the acquired entities were
$53.3 million for the fiscal year ended 2008 compared to $24.9 million for the fiscal year ended
2007. The impact of the increase in sales from our acquired entities was offset by the planned
attrition of low margin print sales and the decline in our commercial print operations over
comparable periods last year due to the impact of the loss of two large promotional customers.
While this impacted our sales during fiscal year 2008 by approximately $3.3 million, we feel the
impact associated with these accounts has matured as the sales in our commercial print operations
during the last six months of fiscal year ended 2008 has been above comparable sales levels last
year. Due to the contracting nature of the print industry, our traditional print plants saw their
sales decline by approximately $5.8 million, or 2.0% during fiscal year 2008.
Apparel Segment. The Apparel Segment net sales represented 44.0%, 43.5%, and 44.3% of our
consolidated net sales for fiscal years 2009, 2008 and 2007 respectively.
Our fiscal year 2009 net sales for the Apparel Segment was approximately $257.0 million
compared to approximately $265.6 million for fiscal year 2008, or a decrease of $8.6 million, or
3.2%. The decrease in our apparel sales for the current fiscal year is the result of
decreased sales during the fourth quarter where apparel sales were down $18.3 million, or 29.6%.
Our Apparel Segment continues to be impacted by the sluggish retail landscape which has contributed
to inventory levels being reduced at the retail level and correspondingly increased at the
manufacturers’ level. This resulted in intensified pricing pressures in the marketplace, from both
domestic and international competitors during the fourth quarter, which placed additional pressures
on top lines and on operational margins..
For fiscal year 2008, our Apparel Segment net sales were approximately $265.6 million compared
to approximately $259.0 million for fiscal year 2007, or an increase of $6.6 million, or 2.5%. The
increase in the Apparel Segment’s net sales during fiscal year 2008 was primarily due to increased
volume associated with new customers and increased sales to existing customers. Management
believes that the Apparel sales during fiscal year 2008 were negatively impacted during the first
six months by lower inventory levels at the beginning of the fiscal year, which hindered the
Apparel Segment’s ability to capture certain opportunity sales during this period. Traditionally,
the Apparel Segment rebuilds its inventory levels in the last half of the fiscal year for the
upcoming summer buying season due to the normal falloff of demand during the winter season.
However, during the second half of fiscal year 2007, demand was at or above forecasted sales
levels. As a result, production levels were only able to stay abreast of then current sales
levels, which resulted in inventory levels not being as robust in the fourth quarter of fiscal year
2007 as during the same period the previous fiscal year. Consequently, several initiatives were
implemented during the first and second quarters of fiscal year 2008 to improve the Apparel
Segment’s inventory levels and to meet forecasted demand. Significant progress was made on these
initiatives during the second and third quarters of fiscal year 2008 and the Apparel Segment’s
inventory levels during the third quarter were significantly improved, which management believes
allowed the apparel sales to return to more normalized sales growth levels during the third and
fourth quarters (5.1% during the third quarter and 11.6% during the fourth quarter).
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| Fiscal Years Ended | ||||||||||||
| Gross Profit by Segment (in thousands) | 2009 | 2008 | 2007 | |||||||||
Print |
$ | 85,295 | $ | 93,767 | $ | 81,986 | ||||||
Apparel |
58,181 | 70,107 | 74,336 | |||||||||
Total |
$ | 143,476 | $ | 163,874 | $ | 156,322 | ||||||
Print Segment. Our Print Segment’s gross profit decreased approximately $8.5 million, or 9.0%
for fiscal year 2009. The decrease in gross profit, on a dollar-basis, relates primarily to the
decline in our sales as previously discussed. As a percentage of sales, our gross profit decreased
from 27.2% during fiscal year 2008 to 26.1% during fiscal year 2009. The decrease in our 2009 Print
margin, as a percentage of sales, related primarily to increased material and freight costs which
have not been fully passed onto to our customers because of contractual obligations and/or timing
of the increases, product mix changes, and lower absorption due to our lower volume. While costs
increases have impacted our margins, we have been able, for the most part, to effectively offset
these costs increases during the period through improved operational efficiencies.
Our fiscal year 2008 Print Segment’s gross profit was increased approximately $11.8 million,
or 14.4% for fiscal year 2008. The increase in gross profit, on a dollar basis relates primarily to
the increase in fiscal year 2008 sales volume. As a percentage of sales, our gross profit increased
to 27.2% during fiscal year 2008 as compared to 25.2% for fiscal year 2007. Our 2008 Print margin,
as a percentage of sales, increased primarily as a result of improved operational efficiencies and
planned attrition of low margin sales.
Apparel Segment. Our Apparel Segment’s gross profit decreased approximately $11.9 million, or
17.0% for fiscal year 2009 and decreased approximately $4.2 million or 5.7% for fiscal year 2008.
As a percentage of sales, our gross profit was 22.6%, 26.4%, and 28.7% for fiscal years 2009, 2008
and 2007, respectively.
Our margins during fiscal year 2009 were significantly impacted by the severe economic
downturn experienced during our fourth quarter, and the resulting impact on inventory levels and
competitors’ pricing strategies. In addition, our margins were negatively impacted by significant
raw material price increases, as well as freight, chemical and energy costs increases during the
period. While several price increases occurred during the first six months of fiscal year 2009,
these increases only partially covered the actual costs increases incurred during this period. In
addition, customer mix changes (i.e., more sales to larger lower pricing tiered customers), and
product mix changes (i.e., shift in sales to lower profit margin items) also impacted the reported
margin during this period. During the second half of the year, due to the severe economic
downturn, retailers significantly reduced their on-hand inventory levels, which in turn resulted in
increased inventory at the manufacturing level. This resulted in increased pricing pressures in
the market place, at a time when manufacturers were still trying to recoup their
material/production cost increases experienced during the first six months of the year. As a
result, manufacturers’ top lines were impacted two-fold: 1. by a reduction in units sold, and 2.
by a reduction in selling price, which placed additional strains on manufacturers’ margins during
the fourth quarter. In addition, margins were further impacted during the period by lower
manufacturing levels as manufacturers adjusted their production to demand levels which decreased
their manufacturing absorption factors. Our Apparel Segment wasn’t immune to this, as we saw our
margins decline from 24.2% to 19.3% on a comparable 4th quarter basis.
Our Apparel margins during the fiscal year 2008 were impacted mainly by the increased costs
associated with our apparel inventory build, and to a lesser extent by higher cotton prices during
our fourth quarter and lower selling prices on certain products due to competitive pressures.
During the first nine months of fiscal year 2008 and in connection with our inventory build
initiative, we incurred approximately $2.1 million in additional overtime charges, $0.8 million in
additional temporary labor charges and $1.5 million in additional cut/sew costs, all of which had a
negative impact on our reported margins. During the fourth quarter of fiscal year 2008, we saw
cotton prices increase significantly, and while we increased selling prices during this period to
offset a portion of this cost increase, our margins were negatively impacted.
| Fiscal Years Ended | ||||||||||||
| Profit by Segment (in thousands) | 2009 | 2008 | 2007 | |||||||||
Print |
$ | 51,553 | $ | 56,012 | $ | 46,077 | ||||||
Apparel |
(49,416 | ) | 29,367 | 33,321 | ||||||||
Total |
2,137 | 85,379 | 79,398 | |||||||||
Less corporate expenses |
15,196 | 15,594 | 13,033 | |||||||||
Earnings (loss) before income taxes |
$ | (13,059 | ) | $ | 69,785 | $ | 66,365 | |||||
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Print Segment. As a percent of sales, our Print Segment’s profits were 15.8%, 16.2%, and
14.1% for fiscal years 2009, 2008 and 2007, respectively. Our Print Segment’s profit for fiscal
year 2009 decreased by approximately $4.5 million, or 8.0%, from $56.0 million for the fiscal year
2008, to $51.6 million for the fiscal year
ended February 28, 2009. The decrease in our Print profit during fiscal year 2009 on a dollar
basis and as a percent of sales as compared to fiscal year 2008 is related to the decline in our
sales and our gross profit margin, as previously discussed.
Our Print Segment’s profit for fiscal year 2008 increased approximately $9.9 million, or 21.6%
for fiscal year 2008, from $46.1 million in fiscal year 2007. The increase in our Print profit
during fiscal year 2008 from fiscal year 2007 on a dollar basis is primarily the result of
increased sales from acquisitions and increase as a percent of sales is primarily the result of our
increased margins as previously discussed.
Apparel Segment. During the fourth quarter of fiscal year ended 2009 we recorded a non-cash
impairment charge of $63.2 million and $4.7 million to goodwill and trademarks, respectively. As a
percent of sales and excluding the impairment charge and certain other unusual charges (bankruptcy
of customer ($2.5 million) and higher than normal inventory reserve charge ($2.0 million)
associated with our fleece and junior products,) this Segment’s profits were 8.9%, 11.1%, and 12.9%
for fiscal years 2009, 2008 and 2007, respectively. Apparel profit decreased approximately $6.4
million or 21.8% from $29.4 million for the fiscal year ended February 28, 2008, to approximately
$23.0 million for fiscal year ended 2009, excluding the non-cash impairment and other unusual
charges. This decrease is primarily a result of decreased sales and gross margins as previously
discussed. During fiscal year 2008, our Apparel Segment’s profit decreased approximately $3.9
million, or 11.9% from fiscal year 2007 primarily due to decreased gross margins as previously
discussed.
Liquidity and Capital Resources
| Fiscal Years Ended | ||||||||||||
| (Dollars in thousands) | 2009 | 2008 | Change | |||||||||
Working Capital |
$ | 138,374 | $ | 133,993 | 3.3 | % | ||||||
Cash and cash equivalents |
$ | 9,286 | $ | 3,393 | 173.7 | % | ||||||
Working Capital. Our working capital increased by approximately $4.4 million, or 3.3% from
$134.0 million at February 29, 2008 to $138.4 million at February 28, 2009. The increase in our
working capital during the period related primarily to a decrease in expenses and accounts payable
offset by a reduction of accounts receivable. Our current ratio, calculated by dividing our
current assets by our current liabilities increased from 3.6-to-1.0 at February 29, 2008 to
4.2-to-1.0 at February 28, 2009.
Cash and cash equivalents. Cash and cash equivalents consists of highly liquid investments,
such as time deposits held at major banks, commercial paper, United States government agency
discount notes, money market mutual funds and other money market securities with original
maturities of 90 days or less.
| Fiscal Years Ended | ||||||||||||
| (Dollars in thousands) | 2009 | 2008 | Change | |||||||||
Net Cash provided by operating activities |
$ | 44,216 | $ | 30,444 | 45.2 | % | ||||||
Net Cash used in investing activities |
$ | (5,350 | ) | $ | (17,285 | ) | -69.0 | % | ||||
Net Cash used in financing activities |
$ | (32,464 | ) | $ | (13,516 | ) | 140.2 | % | ||||
Cash flows from operating activities. Cash flows from operations during fiscal 2009 increased
by $13.8 million, or 45.2% over fiscal year 2008, which had decreased by $19.1 million, or 38.6%
over fiscal year 2007. During fiscal year 2008 we used cash to fund our apparel transition away
from factoring and to build inventory. Cash associated with these activities were approximately
$19.1 million and $15.9 million, respectively. These uses of cash were offset by our improved
operational performance and an increase in our payables, of approximately $9.6 million and $10.6
million, respectively. During fiscal year 2009, we collected the build-up in receivables
associated with our transition away from factoring, improved our receivable turnover ratio, and
used less operational cash during the period to build our apparel inventory, as a result we
generated approximately $39.5 million in cash from these activities. This was offset by our lower
pre-impairment operational results, an increase in our prepaids relating to an over-payment of
taxes, and reduction in our payables, which impacted our operational cash by $9.6 million, $7.5
million and $10.1 million, respectively.
Cash flows from investing activities. Cash used for our investing activities, which relates
primarily to capital expenditures, decreased by $11.9 million, or 69.0% from $17.3 million for
fiscal year 2008 to $5.4 million for fiscal year 2009. Although our capital expenditures increased
by approximately 2%, we did not purchase any additional
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businesses during fiscal year 2009 as we
did during fiscal year 2008 when we acquired two businesses, B&D and Trade for $14.6 million.
Cash flows from financing activities. We used $18.9 million more in cash associated with our
financing activities in fiscal year 2009 when compared to the same period last year. We repaid debt
in the amount of $21.8 million during the fiscal year ended 2009, as compared to $16.7 million
during fiscal year ended 2008. We
borrowed $5.0 million in fiscal year 2009 as compared to $18.0 million in fiscal year 2008
(used to finance the acquisition of B&D and to finance the phase-out of the apparel’s factoring
arrangements).
Stock Repurchase — On October 20, 2008, our Board of Directors authorized the repurchase of
up to $5 million of our 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. As of February 28, 2009, there were 52,700
shares of our common stock that had been purchased under the repurchase program at a cost of $0.6
million and an average price per share of $11.36.
Credit Facility — On March 31, 2006, we entered into an amended and restated credit agreement
with a group of lenders led by LaSalle Bank N.A. (the “Facility”). The Facility provides us access
to $150 million in revolving credit and matures on March 31, 2010. The facility bears interest at
the London Interbank Offered Rate (“LIBOR”) plus a spread ranging from .50% to 1.50% (currently
LIBOR + .50% or 1.00% at fiscal year 2009), depending on our total funded debt to EBITDA ratio, as
defined. The Facility contains financial covenants, restrictions on capital expenditures,
acquisitions, asset dispositions, and additional debt, as well as other customary covenants. As of
February 28, 2009, we had $74.0 million of borrowings under the revolving credit line and $3.0
million outstanding under standby letters of credit arrangements, leaving us availability of
approximately $73.0 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 these
covenants as of fiscal year 2009. The Facility is secured by substantially all of our domestic assets.
During fiscal year 2009, we borrowed $5.0 million and repaid $21.5 million on the revolver and
$0.3 million on other debt. It is anticipated that the available line of credit is sufficient to
cover, should it be required, working capital required for the foreseeable future.
We use derivative financial instruments to manage our exposures to interest rate fluctuations
on our floating rate $150 million revolving credit maturing March 31, 2010. The derivative
instruments are accounted for pursuant to Statement of Financial Accounting Standards No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as amended by FAS No. 138,
“Accounting for Certain Derivative Instruments and Certain Hedging Activities” (“FAS 133”). FAS
133 requires that an entity recognize all derivatives 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 million. The Swap fixes the LIBOR rate at 3.79%. The Swap was designated
as a cash flow hedge, and the fair value at February 28, 2009 was $(2.2) million, $(1.4) million
net of deferred taxes. The Swap was reported on the audited Consolidated Balance Sheet in long
term debt with a related deferred charge recorded as a component of Other Comprehensive Income.
Pension — We are required to make contributions to our defined benefit pension plan. These
contributions are required under the minimum funding requirements of the Employee Retirement
Pension Plan Income Security Act (ERISA). We anticipate that we will contribute from $2.0 million
to $3.0 million during our next fiscal year. We made contributions of $3.0 million to our pension
plan during each of our last 2 fiscal years. As our pension assets are invested in marketable
securities, fluctuations in market values could potentially impact our funding status, associated
liabilities recorded and future required minimum contributions.
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. We have long-term contracts in effect (that govern prices, but do not require
minimum volume) with paper and yarn suppliers. Certain of our rebate programs, do however, require
minimum purchase volumes. Management anticipates meeting the required volumes.
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Capital Expenditures — We expect our capital requirements for 2010, exclusive of capital
required for possible acquisitions and the development of our new manufacturing facility, 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.
On June 26, 2008, we announced plans to build a new manufacturing facility in the town of Agua
Prieta in the state of Sonora, Mexico. We estimate the total capital expenditures of $40 million
to $45 million ($20 million — $25 million for building and $15 million — $20 million for machinery
and equipment), with funding to be provided by internal cash flow and, as required, our existing
credit facilities. The facility is expected to be operational in fiscal year 2011.
Contractual Obligations & Off-Balance Sheet Arrangements — There have been no significant
changes in our contractual obligations since February 28, 2009 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 February 28, 2009 (in thousands).
| 2014 to | ||||||||||||||||||||||||
| Total | 2010 | 2011 | 2012 | 2013 | 2019 | |||||||||||||||||||
Debt: |
||||||||||||||||||||||||
Revolving credit facility |
$ | 74,000 | $ | — | $ | 74,000 | $ | — | $ | — | $ | — | ||||||||||||
Interest rate swap |
2,185 | — | 2,185 | — | — | — | ||||||||||||||||||
Capital leases |
210 | 210 | — | — | — | — | ||||||||||||||||||
Debt subtotal |
76,395 | 210 | 76,185 | — | — | — | ||||||||||||||||||
Interest on capital leases |
5 | 5 | — | — | — | — | ||||||||||||||||||
Debt and interest total |
76,400 | 215 | 76,185 | — | — | — | ||||||||||||||||||
Other contractual commitments: |
||||||||||||||||||||||||
Estimated pension benefit payments |
37,715 | 3,075 | 3,850 | 3,870 | 4,670 | 22,250 | ||||||||||||||||||
Letters of credit |
3,042 | 3,042 | — | — | — | — | ||||||||||||||||||
Operating leases |
14,023 | 5,409 | 4,049 | 2,354 | 1,615 | 596 | ||||||||||||||||||
Total other contractual
commitments |
54,780 | 11,526 | 7,899 | 6,224 | 6,285 | 22,846 | ||||||||||||||||||
Total |
$ | 131,180 | $ | 11,741 | $ | 84,084 | $ | 6,224 | $ | 6,285 | $ | 22,846 | ||||||||||||
Subsequent to February 28, 2009 and through April 30, 2009, we made no additional repayments on our
revolving credit facility. We expect future interest payments of $2.3 million for fiscal year
2010, and $0.2 million for fiscal year 2011 assuming maturity date of March 31, 2010 and interest
rates and debt levels remain the same as at the end of fiscal year 2009.
New Accounting Pronouncements
FAS 157. In September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). The
provisions of FAS 157 define fair value, establish a framework for measuring fair value in
generally accepted accounting principles, and expand disclosures about fair value measurements.
The provisions of FAS 157 are effective for fiscal years beginning after November 15, 2007.
However, in February 2008, the FASB issued FSP FAS 157-2 which delays the effective date of FAS
157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually).
This FSP partially defers the effective date of Statement 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope of
this FSP. The adoption of FSP FAS 157-2 is not expected to have a material impact on our
consolidated financial position, results of operations or cash flows.
FAS 141R. In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business combinations” (“FAS 141R”), which replaces FAS 141. FAS 141R
establishes principles and requirements for how an acquirer in a business combination recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. FAS 141R is to be applied prospectively to business combinations
for which the acquisition date is on or after an entity’s fiscal year that begins after December
15, 2008 (our fiscal year ended
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February 28, 2010). The impact of adopting FAS 141R will depend
on the nature and terms of future acquisitions, if any.
FAS 160. In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No.
51” (“FAS 160”). FAS 160 establishes accounting and reporting standards that require the
ownership interest in subsidiaries held by parties other than the parent to be clearly identified
and presented in the consolidated balance sheets within equity, but separate from the parent’s
equity; the amount of consolidated net income attributable to the parent and the noncontrolling
interest to be clearly identified and presented on the face of the consolidated statement of
earnings; and changes in a parent’s ownership interest while the parent retains its controlling
financial interest in its subsidiary to be accounted for consistently. This statement is
effective for fiscal years beginning on or after
December 15, 2008 (our fiscal year ended February 28, 2009). We do not anticipate the adoption of
this statement will have a material impact on our consolidated financial position, results of
operations or cash flows.
FAS 161. In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB
Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide enhanced disclosures about
derivative instruments and hedging activities. FAS 161 is effective for fiscal years and interim
periods beginning on or after November 15, 2008. The adoption of FAS 161 is not expected to have
a material impact on our consolidated financial position, results of operations or cash flows.
FSP FAS 142-3. In April 2008, the FASB issued Staff Position (“FSP”) No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3.”) FSP FAS 142-3
requires companies estimating the useful life of a recognized intangible asset to consider their
historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would use about renewal
or extension as adjusted for entity-specific factors. FSP FAS 142-3 is effective for
acquisitions made in fiscal years and interim periods beginning after December 15, 2008 (our
quarter ending May 31, 2009). The adoption of FSP FAS 142-3 is not expected to have a material
impact on our current consolidated financial position, results of operations or cash flows.
FAS 162. In May 2008, the FASB issued Statement of Financial Accounting Standards No.
162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section, 411 The Meaning of “Present Fairly in Conformity with
Generally Accepted Accounting Principles”. The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
Generally Accepted Accounting Principles (GAAP). The adoption of FAS 162 is not expected to have a material impact on our current consolidated financial position, results of operations or cash flows.
Generally Accepted Accounting Principles (GAAP). The adoption of FAS 162 is not expected to have a material impact on our current consolidated financial position, results of operations or cash flows.
FSP
EITF 03-6-1. In June 2008, the FASB issued FSP Emerging Issue Task Force (“EITF”)
Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008, and interim periods within those years (our
quarter ending May 31, 2009). Upon adoption, a company is required to retrospectively adjust its
earnings per share data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform with the provisions of FSP EITF 03-6-1. We are currently
evaluating the impact of FSP EITF 03-6-1 on our consolidated results of operations.
FSP FAS 133-1 and FIN 45-4. In September 2008, the FASB issued FSP 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No.
161” (“FSP FAS 133-1” and “FIN 45-4”). FSP FAS 133-1 and FIN 45-4 amends disclosure requirements
for sellers of credit derivatives and financial guarantees. It also clarifies the disclosure
requirements of FAS No. 161 and is effective for quarterly periods beginning after November 15,
2008, and fiscal years that include those periods. The adoption of FSP FAS 133-1 and FIN 45-4
had no material impact on our consolidated financial position, results of operations or cash
flows.
FSP FAS 157-3. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value
of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”). FSP FAS
157-3 clarifies the
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application of FAS 157 in an inactive market. It illustrated how the fair
value of a financial asset is determined when the market for that financial asset is inactive.
FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements
had not been issued. The adoption of FSP FAS 157-3 did not have a material impact on our
consolidated financial position, results of operations or cash flows.
FSP FAS 157-4. In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with FAS 157 when the volume and
level of activity for the asset or liability have significantly decreased. Additionally, this FSP
provides guidance on identifying circumstances that indicate a transaction is not orderly. FSP
FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and
shall be applied prospectively. We have not yet evaluated the impact of adopting FSP FAS 157-4 on
our financial statements, but we do not expect the adoption of FSP FAS 157-4 to have a material
impact on our consolidated financial position, results of operations or cash flows.
FSP FAS 107-1 and APB 28-1. In April 2009, the FASB issued FSP 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107 and APB 28-1”). This
FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“FAS 107”), to
require disclosures about fair value of financial instruments not measured on the balance sheet
at fair value in interim financial statements as well as in annual financial statements. Prior to
this FSP, fair values for these assets and liabilities were only disclosed annually. This FSP
applies to all financial instruments within the scope of FAS 107 and requires all entities to
disclose the methods and significant assumptions used to estimate the fair value of financial
instruments. This FSP is effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP
only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP
does not require disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative disclosures only for
periods ending after initial adoption. Adopting FSP FAS 107-1 and APB 28-1 will not have an
effect on our consolidated financial position, results of operations or cash flows. However, we
are evaluating the effect on our interim fair value disclosures compared to previous interim
periods.
FSP FAS 132R-1. In December 2008, the FASB issued FSP 132R-1, “Employers’ Disclosures
About Postretirement Plan Benefit Assets” (“FSP FAS 132R-1”). FSP FAS 132R-1 will require
entities that are subject to the disclosure requirements of FAS 132R, “Employers’ Disclosures
about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and
106”, to make additional disclosures about plan assets for defined benefit pension and other
postretirement benefit plans. The additional disclosure requirements of FSP FAS 132R-1 include
how investment allocation decisions are made, the major categories of plan assets and the inputs
and valuation techniques used to measure the fair value of plan assets. FSP FAS 132R-1 will be
effective for fiscal years ending after December 15, 2009 (our fiscal year ended February 28,
2010). The adoption of FSP FAS 132R-1 is not expected to have an impact on our consolidated
financial position, results of operations or cash flows.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Cash and Cash Equivalents
We have significant amounts of cash and cash equivalents 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
facilities, totaled $74.0 million at February 28, 2009. 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 fixed through this interest rate swap agreement. The impact on our results of operations
of a one-point interest rate change on the
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outstanding balance of the variable rate financial instruments as of February 28, 2009 would be
approximately $0.3 million.
Foreign Exchange
We have global operations and thus make investments and enter into transactions in various
foreign currencies. The value of our consolidated assets and liabilities located outside the
United States (translated at period end exchange rates) and income and expenses (translated using
average rates prevailing during the period), generally denominated in Pesos and Canadian Dollars,
are affected by the translation into our reporting currency (the U.S. Dollar). Such translation
adjustments are reported as a separate component of shareholders’ equity. In future periods,
foreign exchange rate fluctuations could have an increased impact on our reported results of
operations.
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 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our Consolidated Financial Statements and Supplementary Data required by this Item 8 are set
forth following the signature page of this report and are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No matter requires disclosure.
ITEM 9A. 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
February 28, 2009, 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 February 28, 2009 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 SEC’s 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.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The financial statements, financial analysis and all other information in this Annual Report
on Form 10-K were prepared by management, who is responsible for their integrity and objectivity
and for establishing and maintaining adequate internal controls over financial reporting.
The Company’s internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with accounting principles generally accepted in the
United States of America. The Company’s internal control over financial reporting includes those
policies and procedures that:
| i. | Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company; |
27
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| ii. | Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and | ||
| iii. | Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or dispositions of the Company’s assets that could have a material effect on the financial statements. |
There are inherent limitations in the effectiveness of any internal control, including the
possibility of human error and the circumvention or overriding of controls. Accordingly, even
effective internal controls can provide only reasonable assurances with respect to financial
statement preparation. Further, because of changes in conditions, the effectiveness of internal
controls may vary over time.
Management assessed the design and effectiveness of the Company’s internal control over
financial reporting as of February 28, 2009. In making this assessment, management used the
criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”)
in Internal Control—Integrated Framework. Based on management’s assessment using those criteria,
we believe that, as of February 28, 2009, the Company’s internal control over financial reporting
is effective.
Grant Thornton, LLP, an independent registered public accounting firm, has audited the
consolidated financial statements of the Company for the fiscal year ended February 28, 2009 and
has attested to the effectiveness of the Company’s internal control over financial reporting as of
February 28, 2009. Their report is presented on page F-3 of this Report.
ITEM 9B. OTHER INFORMATION
No matter requires disclosure.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Except as set forth below, the information required by Item 10 is incorporated herein by
reference to the definitive Proxy Statement for our 2009 Annual Meeting of Shareholders.
In the wake of well-publicized corporate scandals, the Securities and Exchange Commission and
the New York Stock Exchange have issued multiple new regulations, requiring the implementation of
policies and procedures in the corporate governance area. In complying with new regulations
requiring the institution of policies and procedures, it has been the goal of the Ennis Board of
Directors and senior leadership to do so in a way which does not inhibit or constrain Ennis’ unique
culture, and which does not unduly impose a bureaucracy of forms and checklists. Accordingly,
formal, written policies and procedures have been adopted in the simplest possible way, consistent
with legal requirements, including a Code of Ethics applicable to the Company’s principal executive
officer, principal financial officer, and principal accounting officer or controller. The
Company’s Corporate Governance Guidelines, its charters for each of its Audit, Compensation,
Nominating and Corporate Governance Committees and its Code of Ethics covering all Employees are
available on the Company’s website, www.ennis.com, and a copy will be mailed upon request to Ms.
Sharlene Reagan at 2441 Presidential Parkway, Midlothian, TX 76065. If we make any substantive
amendments to the Code, or grant any waivers to the Code for any of our senior officers or
directors, we will disclose such amendment or waiver on our website and in a report on Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is hereby incorporated herein by reference to the
definitive Proxy Statement for our 2009 Annual Meeting of Shareholders.
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
The information required by Item 12, as to certain beneficial owners and management, is hereby
incorporated by reference to the definitive Proxy Statement for our 2009 Annual Meeting of
Shareholders.
28
Table of Contents
| Number of | ||||||||||||
| securities | ||||||||||||
| available for | ||||||||||||
| future issuances | ||||||||||||
| Number of | under equity | |||||||||||
| securities to be | Weighted | compensation | ||||||||||
| issued upon | average | plans (excluding | ||||||||||
| exercise of | exercise price | securities | ||||||||||
| outstanding | of outstanding | reflected in | ||||||||||
| options | options | column (a) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
Equity compensation plans approved by the security
holders (1) |
421,654 | $ | 10.98 | 355,430 | ||||||||
Equity compensation plans not approved by security holders |
— | — | — | |||||||||
Total |
421,654 | $ | 10.98 | 355,430 | ||||||||
The following table provides information about securities authorized for issuance under the
Company’s equity compensation plans as of February 28, 2009.
| (1) | Includes the 1998 Option and Restricted Stock Plan, amended and restated as of June 17, 2004 and the 1991 Incentive Stock Option Plan. Includes 103,091 shares of restricted stock. |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
The information required by Item 13 is hereby incorporated herein by reference to the
definitive Proxy Statement for our 2009 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The information required by Item 14 is hereby incorporated herein by reference to the
definitive Proxy Statement for our 2009 Annual Meeting of Shareholders.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
| (a) | Documents filed as a part of the report: |
| (1) | Index to Consolidated Financial Statements of the Company | ||
| An “Index to Consolidated Financial Statements” has been filed as a part of this Report beginning on page F-1 hereof. | |||
| (2) | All schedules for which provision is made in the applicable accounting regulation of the SEC have been omitted because of the absence of the conditions under which they would be required or because the information required is included in the consolidated financial statements of the Registrant or the notes thereto. | ||
| (3) | Exhibits | ||
| An “Index to Exhibits” has been filed as a part of this Report beginning on page E-1 and is herein incorporated by reference. |
29
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: May 11, 2009 | BY: | /s/ KEITH S. WALTERS | ||
| Keith S. Walters, Chairman of the Board, | ||||
| Chief Executive Officer and President | ||||
| Date: May 11, 2009 | BY: | /s/ RICHARD L. TRAVIS, JR. | ||
| Richard L. Travis, Jr. | ||||
| Vice President — Finance and CFO, Secretary and Principal Financial and Accounting Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
Date: May 11, 2009
|
BY: | /s/ KEITH S. WALTERS | ||||
| Keith S. Walters, Chairman | ||||||
Date: May 11, 2009
|
BY: | /s/ MICHAEL D. MAGILL | ||||
| Michael D. Magill, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ FRANK D. BRACKEN | ||||
| Frank D. Bracken, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ GODFREY M. LONG, JR. | ||||
| Godfrey M. Long, Jr., Director | ||||||
Date: May 11, 2009
|
BY: | /s/ THOMAS R. PRICE | ||||
| Thomas R. Price, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ KENNETH G. PRITCHETT | ||||
| Kenneth G. Pritchett, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ ALEJANDRO QUIROZ | ||||
| Alejandro Quiroz, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ MICHAEL J. SCHAEFER | ||||
| Michael J. Schaefer, Director | ||||||
Date: May 11, 2009
|
BY: | /s/ JAMES C. TAYLOR | ||||
| James C. Taylor, Director |
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ENNIS, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Index to Consolidated Financial Statements
| F-2 | ||||
| F-3 | ||||
| F-4 | ||||
| F-6 | ||||
| F-7 | ||||
| F-8 | ||||
| F-9 |
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Ennis, Inc.
Ennis, Inc.
We have audited the accompanying consolidated balance sheets of Ennis, Inc. (a Texas corporation)
and subsidiaries as of February 28, 2009 and February 29, 2008, and the related consolidated
statements of earnings, changes in shareholders’ equity and comprehensive income, and cash flows
for each of the three years in the period ended February 28, 2009. These financial statements are
the responsibility of the Company’s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the financial position of Ennis, Inc. as of February 28, 2009 and February 29, 2008, and
the results of its operations and its cash flows for each of the three years in the period ended
February 28, 2009 in conformity with accounting principles generally accepted in the United States
of America.
As discussed in Note 11 to the consolidated financial statements, the Company also adopted FASB
Statement of Financial Accounting Standards No. 158, Employers’ Accounting for Defined Benefit
Pension and Other Postretirement Plans: An Amendment of FASB Statements No. 87, 88, 106, and 132R,
effective February 28, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Ennis, Inc. and subsidiaries’ internal control over financial reporting as
of February 28, 2009, based on criteria established in Internal Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our
report dated May 11, 2009 expressed an unqualified opinion on the effectiveness of Ennis, Inc.’s
internal control over financial reporting.
| /s/ Grant Thornton LLP | ||||
| Dallas, Texas May 11, 2009 |
||||
F-2
Table of Contents
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Ennis, Inc.
Ennis, Inc.
We have audited Ennis, Inc. (a Texas corporation) and subsidiaries’ internal control over
financial reporting as of February 28, 2009, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). Ennis, Inc.’s management is responsible for maintaining effective internal
control over financial reporting and for its assertion of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Report on Internal Control over
Financial Reporting. Our responsibility is to express an opinion on Ennis, Inc.’s internal control
over financial reporting based on our audit.
We conducted our audit in accordance with standards established by the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process effected by those charged with
governance, management, and other personnel, designed to provide reasonable assurance regarding the
preparation of reliable financial statements in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and
procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (2) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
those charged with governance; and (3) provide reasonable assurance regarding prevention, or timely
detection and correction of unauthorized acquisition, use, or disposition of the company’s assets
that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent, or
detect and correct misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Ennis, Inc. maintained, in all material respects, effective internal control over
financial reporting as of February 28, 2009, based on criteria established in Internal
Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Ennis, Inc. and subsidiaries as of
February 28, 2009 and February 29, 2008 and the related consolidated statements of earnings,
changes in shareholders’ equity and comprehensive income, and cash flows for each of the three
years in the period ended February 28, 2009 and our report dated May 11, 2009 expressed an
unqualified opinion on those financial statements.
| /s/ Grant Thornton LLP | ||||
Dallas, Texas
May 11, 2009
May 11, 2009
F-3
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
| Fiscal Years Ended | ||||||||
| 2009 | 2008 | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 9,286 | $ | 3,393 | ||||
Accounts receivable, net of allowance for doubtful receivables
of $3,561 at February 28, 2009 and $3,954 at February 29, 2008 |
57,467 | 72,278 | ||||||
Prepaid expenses |
3,780 | 3,500 | ||||||
Prepaid income taxes |
4,826 | — | ||||||
Inventories |
101,167 | 98,570 | ||||||
Deferred income taxes |
5,728 | 7,786 | ||||||
Assets held for sale |
— | 292 | ||||||
Total current assets |
182,254 | 185,819 | ||||||
Property, plant and equipment, at cost |
||||||||
Plant, machinery and equipment |
133,300 | 130,214 | ||||||
Land and buildings |
43,150 | 42,793 | ||||||
Other |
22,679 | 22,586 | ||||||
Total property, plant and equipment |
199,129 | 195,593 | ||||||
Less accumulated depreciation |
144,457 | 136,605 | ||||||
Net property, plant and equipment |
54,672 | 58,988 | ||||||
Goodwill |
117,341 | 178,388 | ||||||
Trademarks and tradenames, net |
59,030 | 63,880 | ||||||
Customer lists, net |
22,007 | 24,260 | ||||||
Deferred finance charges, net |
486 | 934 | ||||||
Prepaid pension asset |
— | 260 | ||||||
Other assets |
590 | 602 | ||||||
Total assets |
$ | 436,380 | $ | 513,131 | ||||
See accompanying notes to consolidated financial statements.
F-4
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)
| Fiscal Years Ended | ||||||||
| 2009 | 2008 | |||||||
Liabilities and Shareholders’ Equity |
||||||||
Current liabilities |
||||||||
Accounts payable |
$ | 24,723 | $ | 29,658 | ||||
Accrued expenses
|
||||||||
Employee compensation and benefits |
12,919 | 14,840 | ||||||
Taxes other than income |
1,322 | 989 | ||||||
Federal and state income taxes payable |
— | 501 | ||||||
Other |
4,706 | 5,583 | ||||||
Current installments of long-term debt |
210 | 255 | ||||||
Total current liabilities |
43,880 | 51,826 | ||||||
Long-term debt, less current installments |
76,185 | 90,710 | ||||||
Liability for pension benefits |
6,988 | — | ||||||
Deferred income taxes |
16,250 | 20,775 | ||||||
Other liabilities |
1,071 | 1,341 | ||||||
Total liabilities |
144,374 | 164,652 | ||||||
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 in 2009 and 2008 |
75,134 | 75,134 | ||||||
Additional paid in capital |
122,448 | 122,566 | ||||||
Retained earnings |
186,857 | 235,624 | ||||||
Accumulated other comprehensive income (loss): |
||||||||
Foreign currency translation |
(1,016 | ) | 929 | |||||
Unrealized gain (loss) on derivative instruments |
(1,387 | ) | — | |||||
Minimum pension liability |
(12,107 | ) | (6,450 | ) | ||||
| (14,510 | ) | (5,521 | ) | |||||
| 369,929 | 427,803 | |||||||
Treasury stock |
||||||||
Cost of 4,336,557 shares in 2009 and 4,391,193 shares in 2008 |
(77,923 | ) | (79,324 | ) | ||||
Total shareholders’ equity |
292,006 | 348,479 | ||||||
Total liabilities and shareholders’ equity |
$ | 436,380 | $ | 513,131 | ||||
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share amounts)
| Fiscal Years Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Net sales |
$ | 584,029 | $ | 610,610 | $ | 584,713 | ||||||
Cost of goods sold |
440,553 | 446,736 | 428,391 | |||||||||
Gross profit |
143,476 | 163,874 | 156,322 | |||||||||
Selling, general and administrative |
86,217 | 88,851 | 83,121 | |||||||||
Impairment of goodwill and trademarks |
67,851 | — | — | |||||||||
Gain from disposal of assets |
(514 | ) | (757 | ) | (258 | ) | ||||||
Income (loss) from operations |
(10,078 | ) | 75,780 | 73,459 | ||||||||
Other income (expense) |
||||||||||||
Interest expense |
(3,363 | ) | (5,678 | ) | (6,936 | ) | ||||||
Other, net |
382 | (317 | ) | (158 | ) | |||||||
| (2,981 | ) | (5,995 | ) | (7,094 | ) | |||||||
Earnings (loss) before income taxes |
(13,059 | ) | 69,785 | 66,365 | ||||||||
Provision for income taxes |
19,709 | 25,195 | 24,764 | |||||||||
Net earnings (loss) |
$ | (32,768 | ) | $ | 44,590 | $ | 41,601 | |||||
Weighted average common shares outstanding |
||||||||||||
Basic |
25,707,265 | 25,623,325 | 25,530,732 | |||||||||
Diluted |
25,790,166 | 25,860,358 | 25,758,948 | |||||||||
Per share amounts |
||||||||||||
Net earnings (loss) — basic |
$ | (1.27 | ) | $ | 1.74 | $ | 1.63 | |||||
Net earnings (loss) — diluted |
$ | (1.27 | ) | $ | 1.72 | $ | 1.62 | |||||
Cash dividends per share |
$ | 0.62 | $ | 0.62 | $ | 0.62 | ||||||
See accompanying notes to consolidated financial statements.
F-6
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED 2007, 2008, AND 2009
(Dollars in thousands, except share and per share amounts)
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY AND
COMPREHENSIVE INCOME FOR THE FISCAL YEARS ENDED 2007, 2008, AND 2009
(Dollars in thousands, except share and per share amounts)
| Accumulated | ||||||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Treasury Stock | ||||||||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Total | |||||||||||||||||||||||||
Balance March 1, 2006 |
30,053,443 | $ | 75,134 | $ | 122,922 | $ | 181,423 | $ | 460 | (4,574,329 | ) | $ | (82,604 | ) | $ | 297,335 | ||||||||||||||||
Net earnings |
— | — | — | 41,601 | — | — | — | 41,601 | ||||||||||||||||||||||||
Foreign currency translation,
net of deferred tax of $255 |
— | — | — | — | (435 | ) | — | — | (435 | ) | ||||||||||||||||||||||
Comprehensive income |
41,166 | |||||||||||||||||||||||||||||||
Adjustment to initially apply
FAS 158, net of tax of $4,739 |
— | — | — | — | (7,396 | ) | — | — | (7,396 | ) | ||||||||||||||||||||||
Dividends declared
($.62 per share) |
— | — | — | (15,834 | ) | — | — | — | (15,834 | ) | ||||||||||||||||||||||
Excess tax benefit of stock
option exercises and restricted
stock grants |
— | — | 169 | — | — | — | — | 169 | ||||||||||||||||||||||||
Stock based compensation |
— | — | 302 | — | — | — | — | 302 | ||||||||||||||||||||||||
Exercise of stock options
and restricted stock grants |
— | — | (1,088 | ) | — | — | 98,367 | 1,749 | 661 | |||||||||||||||||||||||
Balance February 28, 2007 |
30,053,443 | 75,134 | 122,305 | 207,190 | (7,371 | ) | (4,475,962 | ) | (80,855 | ) | 316,403 | |||||||||||||||||||||
Net earnings |
— | — | — | 44,590 | — | — | — | 44,590 | ||||||||||||||||||||||||
Foreign currency translation,
net of deferred tax of $526 |
— | — | — | — | 904 | — | — | 904 | ||||||||||||||||||||||||
Adjustment to pension
net of deferred tax of $584 |
— | — | — | — | 946 | — | — | 946 | ||||||||||||||||||||||||
Comprehensive income |
46,440 | |||||||||||||||||||||||||||||||
Cumulative impact of a change in
accounting for income tax
uncertainties pursuant to FIN 48 |
— | — | — | (240 | ) | — | — | — | (240 | ) | ||||||||||||||||||||||
Dividends declared
($.62 per share) |
— | — | — | (15,916 | ) | — | — | — | (15,916 | ) | ||||||||||||||||||||||
Excess tax benefit of stock
option exercises and restricted
stock grants |
— | — | 385 | — | — | — | — | 385 | ||||||||||||||||||||||||
Stock based compensation |
— | — | 734 | — | — | — | — | 734 | ||||||||||||||||||||||||
Exercise of stock options
and restricted stock grants |
— | — | (858 | ) | — | — | 84,769 | 1,531 | 673 | |||||||||||||||||||||||
Balance February 29, 2008 |
30,053,443 | 75,134 | 122,566 | 235,624 | (5,521 | ) | (4,391,193 | ) | (79,324 | ) | 348,479 | |||||||||||||||||||||
Net earnings (loss) |
— | — | — | (32,768 | ) | — | — | — | (32,768 | ) | ||||||||||||||||||||||
Foreign currency translation,
net of deferred tax of $1,142 |
— | — | — | — | (1,945 | ) | — | — | (1,945 | ) | ||||||||||||||||||||||
Unrealized loss on
derivative instruments, net
of deferred tax of $797 |
— | — | — | — | (1,387 | ) | — | — | (1,387 | ) | ||||||||||||||||||||||
Adjustment to pension
net of deferred tax of $3,252 |
— | — | — | — | (5,657 | ) | — | — | (5,657 | ) | ||||||||||||||||||||||
Comprehensive loss |
(41,757 | ) | ||||||||||||||||||||||||||||||
Dividends declared
($0.62 per share) |
— | — | — | (15,999 | ) | — | — | — | (15,999 | ) | ||||||||||||||||||||||
Excess tax benefit of stock |
||||||||||||||||||||||||||||||||
option exercises and restricted
stock grants |
— | — | 249 | — | — | — | — | 249 | ||||||||||||||||||||||||
Stock based compensation |
— | — | 993 | — | — | — | — | 993 | ||||||||||||||||||||||||
Exercise of stock options
and restricted stock grants |
— | — | (1,360 | ) | — | — | 107,336 | 2,000 | 640 | |||||||||||||||||||||||
Stock repurchases |
— | — | — | — | — | (52,700 | ) | (599 | ) | (599 | ) | |||||||||||||||||||||
Balance February 28, 2009 |
30,053,443 | $ | 75,134 | $ | 122,448 | $ | 186,857 | $ | (14,510 | ) | (4,336,557 | ) | $ | (77,923 | ) | $ | 292,006 | |||||||||||||||
See accompanying notes to consolidated financial statements.
F-7
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
| Fiscal Years Ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Cash flows from operating activities: |
||||||||||||
Net earnings (loss) |
$ | (32,768 | ) | $ | 44,590 | $ | 41,601 | |||||
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities: |
||||||||||||
Depreciation |
9,993 | 12,217 | 14,670 | |||||||||
Amortization of deferred finance charges |
448 | 448 | 451 | |||||||||
Amortization of trademarks and customer lists |
2,419 | 2,062 | 1,957 | |||||||||
Impairment of goodwill and trademarks |
67,851 | — | — | |||||||||
Gain from disposal of assets |
(514 | ) | (757 | ) | (258 | ) | ||||||
Bad debt expense |
3,609 | 1,970 | 1,390 | |||||||||
Stock based compensation |
993 | 734 | 302 | |||||||||
Excess tax benefit of stock based compensation |
(249 | ) | (385 | ) | (169 | ) | ||||||
Deferred income taxes |
(4,265 | ) | 682 | (4,963 | ) | |||||||
Changes in operating assets and liabilities, net of the
effects of acquisitions: |
||||||||||||
Accounts receivable |
10,580 | (22,854 | ) | (3,762 | ) | |||||||
Prepaid expenses |
(5,313 | ) | 2,239 | (1,225 | ) | |||||||
Inventories |
(4,154 | ) | (10,148 | ) | 5,797 | |||||||
Other current assets |
2,058 | — | — | |||||||||
Other assets |
(4 | ) | 16 | (482 | ) | |||||||
Accounts payable and accrued expenses |
(7,789 | ) | 2,348 | (8,313 | ) | |||||||
Other liabilities |
(270 | ) | (701 | ) | (734 | ) | ||||||
Prepaid pension asset/liability for pension benefits |
1,591 | (2,017 | ) | 3,255 | ||||||||
Net cash provided by operating activities |
44,216 | 30,444 | 49,517 | |||||||||
Cash flows from investing activities: |
||||||||||||
Capital expenditures |
(6,399 | ) | (4,294 | ) | (4,999 | ) | ||||||
Purchase of businesses, net of cash acquired |
— | (14,638 | ) | (17,637 | ) | |||||||
Proceeds from disposal of plant and property |
1,049 | 1,647 | 2,811 | |||||||||
Net cash used in investing activities |
(5,350 | ) | (17,285 | ) | (19,825 | ) | ||||||
Cash flows from financing activities: |
||||||||||||
Borrowings on debt |
5,000 | 18,000 | 15,647 | |||||||||
Repayment of debt |
(21,755 | ) | (16,658 | ) | (40,621 | ) | ||||||
Dividends |
(15,999 | ) | (15,916 | ) | (15,834 | ) | ||||||
Purchase of treasury stock |
(599 | ) | — | — | ||||||||
Proceeds from exercise of stock options |
640 | 673 | 661 | |||||||||
Excess tax benefit of stock based compensation |
249 | 385 | 169 | |||||||||
Net cash used in financing activities |
(32,464 | ) | (13,516 | ) | (39,978 | ) | ||||||
Effect of exchange rate changes on cash |
(509 | ) | 168 | 8 | ||||||||
Net change in cash and cash equivalents |
5,893 | (189 | ) | (10,278 | ) | |||||||
Cash and cash equivalents at beginning of period |
3,393 | 3,582 | 13,860 | |||||||||
Cash and cash equivalents at end of period |
$ | 9,286 | $ | 3,393 | $ | 3,582 | ||||||
See accompanying notes to consolidated financial statements.
F-8
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters
Nature of Operations. Ennis, Inc. and its wholly owned subsidiaries (the Company) are principally
engaged in the production of and sale of business forms, other business products and apparel to
customers primarily located in the United States.
Basis of Consolidation. The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been
eliminated. The Company’s fiscal years ended on the following days: February 28, 2009, February 29,
2008 and February 28, 2007 (fiscal years ended 2009, 2008, and 2007, respectively).
Cash and Cash Equivalents. Cash and cash equivalents consist of highly liquid investments, such as
time deposits held at major banks, commercial paper, United States government agency discount
notes, money market mutual funds and other money market securities with original maturities of 90
days or less. At February 28, 2009, the Company had $529,000 in Canadian and $1,299,000 in Mexican
bank accounts.
Accounts Receivable. Trade receivables are uncollateralized customer obligations due under normal
trade terms requiring payment generally within 30 days from the invoice date. The Company’s
allowance for doubtful receivables reserve is based on an analysis that estimates the amount of its
total customer receivable balance that is not collectible. This analysis includes assessing a
default probability to customers’ receivable balances, which is influenced by several factors
including (i) current market conditions, (ii) periodic review of customer credit worthiness, and
(iii) review of customer receivable aging and payment trends.
Select trade accounts receivable are sold by the Company to various factors on both non-recourse
and recourse bases. These transactions are accounted for as a sale of financial assets if sold
without recourse and a secured borrowing if sold with recourse. Advances may be paid at the
Company’s request on receivables not yet collected by the factors.
Inventories. With the exception of approximately one third of the raw materials of its print
segment inventories, which are valued at the lower of last-in, first-out (LIFO) cost or market, the
Company values its inventories at the lower of first in, first out (FIFO) cost or market. At fiscal
years ended 2009 and 2008, approximately 5.16% and 5.26% of inventories, respectively, are valued
at LIFO with the remainder of inventories valued at FIFO. 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 Company provides
reserves for excess and obsolete inventory when necessary based upon analysis of quantities on
hand, recent sales volumes and reference to market prices. Reserve for obsolete inventory at fiscal
years ended 2009 and 2008 were $3.5 million and $1.6 million, respectively.
Property, Plant and Equipment. Depreciation of property, plant and equipment is calculated using
the straight-line method over a period presently considered adequate to amortize the total cost
over the useful lives of the assets, which range from 3 to 11 years for plant, machinery and
equipment and 10 to 40 years for buildings and improvements. Leasehold improvements are amortized
over the shorter of the lease term or the estimated useful life of the improvements. Repairs and
maintenance are expensed as incurred. Renewals and betterments are capitalized and depreciated over
the remaining life of the specific property unit. The Company capitalizes all leases that are in
substance acquisitions of property. As of February 29, 2008, the Company had land and building of
approximately $0.3 million classified as assets held for sale on the consolidated balance sheet.
This balance reflects the net book value of a vacant facility and the associated land under
contract for sale which is the lower of carrying amount or fair value less cost to sell.
Goodwill and Other Intangible Assets. Goodwill is the excess of the purchase price paid over the
value of net assets of businesses acquired and is not amortized. Intangible assets with
determinable lives are amortized on a straight-line basis over the estimated useful life.
Intangible assets with indefinite lives are not amortized. Goodwill and indefinite-lived
intangibles are evaluated for impairment on an annual basis, or more frequently if impairment
F-9
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters-continued
indicators arise, using a fair-value-based test that compares the fair value of the related
business unit to its carrying value. Refer to Note 6 for further discussion of the Company’s
fiscal year 2009 goodwill and trademark impairment.
Long-Lived Assets. Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of an asset to
future undiscounted net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is based upon future discounted net cash
flows.
Fair Value of Financial Instruments. The carrying amounts of cash and cash equivalents, accounts
receivables, 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. Refer to Note 9 for additional discussion of fair value measurements.
Treasury Stock. The Company accounts for repurchases of common stock using the cost method with
common stock in treasury classified in the Consolidated Balance Sheets as a reduction of
shareholders’ equity.
Deferred Finance Charges. The Company accounts for deferred finance charges in connection with its
revolving and term credit facility. The costs associated with the debt are amortized using the
straight-line method over the term of the facility. If the facility is extinguished before the end
of the term, the remaining balance of the deferred finance charges will be amortized fully in such
year.
Revenue Recognition. Revenue is generally recognized upon shipment of products. Net sales represent
gross sales invoiced to customers, less certain related charges, including sales tax, discounts,
returns and other allowances. Returns, discounts and other allowances have historically been
insignificant. In some cases and upon customer request, the Company prints and stores custom print
product for customer specified future delivery, generally within twelve months. In this case, risk
of loss passes to the customer, the customer is invoiced under normal credit terms, and revenue is
recognized when manufacturing is complete. Approximately $18,294,000, $20,250,000, and $20,147,000
of revenue was recognized under these arrangements during fiscal years 2009, 2008, and 2007
respectively.
Advertising Expenses. The Company expenses advertising costs as incurred. Catalog and brochure
preparation and printing costs, which are considered direct response advertising, are amortized to
expense over the life of the catalog, which typically ranges from three to twelve months.
Advertising expense was approximately $1,676,000, $2,014,000, and $1,905,000, during the fiscal
years ended 2009, 2008, and 2007, respectively and is included in selling, general and
administrative expenses in the consolidated statements of earnings. Included in advertising
expense is amortization related to direct response advertising of $693,000, $876,000, and $703,000
for the fiscal years ended 2009, 2008 and 2007, respectively. Unamortized direct advertising costs
included in prepaid expenses at fiscal years ended 2009 and 2008 were $409,000 and $231,000,
respectively.
Income Taxes. Deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating loss and tax credit
carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected
to apply to taxable income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
Earnings (Loss) Per Share. Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during the period. Diluted earnings per share
is computed by dividing net earnings by the weighted average number of common shares outstanding
plus the number of additional shares that would have been outstanding if potentially dilutive
securities had been issued, calculated using the treasury stock method. For fiscal year 2009,
90,200 of options were not included in the diluted earnings (loss) per share
F-10
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters-continued
computation because their effect was anti-dilutive. In 2008 and 2007 all options and restricted
stock grants were dilutive.
Accumulated Other Comprehensive Income (Loss). Other comprehensive income (loss) is defined as the
change in equity resulting from transactions from non-owner sources. Other comprehensive income
(loss) consisted of the following: adjustments resulting from the foreign currency translation of
the Company’s Mexican and Canadian operations, changes in the fair value of interest rate swap and
changes in the fair value of the Company’s pension plan assets.
Derivative Instruments and Hedging Activities. The Company uses derivative financial instruments to
manage its exposures to interest rate fluctuations on its floating debt agreements when the Company
deems it prudent to do so. The derivative instruments are accounted for pursuant to Statement of
Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended by FAS No. 138, “Accounting for Certain Derivative Instruments and Certain
Hedging Activities” (“FAS 133”). FAS 133 requires that an entity recognize all derivatives 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.
Foreign Currency Translation. The functional currency for the Company’s foreign subsidiaries is the
applicable local currency. Assets and liabilities of the foreign subsidiaries are translated to
U.S. dollars at year-end exchange rates. Income and expense items are translated at the rates of
exchange prevailing during the year. The adjustments resulting from translating the financial
statements of the foreign subsidiary are reflected in shareholders’ equity as accumulated other
comprehensive income or loss.
Transaction gains and losses that arise from exchange rate fluctuations on transactions denominated
in a currency other than the functional currency are included in the results of operations in other
income (expense), net as incurred. Transaction gains and losses totaled approximately ($384,000),
$322,000 and $265,000 for fiscal years ended 2009, 2008 and 2007, respectively.
Estimates. The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported amounts of revenue
and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications. Reclassifications were made to prior-year financial statements to conform to
the current-year presentations. The Company reclassified $11.2 million and $10.4 million of
distribution and warehousing expense from cost of goods sold to selling, general and administrative
expense for fiscal years 2008 and 2007, respectively.
Shipping and Handling Costs. In accordance with Emerging Issues Task Force (“EITF”) 00-10,
“Accounting for Shipping and Handling Fees and Costs,” the Company records amounts billed to
customers for shipping and handling costs in net sales and related costs are included in cost of
goods sold.
Stock Based Compensation. The Company recognizes stock-based compensation expense net of estimated
forfeitures (estimated at 3%) over the requisite service period of the individual grants, which
generally equals the vesting period. The fair value of all share based awards is estimated on the
date of grant. For a further discussion of the impact of stock based
compensation on the results of our consolidated financial statements, see Note 12, “Stock Option
Plans and Stock Based Compensation.”
F-11
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters-continued
New Accounting Pronouncements
FAS 157. In September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”). The
provisions of FAS 157 define fair value, establish a framework for measuring fair value in
generally accepted accounting principles, and expand disclosures about fair value measurements.
The provisions of FAS 157 are effective for fiscal years beginning after November 15, 2007.
However, in February 2008, the FASB issued FSP FAS 157-2 which delays the effective date of FAS
157 for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually).
This FSP partially defers the effective date of Statement 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items within the scope of
this FSP. The Company does not expect the adoption of FSP FAS 157-2 to have a material impact on
its consolidated financial position, results of operations or cash flows.
FAS 141R. In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised 2007), “Business combinations” (“FAS 141R”), which replaces FAS 141. FAS 141R
establishes principles and requirements for how an acquirer in a business combination recognizes
and measures in its financial statements the identifiable assets acquired, the liabilities
assumed, and any controlling interest; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; and determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. FAS 141R is to be applied prospectively to business combinations
for which the acquisition date is on or after an entity’s fiscal year that begins after December
15, 2008 (the Company’s fiscal year ended February 28, 2010). The impact of adopting FAS 141R
will depend on the nature and terms of future acquisitions, if any.
FAS 160. In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160 “Noncontrolling Interests in Consolidated Financial Statements — an amendment to ARB No.
51” (“FAS 160”). FAS 160 establishes accounting and reporting standards that require the
ownership interest in subsidiaries held by parties other than the parent to be clearly identified
and presented in the consolidated balance sheets within equity, but separate from the parent’s
equity; the amount of consolidated net income attributable to the parent and the noncontrolling
interest to be clearly identified and presented on the face of the consolidated statement of
earnings; and changes in a parent’s ownership interest while the parent retains its controlling
financial interest in its subsidiary to be accounted for consistently. This statement is
effective for fiscal years beginning on or after December 15, 2008 (the Company’s fiscal year
ended February 28, 2010). The Company does not anticipate the adoption of this statement will
have a material impact on the Company’s consolidated financial position, results of operations or
cash flows.
FAS 161. In March 2008, the FASB issued Statement of Financial Accounting Standards No.
161, “Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB
Statement No. 133” (“FAS 161”). FAS 161 requires entities to provide enhanced disclosures about
derivative instruments and hedging activities. FAS 161 is effective for fiscal years and interim
periods beginning on or after November 15, 2008. The adoption of FAS 161 is not expected to have
a material impact on the Company’s consolidated financial position, results of operations or cash
flows.
FSP FAS 142-3. In April 2008, the FASB issued Staff Position (“FSP”) No. 142-3,
“Determination of the Useful Life of Intangible Assets” (“FSP FAS 142-3.”) FSP FAS 142-3
requires companies estimating the useful life of a recognized intangible asset to consider their
historical experience in renewing or extending similar arrangements or, in the absence of
historical experience, to consider assumptions that market participants would use about renewal
or extension as adjusted for entity-specific factors. FSP FAS 142-3 is effective for
acquisitions made in fiscal years and interim periods beginning after December 15, 2008 (the
Company’s quarter
ending May 31, 2009). The adoption of FSP FAS 142-3 is not expected to have a material impact on
the Company’s current consolidated financial position, results of operations or cash flows.
F-12
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ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters-continued
FAS 162. In May 2008, the FASB issued Statement of Financial Accounting Standards No.
162, “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 is
effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board
Auditing amendments to AU Section, 411 The Meaning of “Present Fairly in Conformity with
Generally Accepted Accounting Principles”. The statement is intended to improve financial
reporting by identifying a consistent hierarchy for selecting accounting principles to be used in
preparing financial statements that are presented in conformity with U.S.
Generally Accepted Accounting Principles (GAAP). The Company does not anticipate the adoption of
this statement will have a material impact on the Company’s consolidated financial position,
results of operations or cash flows.
FSP EITF 03-6-1, In June 2008, the FASB issued FSP Emerging Issue Task Force (“EITF”)
Issue No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions
Are Participating Securities” (“FSP EITF 03-6-1”). FSP EITF 03-6-1 provides that unvested
share-based payment awards that contain non-forfeitable rights to dividends or dividend
equivalents (whether paid or unpaid) are participating securities and shall be included in the
computation of earnings per share pursuant to the two-class method. FSP EITF 03-6-1 is effective
for fiscal years beginning after December 15, 2008, and interim periods within those years (our
quarter ending May 31, 2009). Upon adoption, a company is required to retrospectively adjust its
earnings per share data (including any amounts related to interim periods, summaries of earnings
and selected financial data) to conform with the provisions of FSP EITF 03-6-1. The Company is
currently evaluating the impact of FSP EITF 03-6-1 on its consolidated results of operations.
FSP FAS 133-1 and FIN 45-4. In September 2008, the FASB issued FSP 133-1 and FIN 45-4,
“Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No.
161” (“FSP FAS 133-1” and “FIN 45-4”). SP 133-1 and FIN 45-4 amends disclosure requirements for
sellers of credit derivatives and financial guarantees. It also clarifies the disclosure
requirements of FAS No. 161 and is effective for quarterly periods beginning after November 15,
2008, and fiscal years that include those periods. The adoption of FSP 133-1 and FIN 45-4 had no
material impact on the Company’s consolidated financial position, results of operations or cash
flows.
FSP FAS 157-3. In October 2008, the FASB issued FSP 157-3, “Determining the Fair Value
of a Financial Asset When the Market for That Asset is Not Active” (“FSP FAS 157-3”). FSP FAS
157-3 clarifies the application of FAS 157 in an inactive market. It illustrated how the fair
value of a financial asset is determined when the market for that financial asset is inactive.
FSP FAS 157-3 was effective upon issuance, including prior periods for which financial statements
had not been issued. The adoption of FSP FAS 157-3 did not have a material impact on the
Company’s consolidated financial position, results of operations or cash flows.
FSP FAS 157-4. In April 2009, the FASB issued FSP 157-4, “Determining Fair Value When
the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (“FSP FAS 157-4”). FSP FAS 157-4 provides
additional guidance for estimating fair value in accordance with FAS 157 when the volume and
level of activity for the asset or liability have significantly decreased. Additionally, this FSP
provides guidance on identifying circumstances that indicate a transaction is not orderly. FSP
FAS 157-4 is effective for interim and annual reporting periods ending after June 15, 2009, and
shall be applied prospectively. The Company has not yet evaluated the impact of adopting FSP FAS
157-4 on its financial statements, but the Company does not expect the adoption of FSP FAS 157-4
to have a material impact on its consolidated financial position, results of operations or cash
flows.
FSP FAS 107-1 and APB 28-1. In April 2009, the FASB issued FSP 107-1 and APB 28-1,
“Interim Disclosures about Fair Value of Financial Instruments” (FSP FAS 107 and APB 28-1”). This
FSP amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” (“FAS 107”), to
require disclosures about fair value of
financial instruments not measured on the balance sheet at fair value in interim financial
statements as well as in annual financial statements. Prior to this FSP, fair values for these
assets and liabilities were only disclosed annually. This FSP applies to all financial
instruments within the scope of FAS 107 and requires all entities to disclose the methods and
significant assumptions used to estimate the fair value of financial
F-13
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) Significant Accounting Policies and General Matters-continued
instruments. This FSP is effective for interim periods ending after June 15, 2009, with early
adoption permitted for periods ending after March 15, 2009. An entity may early adopt this FSP
only if it also elects to early adopt FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2. This FSP
does not require disclosures for earlier periods presented for comparative purposes at initial
adoption. In periods after initial adoption, this FSP requires comparative disclosures only for
periods ending after initial adoption. Adopting FSP FAS 107-1 and APB 28-1 will not have an
effect on the Company’s consolidated financial position, results of operations or cash flows.
However, the Company is evaluating the effect on its interim fair value disclosures compared to
previous interim periods.
FSP FAS 132R-1. In December 2008, the FASB issued FSP 132R-1, “Employers’ Disclosures
About Postretirement Plan Benefit Assets” (“FSP FAS 132R-1”). FSP FAS 132R-1 will require
entities that are subject to the disclosure requirements of FAS 132R, “Employers’ Disclosures
about Pensions and Other Postretirement Benefits—an amendment of FASB Statements No. 87, 88, and
106”, to make additional disclosures about plan assets for defined benefit pension and other
postretirement benefit plans. The additional disclosure requirements of FSP FAS 132R-1 include
how investment allocation decisions are made, the major categories of plan assets and the inputs
and valuation techniques used to measure the fair value of plan assets. FSP FAS 132R-1 will be
effective for fiscal years ending after December 15, 2009 (the Company’s fiscal year ended
February 28, 2010). The adoption of FSP FAS 132R-1 is not expected to have an impact on the
Company’s consolidated financial position, results of operations or cash flows.
Concentrations of Risk
Financial instruments that potentially subject the Company to a concentration of credit risk
principally consist of cash and cash equivalents, and trade receivables. Cash and cash equivalents
are placed with high-credit quality financial institutions. The Company’s credit risk with respect
to trade receivables is limited in management’s 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 a single source. 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.
(2) Due From Factors
Pursuant to terms of an agreement between the Company and various factors, the Company sold
approximately 1.4% of its trade accounts receivable of Alstyle Apparel (“Alstyle”) to the factors
on a non-recourse basis in fiscal year 2009. The price at which the accounts are sold is the
invoice amount reduced by the factor commission of between 0.25% and 1.50%. Additionally, some
trade accounts receivable are sold to the factors on a recourse basis.
Trade accounts receivable not sold to the factor remain in the custody and control of the Company
and the Company maintains all credit risk on those accounts as well as accounts which are sold to
the factor with recourse. The Company accounts for receivables sold to factors with recourse as
secured borrowings.
The Company may request payment from the factor in advance of the collection date or maturity. Any
such advance payments are assessed interest charges through the collection date or maturity at the
JP Morgan Chase Prime Rate. The Company’s obligations with respect to advances from the factor are
limited to the interest charges thereon. Advance payments are limited to a maximum of 90% (ninety
percent) of eligible accounts receivable.
During July 2008, the Company discontinued
selling its trade accounts receivable of Alstyle to the
factors. As of February 29, 2008,
the Company had outstanding factored receivables without recourse of $2,315,000 and advances from
factors of $1,467,000.
F-14
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(3) Accounts Receivable and Allowance for Doubtful Receivables
Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible.
Approximately 96% of the Company’s 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
customer’s financial condition, (ii) the amount of credit the customer requests and (iii) the
customer’s actual payment history (which includes disputed invoice resolution). The Company does
not typically require its customers to post a deposit or supply collateral. The Company’s allowance
for doubtful receivables reserve is based on an analysis that estimates the amount of its total
customer receivable balance that is not collectible. This analysis includes assessing a default
probability to customers’ receivable balances, which is influenced by several factors including (i)
current market conditions, (ii) periodic review of customer credit worthiness, and (iii) review of
customer receivable aging and payment trends.
The Company writes-off accounts receivable when they become uncollectible, and payments
subsequently received on such receivables are credited to the allowance in the period the payment
is received. Credit losses from continuing operations have consistently been within management’s
expectations.
The following table represents the activity in the Company’s allowance for doubtful receivables for
the fiscal years ended (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
Balance at beginning of period |
$ | 3,954 | $ | 2,698 | $ | 3,001 | ||||||
Bad debt expense |
3,609 | 1,970 | 1,390 | |||||||||
Other |
— | — | — | |||||||||
Recoveries |
24 | 29 | 101 | |||||||||
Accounts written off |
(4,026 | ) | (743 | ) | (1,794 | ) | ||||||
Balance at end of period |
$ | 3,561 | $ | 3,954 | $ | 2,698 | ||||||
(4) Inventories
The following table summarizes the components of inventories at the different stages of production
for the fiscal years ended (in thousands):
| 2009 | 2008 | |||||||
Raw material |
$ | 13,357 | $ | 14,711 | ||||
Work-in-process |
13,090 | 15,467 | ||||||
Finished goods |
74,720 | 68,392 | ||||||
| $ | 101,167 | $ | 98,570 | |||||
The excess of current costs at FIFO over LIFO stated values was approximately $5,290,034 and
$4,860,000 at fiscal years ended 2009 and 2008, respectively. There were no significant
liquidations of LIFO inventories during the fiscal years ended 2009, 2008 and 2007. Cost includes
materials, labor and overhead related to the purchase and production of inventories.
(5) Acquisitions and Disposal
On October 5, 2007, the Company acquired certain assets of B & D Litho, Inc. (“B & D”)
headquartered in Phoenix, Arizona, and certain assets and related real estate of Skyline Business
Forms (“Skyline”), operating in Denver, Colorado through its wholly owned subsidiaries for $12.5
million in cash. The acquisition of B&D Litho, Inc. did not include the acquisition of B&D Litho
California, Inc., which is primarily a commercial printing operation
located in Ontario, California. No significant liabilities were assumed in the transactions.
Acquired customer lists are being amortized over a 10 year period. The combined sales of the
purchased operations were $25.0 million during the most recent twelve month period. The acquisition
will add additional medium and long run multi-part forms, laser cut sheets, jumbo rolls and mailer
products sold through the indirect sales (distributorship) marketplace.
F-15
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(5) Acquisitions and Disposal-continued
The following is a summary of the purchase price allocation for B & D and Skyline (in thousands):
Accounts receivable |
$ | 2,713 | ||
Inventories |
1,711 | |||
Other assets |
66 | |||
Property, plant & equipment |
2,662 | |||
Customer lists |
5,084 | |||
Trademarks |
671 | |||
Noncompete |
18 | |||
Accounts payable and accrued liabilities |
(443 | ) | ||
| $ | 12,482 | |||
On September 17, 2007, the Company acquired certain assets of Trade Envelope, Inc. (“Trade”) for
$2.7 million. Under the terms of the purchase agreement, the Company has agreed to pay the former
owners of Trade under a contingent earn-out arrangement over three years for intangibles, subject
to certain set-offs. Trade is an envelope manufacturer (converter) and printer, offering high
quality, 1-4 color process with lithograph and flexography capabilities with locations in
Tullahoma, Tennessee and Carol Stream, Illinois. The sales for the most recent twelve month period
was $11.4 million. The acquisition expanded and strengthened the envelope product line for the
Company.
The following is a summary of the purchase price allocation for Trade (in thousands):
Accounts receivable |
$ | 974 | ||
Inventories |
346 | |||
Property, plant & equipment |
419 | |||
Customer lists |
767 | |||
Trademarks |
306 | |||
Noncompete |
15 | |||
Accounts payable and accrued liabilities |
(171 | ) | ||
| $ | 2,656 | |||
The results of operations for B&D and Trade are included in the Company’s consolidated financial
statements from the dates of acquisition. The following table represents certain operating
information on a pro forma basis as though all companies had been acquired as of March 1, 2007,
after the estimated impact of adjustments such as amortization of intangible assets, interest
expense, interest income and related tax effects (in thousands except per share amounts):
| Unaudited | ||||
| 2008 | ||||
Pro forma net sales |
$ | 631,786 | ||
Pro forma net earnings |
44,979 | |||
Pro forma earnings per share — diluted |
1.74 | |||
The pro forma results are not necessarily indicative of what would have occurred if the
acquisitions had been in effect for the periods presented.
(6) Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired
businesses and is not amortized. Goodwill and indefinite-lived intangibles are evaluated for
impairment on an annual basis, or more frequently if impairment indicators arise, using a
fair-value-based test that compares the fair value of the asset to its
F-16
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Goodwill and Other Intangible Assets-continued
carrying value. Fair values of reporting units are typically calculated using a factor of expected
earnings before interest, taxes, depreciation, and amortization. After conducting its fiscal year
2009 test, the Company determined there was no impairment in the Print Segment and $63.2 million of
goodwill in the Apparel Segment was impaired. The goodwill impairment charge is primarily driven
by current adverse economic conditions and to a lesser extent by expected future cash flows. 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 the estimated useful
life (between 1 and 10 years). Trademarks with indefinite lives, with a net book value of $63.2
million (fair value at time of acquisition) at fiscal year end 2008, were evaluated for impairment
and determined to have been impaired. A $4.7 million impairment charge was recorded to reduce the
carrying value of the trademarks to their fair value of $58.5 million at fiscal year end 2009.
The Company assesses the recoverability of its definite-lived intangible assts primarily based on
its current and anticipated future undiscounted cash flows. The carrying amount and accumulated
amortization of the Company’s intangible assets at each balance sheet date are as follows (in
thousand):
| Gross | ||||||||||||
| Carrying | Accumulated | |||||||||||
| As of February 28, 2009 | Amount | Amortization | Net | |||||||||
Amortized intangible assets (in thousands) |
||||||||||||
Tradenames |
$ | 1,234 | $ | 742 | $ | 492 | ||||||
Customer lists |
29,908 | 7,901 | 22,007 | |||||||||
Noncompete |
500 | 467 | 33 | |||||||||
| $ | 31,642 | $ | 9,110 | $ | 22,532 | |||||||
| As of February 29, 2008 | ||||||||||||
Amortized intangible assets (in thousands) |
||||||||||||
Tradenames |
$ | 1,234 | $ | 592 | $ | 642 | ||||||
Customer lists |
29,908 | 5,648 | 24,260 | |||||||||
Noncompete |
500 | 451 | 49 | |||||||||
| $ | 31,642 | $ | 6,691 | $ | 24,951 | |||||||
| Fiscal Years Ended | ||||||||
| 2009 | 2008 | |||||||
Non-amortizing intangible assets (in thousands) |
||||||||
Trademarks |
$ | 58,538 | $ | 63,238 | ||||
Aggregate amortization expense for fiscal years 2009, 2008 and 2007 was $2,419,000, $2,062,000, and
$1,957,000, respectively.
F-17
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) Goodwill and Other Intangible Assets-continued
The Company’s estimated amortization expense for the next five years is as follows:
2010 |
$ | 2,403,000 | ||
2011 |
2,397,000 | |||
2012 |
2,391,000 | |||
2013 |
2,347,000 | |||
2014 |
2,254,000 |
The following table represents changes in the carrying amount of goodwill for the fiscal years
ended (in thousands):
| Apparel | ||||||||||||
| Segment | Segment | |||||||||||
| Total | Total | Total | ||||||||||
Balance as of March 1, 2007 |
$ | 40,614 | $ | 137,700 | $ | 178,314 | ||||||
Goodwill acquired |
74 | — | 74 | |||||||||
Balance as of March 1, 2008 |
40,688 | 137,700 | 178,388 | |||||||||
Goodwill acquired |
2,104 | — | 2,104 | |||||||||
Goodwill impairment |
— | (63,151 | ) | (63,151 | ) | |||||||
Balance as of February 28, 2009 |
$ | 42,792 | $ | 74,549 | $ | 117,341 | ||||||
An adjustment of ($63.2) million during the fiscal year ended February 28, 2009 reflects an
impairment charge related to goodwill recorded from the previous acquisition of Alstyle Apparel.
An adjustment of $74,000 during the fiscal year ended February 29, 2008 was added to goodwill due
to revised estimates in accrued expenses from the previous acquisition of Tennessee Business Forms
and an adjustment of $2.1 million during fiscal year end February 28, 2009 due to revised tax
estimate of prior acquisitions.
(7) Other Accrued Expenses
The following table summarizes the components of other accrued expenses for the fiscal years ended
(in thousands):
| February 28, 2009 | February 29, 2008 | |||||||
Accrued taxes |
$ | 332 | $ | 405 | ||||
Accrued legal and professional fees |
430 | 244 | ||||||
Accrued interest |
129 | 604 | ||||||
Accrued utilities |
1,499 | 1,358 | ||||||
Accrued repairs and maintenance |
410 | 274 | ||||||
Factored receivables with recourse |
— | 539 | ||||||
Accrued contract labor |
— | 280 | ||||||
Other accrued expenses |
1,906 | 1,879 | ||||||
| $ | 4,706 | $ | 5,583 | |||||
(8) Derivative Instruments and Hedging Activities
The Company uses derivative financial instruments to manage its exposures to interest rate
fluctuations on its floating rate $150 million revolving credit maturing March 31, 2010. On July
7, 2008, the company entered into a three-year Interest Rate Swap Agreement (“Swap”) for a notional
amount of $40 million. The Swap fixes the LIBOR rate at 3.79%.
The Swap was designated as a cash flow hedge, and the fair value at February 28, 2009 was $(2.2)
million, $(1.4) million net of deferred taxes. 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).
F-18
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(9) Fair Value Financial Instruments
Effective March 1, 2008, the Company adopted Statement of Financial Accounting Standards No. 157,
“Fair Value Measurements” (“FAS 157”), for financial assets and financial liabilities. In
accordance with Financial Accounting Standards Board Staff Position No. 157-2, the Company will
delay application of FAS 157 for non-financial assets and non-financial liabilities, until March 1,
2009. FAS 157 defines fair value, establishes a framework for measuring fair value in generally
accepted accounting principles and expands disclosures about fair value measurements.
FAS 157 defines fair value as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants. FAS 157 establishes a fair
value hierarchy for valuation inputs that gives the highest priority to quoted prices in active
markets for identical assets or liabilities and the lowest priority to unobservable inputs. The
fair value hierarchy is as follows:
| 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. |
Derivatives are reported at fair value utilizing Level 2 inputs. The Company utilizes valuation
models with observable market data inputs to estimate fair value of its interest rate swap.
The following table summarizes financial assets and financial liabilities measured at fair value on
a recurring basis as of February 28, 2009, segregated by the level of the valuation inputs within
the fair value hierarchy utilized to measure fair value (in thousands):
| Fair Value Measurements Using | ||||||||||||||||
| Quoted Prices in Active | Significant Other | Significant | ||||||||||||||
| Markets for Identical | Observable | Unobservable | ||||||||||||||
| Assets | Input | Inputs | ||||||||||||||
| Description | February 28, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Derivative asset |
$ | — | $ | — | $ | — | ||||||||||
| $ | — | $ | — | $ | — | $ | — | |||||||||
Derivative liability |
$ | (2,185 | ) | $ | — | $ | (2,185 | ) | $ | — | ||||||
| $ | (2,185 | ) | $ | — | $ | (2,185 | ) | $ | — | |||||||
F-19
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(10) Long-Term Debt
Long-term debt consisted of the following at fiscal years ended (in thousands):
| February 28, 2009 | February 29, 2008 | |||||||
Revolving credit facility |
$ | 74,000 | $ | 90,500 | ||||
Interest rate swap |
2,185 | — | ||||||
Capital lease obligations |
210 | 452 | ||||||
Other |
— | 13 | ||||||
| 76,395 | 90,965 | |||||||
Less current installments |
210 | 255 | ||||||
Long-term debt |
$ | 76,185 | $ | 90,710 | ||||
On March 31, 2006, the Company entered into an amended and restated credit agreement with a group
of lenders led by LaSalle Bank N.A. (the “Facility”). The Facility provides the Company access to
$150 million in revolving credit and matures on March 31, 2010. The facility bears interest at the
London Interbank Offered Rate (“LIBOR”) plus a spread ranging from .50% to 1.50% (currently LIBOR +
.50% or 1.00% at February 28, 2009), depending on the Company’s total funded debt to EBITDA ratio,
as defined. As of February 28, 2009, the Company had $74.0 million of borrowings under the
revolving credit line and $3.0 million outstanding under standby letters of credit arrangements,
leaving the Company availability of approximately $73.0 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.
The Company is in compliance with these covenants as of February 28, 2009. The Facility is secured
by substantially all of the Company’s domestic assets.
The capital lease obligation has interest due monthly at 4.96% and principal paid in equal monthly
installments. The lease will mature in January 2010. Assets under capital leases have a total
gross book value of $936,000 and $1,154,000 and the related accumulated amortization of $488,000
and $407,000 for fiscal years ended 2009 and 2008, respectively, and are included in property,
plant and equipment. Amortization of assets under capital leases is included in depreciation
expense.
The Company’s long-term debt maturities for the years following February 28, 2009 are as follows
(in thousands):
| Capital | ||||||||||||
| Debt | Leases | Total | ||||||||||
2010 |
$ | — | $ | 215 | $ | 215 | ||||||
2011 |
76,185 | — | 76,185 | |||||||||
| 76,185 | 215 | 76,400 | ||||||||||
Less amount representing interest |
— | 5 | 5 | |||||||||
| $ | 76,185 | $ | 210 | $ | 76,395 | |||||||
(11) Shareholders’ Equity
On October 20, 2008, the Board of Directors authorized the repurchase of up to $5 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. As of February 28, 2009, there were 52,700 shares of the
common stock that had been purchased under the repurchase program at an average price per share of
$11.36.
The Company’s revolving credit facility restricts acquisition of treasury shares and distributions
to its shareholders.
F-20
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stock Option Plans and Stock Based Compensation
The Company accounts for stock based compensation using Statement of Financial Accounting Standards
No. 123 (revised 2004), “Share-Based Payment” (“FAS 123R”). FAS 123R requires the recognition of
the fair value of stock-based compensation in earnings.
The Company has stock options granted to key executives and managerial employees and non-employee
directors. At fiscal year ended 2009, the Company has two stock option plans: the 1998 Option and
Restricted Stock Plan amended and restated as of June 17, 2004 (“Plan”) and the 1991 Incentive
Stock Option Plan. The Company has 355,430 shares of unissued common stock reserved under the stock
option plans for issuance to officers and directors, and supervisory employees of the Company and
its subsidiaries. The exercise price of each option granted equals the quoted market price of the
Company’s common stock on the date of grant, and an option’s maximum term is ten years. Options may
be granted at different times during the year and vest ratably over various periods, from upon
grant to five years. The Company uses treasury stock to satisfy option exercises and restricted
stock awards.
For the years ended 2009, 2008 and 2007, the company recorded in selling, general and
administrative expenses, compensation expense related to its share based compensation of $993,000
($631,000 net of tax), $734,000 ($462,000 net of tax) and $302,000 ($190,000 net of tax),
respectively.
The Company had the following stock option activity for the three years ended February 28, 2009:
| Weighted | ||||||||||||||||
| Number | Weighted | Average | Aggregate | |||||||||||||
| of | Average | Remaining | Intrinsic | |||||||||||||
| Shares | Exercise | Contractual | Value(a) | |||||||||||||
| (exact quantity) | Price | Life (in years) | (in thousands) | |||||||||||||
Outstanding at March 1, 2006 |
687,850 | $ | 10.63 | 4.6 | ||||||||||||
Granted |
— | — | ||||||||||||||
Terminated |
(22,500 | ) | 11.13 | |||||||||||||
Exercised |
(111,837 | ) | 8.33 | |||||||||||||
Outstanding at February 28, 2007 |
553,513 | $ | 11.08 | 3.9 | ||||||||||||
Granted |
— | — | ||||||||||||||
Terminated |
(20,500 | ) | 15.15 | |||||||||||||
Exercised |
(63,500 | ) | 10.60 | |||||||||||||
Outstanding at February 29, 2008 |
469,513 | $ | 10.97 | 2.9 | ||||||||||||
Granted |
— | — | ||||||||||||||
Terminated |
(46,450 | ) | 12.31 | |||||||||||||
Exercised |
(104,500 | ) | 10.34 | |||||||||||||
Outstanding at February 28, 2009 |
318,563 | $ | 10.98 | 2.4 | $ | 75 | ||||||||||
Exercisable at February 28, 2009 |
300,138 | $ | 10.65 | 2.2 | $ | 75 | ||||||||||
| (a) | Value is calculated on the basis of the difference between the market value of the Company’s Common Stock as reported on the New York Stock Exchange on February 28, 2009 ($8.18) and the weighted exercise price, multiplied by the number of shares indicated. |
F-21
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stock Option Plans and Stock Based Compensation-continued
The Company did not grant any stock options during fiscal years 2009, 2008 and 2007. A summary of
the stock options exercised and tax benefits realized from stock based compensation is presented
below for the three fiscal years ended (in thousands):
| Fiscal years ended | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
Total cash received |
$ | 640 | $ | 673 | $ | 661 | ||||||
Income tax benefits |
249 | 385 | 169 | |||||||||
Total grant-date fair value |
134 | 83 | 102 | |||||||||
Intrinsic value |
536 | 611 | 1,364 | |||||||||
A summary of the status of the company’s unvested stock options at February 28, 2009, and changes
during the fiscal year ended February 28, 2009 is presented below:
| Weighted | ||||||||
| Average | ||||||||
| Number | Grant Date | |||||||
| of Options | Fair Value | |||||||
Unvested at February 29, 2008 |
45,600 | $ | 2.64 | |||||
New grants |
— | — | ||||||
Vested |
(23,425 | ) | 2.44 | |||||
Forfeited |
(3,750 | ) | 2.84 | |||||
Unvested at February 28, 2009 |
18,425 | 2.85 | ||||||
As of February 28, 2009, there was $17,000 of unrecognized compensation cost related to nonvested
stock options granted under the Plan. The weighted average remaining requisite service period of
the unvested stock options was 0.7 year. The total fair value of shares underlying the options
vested during the fiscal year ended February 28, 2009 was $192,000.
The following table summarizes information about stock options outstanding at the end of fiscal
year 2009:
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||
| Weighted Average | ||||||||||||||||||||||||||||
| Remaining | Weighted | Weighted | ||||||||||||||||||||||||||
| Number | Contractual | Average | Number | Average | ||||||||||||||||||||||||
| Exercise Prices | Outstanding | Life (in Years) | Exercise Price | Exercisable | Exercise Price | |||||||||||||||||||||||
$ 7.0625 |
to | $ | 8.6875 | 209,613 | 0.8 | $ | 8.10 | 209,613 | $ | 8.10 | ||||||||||||||||||
11.6700 |
10,000 | 4.1 | 11.67 | 10,000 | 11.67 | |||||||||||||||||||||||
13.2800 |
to | 16.4200 | 66,450 | 5.2 | 15.69 | 48,025 | 15.48 | |||||||||||||||||||||
19.6900 |
32,500 | 7.0 | 19.69 | 32,500 | 19.69 | |||||||||||||||||||||||
| 318,563 | 2.4 | 10.98 | 300,138 | 10.65 | ||||||||||||||||||||||||
F-22
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(12) Stock Option Plans and Stock Based Compensation-continued
The Company had the following restricted stock grants activity for the three fiscal years ended
February 28, 2009:
| Weighted | ||||||||
| Average | ||||||||
| Number of | Grant Date | |||||||
| Shares | Fair Value | |||||||
Outstanding at March 1, 2006 |
23,919 | $ | 19.69 | |||||
Granted |
16,000 | 19.64 | ||||||
Terminated |
— | |||||||
Exercised |
— | |||||||
Outstanding at February 28, 2007 |
39,919 | $ | 19.67 | |||||
Granted |
56,600 | 26.79 | ||||||
Terminated |
(1,334 | ) | 19.64 | |||||
Exercised |
(21,269 | ) | 19.68 | |||||
Outstanding at February 29, 2008 |
73,916 | $ | 25.12 | |||||
Granted |
75,080 | 15.67 | ||||||
Terminated |
(15,236 | ) | 19.89 | |||||
Exercised |
(30,669 | ) | 24.05 | |||||
Outstanding at February 28, 2009 |
103,091 | $ | 19.33 | |||||
Exercisable at February 28, 2009 |
— | $ | — | |||||
As of February 28, 2009, the total remaining unrecognized compensation cost related to unvested
restricted stock was approximately $1.3 million. The weighted average remaining requisite service
period of the unvested restricted stock awards was 1.8 years. During the fiscal year ended 2009,
the Company’s restricted stock grants had an underlying fair value at date of grant of $2.0
million.
(13) Employee Benefit Plans
The Company and certain subsidiaries have a noncontributory defined benefit retirement plan
covering approximately 14% of their employees. Benefits are based on years of service and the
employee’s average compensation for the highest five compensation years preceding retirement or
termination. The Company’s funding policy is to contribute annually an amount in accordance with
the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
The Company’s pension plan asset allocation, by asset category, is as follows for the fiscal years
ended:
| 2009 | 2008 | |||||||
Equity securities |
42 | % | 49 | % | ||||
Debt securities |
48 | % | 44 | % | ||||
Cash and cash equivalents |
10 | % | 7 | % | ||||
Total |
100 | % | 100 | % | ||||
The current asset allocation is being managed to meet the Company stated objective of asset growth
and capital preservation. The factor is based upon the combined judgments of the Company’s
Administrative Committee and its investment advisors to meet the Company’s investment needs,
objective, and risk tolerance. The Company’s target asset allocation percentage, by asset class,
for the year ended February 28, 2009 is as follows:
F-23
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Benefit Plans-continued
| Target Allocation | ||||
| Asset Class | Percentage | |||
Money Market |
0 - 3 | % | ||
Bonds |
43 - 47 | % | ||
Stocks |
45 - 50 | % | ||
The Company estimates the long-term rate of return on plan assets will be 8.0% based upon target
asset allocation. Expected returns are developed based upon the information obtained from the
Company’s investment advisors. The advisors provide ten-year historical and five-year expected
returns on the fund in the target asset allocation. The return information is weighted based upon
the asset allocation at the end of the fiscal year. The expected rate of return at the beginning of
the fiscal year ended 2009 was 8.0%, the rate used in the calculation of the current year pension
expense.
The Company’s retirement benefit plan costs are accounted for using a valuation required by
Statement of Financial Accounting Standard No. 87 (“FAS 87”), “Employers’ Accounting for Pensions.”
The Company adopted Statement of Financial Accounting Standard No. 158, “Employer’s Accounting for
Defined Benefit Pension and other Postretirement Plans — an amendment FASB Statements No. 87, 88,
106 and 132R” (“FAS 158”) as of February 28, 2007. FAS 158 requires an entity to recognize the
funded status of its defined pension plans on the balance sheet and to recognize changes in the
funded status that arise during the period but are not recognized as components of net periodic
benefit cost, within accumulated other comprehensive income (loss), net of income tax.
Pension expense is composed of the following components included in cost of goods sold and selling,
general and administrative expenses in the Company’s consolidated statements of earnings for fiscal
years ended (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
Components of net periodic benefit cost |
||||||||||||
Service cost |
$ | 1,341 | $ | 1,430 | $ | 1,440 | ||||||
Interest cost |
2,627 | 2,505 | 2,440 | |||||||||
Expected return on plan assets |
(3,249 | ) | (3,079 | ) | (2,848 | ) | ||||||
Amortization of: |
||||||||||||
Prior service cost |
(145 | ) | (145 | ) | (145 | ) | ||||||
Unrecognized net loss |
766 | 905 | 956 | |||||||||
Net periodic benefit cost |
1,340 | 1,616 | 1,843 | |||||||||
Other changes in Plan Assets and Projected Benefit Obligation
Recognized in Other comprehensive Income |
||||||||||||
Net actuarial loss |
9,529 | (818 | ) | — | ||||||||
Amortization of net actuarial loss |
(766 | ) | (905 | ) | — | |||||||
Amortization of prior service credit |
145 | 145 | — | |||||||||
| 8,908 | (1,578 | ) | — | |||||||||
Total recognized in net periodic pension cost and
other comprehensive income |
$ | 10,248 | $ | 38 | $ | 1,843 | ||||||
The following table represents the assumptions used to determine benefit obligations and net
periodic pension cost for fiscal years ended:
| 2009 | 2008 | 2007 | ||||||||||
Weighted average discount rate (net periodic pension cost) |
6.40 | % | 6.00 | % | 6.00 | % | ||||||
Earnings progression (net periodic pension cost) |
3.00 | % | 3.00 | % | 3.50 | % | ||||||
Expected long-term rate of return on plan assets |
8.00 | % | 8.00 | % | 8.00 | % | ||||||
Weighted average discount rate (benefit obligations) |
7.15 | % | 6.40 | % | 6.00 | % | ||||||
Earnings progression (benefit obligations) |
3.00 | % | 3.00 | % | 3.00 | % | ||||||
F-24
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(13) Employee Benefit Plans-continued
The accumulated benefit obligation (“ABO”), change in projected benefit obligation (“PBO”), change
in plan assets, funded status, and reconciliation to amounts recognized in the consolidated balance
sheets are as follows:
| 2009 | 2008 | |||||||
Change in benefit obligation |
||||||||
Projected benefit obligation at beginning of year |
$ | 42,311 | $ | 42,860 | ||||
Service cost |
1,341 | 1,430 | ||||||
Interest cost |
2,626 | 2,505 | ||||||
Actuarial loss |
(3,623 | ) | (1,970 | ) | ||||
Benefits paid |
(3,704 | ) | (2,514 | ) | ||||
Projected benefit obligation at end of year |
$ | 38,951 | $ | 42,311 | ||||
Change in plan assets: |
||||||||
Fair value of plan assets at beginning of year |
$ | 42,571 | $ | 40,158 | ||||
Company contributions |
3,000 | 3,000 | ||||||
Gains on plan assets |
(9,904 | ) | 1,927 | |||||
Benefits paid |
(3,704 | ) | (2,514 | ) | ||||
Fair value of plan assets at end of year |
$ | 31,963 | $ | 42,571 | ||||
Funded status (benefit obligation less plan assets) |
$ | (6,988 | ) | $ | 260 | |||
Accumulated benefit obligation at end of year |
$ | 33,957 | $ | 36,895 | ||||
The measurement dates used to determine pension and other postretirement benefits is the Company’s
fiscal year end. The Company expects to contribute from $2.0 million to $3.0 million during fiscal
year 2010.
Estimated future benefit payments which reflect expected future service, as appropriate, are
expected to be paid in the fiscal years ended (in thousands):
| Projected | ||||
| Year | Payments | |||
2009 |
$ | 3,075 | ||
2010 |
3,850 | |||
2011 |
3,870 | |||
2012 |
4,670 | |||
2013 |
4,035 | |||
2014 — 2018 |
18,215 | |||
Effective February 1, 1994, the Company adopted a Defined Contribution 401(k) Plan (the 401(k)
Plan) for its United States employees. The 401(k) Plan covers substantially all full-time employees
who have completed sixty days of service and attained the age of eighteen. United States employees
can contribute up to 100 percent of their annual compensation, but are limited to the maximum
annual dollar amount allowable under the Internal Revenue Code. The 401(k) Plan provides for
employer matching contributions or discretionary employer contributions for certain employees not
enrolled in the pension plan for employees of the Company. Eligibility for employer contributions,
matching percentage, and limitations depends on the participant’s employment location and whether
the employees are covered by the Company’s pension plan, etc. The Company’s matching contributions
are immediately vested. The Company made matching 401(k) contributions in the amount of $372,000,
$421,000 and $360,000 in fiscal years ended 2009, 2008 and 2007, respectively.
In addition, the Northstar Computer Forms, Inc. 401(k) Profit Sharing Plan was merged into the
401(k) Plan on February 1, 2001. The Company declared profit sharing contributions on behalf of the
former employees of Northstar Computer Forms, Inc. in accordance with its original plan in the
amounts of $345,000, $360,000, and $370,000 in fiscal years ended 2009, 2008, and 2007,
respectively.
F-25
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Income Taxes
The following table represents components of the provision for income taxes for fiscal years ended
(in thousands):
| 2009 | 2008 | 2007 | ||||||||||
Current: |
||||||||||||
Federal |
$ | 14,723 | $ | 20,144 | $ | 19,611 | ||||||
State and local |
3,444 | 2,787 | 3,849 | |||||||||
Foreign |
573 | 2,147 | 1,624 | |||||||||
Deferred |
969 | 117 | (320 | ) | ||||||||
Total provision for income taxes |
$ | 19,709 | $ | 25,195 | $ | 24,764 | ||||||
The Company’s effective tax rate on earnings from operations for the year ended February 28, 2009,
was a negative 150.9%, which reflected a non-deductible goodwill impairment charge of $63.2
million, as compared with 36.1% and 37.3% in 2008 and 2007, respectively. Excluding the
impairment the effective tax rate would be 39.4%. Provision for state income tax of (18.4)% was
due to a negative pre-tax income amount created by the impairment charge. The following summary
reconciles the statutory U.S. Federal income tax rate to the Company’s effective tax rate for the
fiscal years ended:
| 2009 | 2008 | 2007 | ||||||||||
Statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Provision for state income taxes, net of Federal income tax benefit |
(18.4 | ) | 2.6 | 3.9 | ||||||||
Impairment of goodwill |
(169.3 | ) | — | — | ||||||||
Other |
1.8 | (1.5 | ) | (1.6 | ) | |||||||
| (150.9 | )% | 36.1 | % | 37.3 | % | |||||||
Deferred taxes are recorded to give recognition to temporary differences between the tax basis of
assets and liabilities and their reported amounts in the financial statements. The tax effects of
these temporary differences are recorded as deferred tax assets and deferred tax liabilities.
Deferred tax assets generally represent items that can be used as a tax deduction or credit in
future years. Deferred tax liabilities generally represent items that have been deducted for tax
purposes, but have not yet been recorded in the consolidated statements of earnings. To the extent
there are deferred tax assets that are more likely than not to be realized, a valuation allowance
would not be recorded. The components of deferred income tax assets and liabilities are summarized
as follows (in thousands) for fiscal years ended:
| 2009 | 2008 | |||||||
Current deferred tax assets related to: |
||||||||
Allowance for doubtful receivables |
$ | 1,366 | $ | 1,517 | ||||
Inventories |
2,739 | 4,100 | ||||||
Employee compensation and benefits |
1,661 | 1,715 | ||||||
Other |
(38 | ) | 454 | |||||
| $ | 5,728 | $ | 7,786 | |||||
Noncurrent deferred tax liability (asset) related to: |
||||||||
Property, plan and equipment |
$ | 4,787 | $ | 4,960 | ||||
Goodwill and other intangible assets |
20,084 | 18,944 | ||||||
Pension and noncurrent employee compensation benefits |
(3,644 | ) | (1,471 | ) | ||||
Net operating loss and foreign tax credits |
(3,143 | ) | (2,365 | ) | ||||
Interest rate swap |
(838 | ) | — | |||||
Other |
(996 | ) | 707 | |||||
| $ | 16,250 | $ | 20,775 | |||||
F-26
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(14) Income Taxes-continued
The Company maintains a valuation allowance to adjust the basis of net deferred tax assets in
accordance with FAS 109 “Accounting for Income Taxes” for approximately $250,000 as of February 28,
2009 and February 29, 2008, respectively, related to foreign tax credits. Other non-current
deferred tax liability (asset) includes currency exchange, stock options exercised, valuation
allowance and other. The Company has federal and state net operating loss carry forwards as a
result of an acquisition in the amount of $2,721,000 expiring in fiscal years 2017 through 2025.
The Company has foreign tax credit carry forwards in the amount of $2,692,000 expiring in fiscal
years 2010 through 2012. Based on historical earnings, management believes it will be able to
fully utilize the net operating loss carry forwards and foreign tax credit.
In June 2006, the Financial Accounting Standards Board issued Interpretation No. 48, “Accounting
for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109,” (FIN 48),
effective for fiscal years beginning after December 15, 2006. FIN 48 requires a two-step approach
to determine how to recognize tax benefits in the financial statements where recognition and
measurement of a tax benefit must be evaluated separately. A tax benefit will be recognized only
if it meets a “more-likely-than-not” recognition threshold. For tax positions that meet this
threshold, the tax benefit recognized is based on the largest amount of tax benefit that is greater
than 50 percent likely of being realized upon ultimate settlement with the taxing authority.
The Company adopted the provisions of FIN 48 on March 1, 2007 and the adoption resulted in an
increase of $240,000 to non-current other liabilities and $240,000 decrease of retained earnings on
the consolidated balance sheet with no net impact to the consolidated statement of earnings.
Unrecognized tax benefits, including accrued interest and penalties, at fiscal year end 2009, 2008
and 2007 of $278,000, $228,000 and $240,000, respectively, related to uncertain tax positions are
included in other liabilities on the consolidated balance sheets and would impact the effective
rate if recognized. This unrecognized tax benefit includes an aggregate of $34,000 of interest
expense. Approximately $93,000 of unrecognized tax benefits relate to items that are affected by
expiring statutes of limitations within the next 12 months. A reconciliation of the change in the
unrecognized tax benefits for fiscal year ended 2009 is as follows (in thousands):
| 2009 | 2008 | |||||||
Balance at beginning of year |
$ | 201 | $ | 202 | ||||
Additions based on tax positions related to the current year |
109 | 67 | ||||||
Reductions due to lapses of statutes of limitations |
(67 | ) | (68 | ) | ||||
Balance at end of year |
$ | 243 | $ | 201 | ||||
The Company is subject to U.S. federal income tax as well as to income tax of multiple state
jurisdictions and foreign tax jurisdictions. The Company has concluded all U.S. federal income tax
matters for years through 2005. All material state and local income tax matters have been
concluded for years through 2003 and foreign tax jurisdictions through 2000.
The Company recognizes interest expense on underpayments of income taxes and accrued penalties
related to unrecognized non-current tax benefits as part of the income tax provision. Other than
amounts included in the unrecognized tax benefits, the Company did not recognize any interest or
penalties for the fiscal years ended 2009, 2008 and 2007.
(15) Earnings (loss) per Share
Basic earnings (loss) per share have been computed by dividing net earnings by the weighted average
number of common shares outstanding during the applicable period. Diluted earnings per share
reflect the potential dilution that could occur if stock options or other contracts to issue common shares were exercised or
converted into common stock. The following table sets forth the computation for basic and diluted
earnings per share for the fiscal years ended:
F-27
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(15) Earnings (loss) per Share-continued
| 2009 | 2008 | 2007 | ||||||||||
Basic weighted average common shares outstanding |
25,707,265 | 25,623,325 | 25,530,732 | |||||||||
Effect of dilutive options |
82,901 | 237,033 | 228,216 | |||||||||
Diluted weighted average common shares outstanding |
25,790,166 | 25,860,358 | 25,758,948 | |||||||||
Per share amounts: |
||||||||||||
Net earnings (loss) — basic |
$ | (1.27 | ) | $ | 1.74 | $ | 1.63 | |||||
Net earnings (loss) — diluted |
$ | (1.27 | ) | $ | 1.72 | $ | 1.62 | |||||
Cash dividends |
$ | 0.62 | $ | 0.62 | $ | 0.62 | ||||||
(16) Segment Information and Geographic Information
The Company operates in two segments — the Print Segment and the Apparel Segment.
The Print Segment, which represented 56% of the Company’s consolidated net sales for fiscal year
2009, 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 39 manufacturing locations throughout the United States in 16 strategically located
domestic states. Approximately 95% of the business products manufactured by the Print Segment are
custom and semi-custom, constructed in a wide variety of sizes, colors, number of parts and
quantities on an individual job basis depending upon the customers’ specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes,
integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs
under the following labels: Ennis®, Royal Business FormsSM, Block Graphics®, Specialized
Printed FormsSM, 360º Custom LabelsSM, Enfusion®, Uncompromised Check
Solutions®, Witt PrintingSM, B&D Litho of ArizonaSM,
GenformsSM
and Calibrated FormsSM. The Print Segment also sells the Adams-McClureSM
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 GFSSM (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 44% of the Company’s fiscal year 2009
consolidated net sales, consists of Alstyle Apparel, which was acquired in November 2004. This
group is primarily engaged in the production and sale of activewear including t-shirts, fleece
goods, and other wearables. Alstyle sales are seasonal, with sales in the first and second quarters
generally being the highest. Substantially all of the Apparel Segment sales are to customers in the
United States.
Corporate information is included to reconcile segment data to the consolidated financial
statements and includes assets and expenses related to the Company’s corporate headquarters and
other administrative costs.
F-28
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Segment Information and Geographic Information-continued
Segment data for the fiscal years ended 2009, 2008, and 2007 were as follows (in thousands):
| Apparel | Consolidated | |||||||||||||||
| Segment | Segment | Corporate | Totals | |||||||||||||
Fiscal year ended February 28, 2009: |
||||||||||||||||
Net sales |
$ | 327,034 | $ | 256,995 | $ | — | $ | 584,029 | ||||||||
Depreciation |
6,406 | 2,640 | 947 | 9,993 | ||||||||||||
Amortization of identifiable intangibles |
952 | 1,467 | — | 2,419 | ||||||||||||
Impairment of goodwill and trademarks |
— | 67,851 | — | 67,851 | ||||||||||||
Segment earnings (loss) before
income tax |
51,553 | (49,416 | ) | (15,196 | ) | (13,059 | ) | |||||||||
Segment assets |
152,971 | 267,499 | 15,910 | 436,380 | ||||||||||||
Capital expenditures |
5,973 | 324 | 102 | 6,399 | ||||||||||||
Fiscal year ended February 29, 2008: |
||||||||||||||||
Net sales |
$ | 345,042 | $ | 265,568 | $ | — | $ | 610,610 | ||||||||
Depreciation |
8,009 | 3,306 | 902 | 12,217 | ||||||||||||
Amortization of identifiable intangibles |
595 | 1,467 | — | 2,062 | ||||||||||||
Segment earnings (loss) before
income tax |
56,012 | 29,367 | (15,594 | ) | 69,785 | |||||||||||
Segment assets |
157,979 | 347,861 | 7,291 | 513,131 | ||||||||||||
Capital expenditures |
2,939 | 1,275 | 80 | 4,294 | ||||||||||||
Fiscal year ended February 28, 2007: |
||||||||||||||||
Net sales |
$ | 325,679 | $ | 259,034 | $ | — | $ | 584,713 | ||||||||
Depreciation |
8,275 | 5,745 | 650 | 14,670 | ||||||||||||
Amortization of identifiable intangibles |
384 | 1,573 | — | 1,957 | ||||||||||||
Segment earnings (loss) before
income tax |
46,077 | 33,321 | (13,033 | ) | 66,365 | |||||||||||
Segment assets |
151,746 | 313,716 | 12,766 | 478,228 | ||||||||||||
Capital expenditures |
2,647 | 1,038 | 1,314 | 4,999 | ||||||||||||
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 Company’s
operations in different geographic areas as of and for the fiscal years ended is as follows (in
thousand):
| United States | Canada | Mexico | Total | |||||||||||||
2009 |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 327,034 | $ | — | $ | — | $ | 327,034 | ||||||||
Apparel Segment |
240,798 | 14,913 | 1,284 | 256,995 | ||||||||||||
| $ | 567,832 | $ | 14,913 | $ | 1,284 | $ | 584,029 | |||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 42,272 | $ | — | $ | — | 42,272 | |||||||||
Apparel Segment |
5,856 | 38 | 1,173 | 7,067 | ||||||||||||
Corporate |
5,333 | — | — | 5,333 | ||||||||||||
| $ | 53,461 | $ | 38 | $ | 1,173 | $ | 54,672 | |||||||||
F-29
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(16) Segment Information and Geographic Information-continued
| United States | Canada | Mexico | Total | |||||||||||||
2008 |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 345,042 | $ | — | $ | — | $ | 345,042 | ||||||||
Apparel Segment |
248,431 | 17,137 | — | 265,568 | ||||||||||||
| $ | 593,473 | $ | 17,137 | $ | — | $ | 610,610 | |||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 43,004 | $ | — | $ | — | 43,004 | |||||||||
Apparel Segment |
7,698 | 74 | 2,092 | 9,864 | ||||||||||||
Corporate |
6,120 | — | — | 6,120 | ||||||||||||
| $ | 56,822 | $ | 74 | $ | 2,092 | $ | 58,988 | |||||||||
2007 |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 325,679 | $ | — | $ | — | $ | 325,679 | ||||||||
Apparel Segment |
241,477 | 17,557 | — | 259,034 | ||||||||||||
| $ | 567,156 | $ | 17,557 | $ | — | $ | 584,713 | |||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 44,291 | $ | — | $ | — | 44,291 | |||||||||
Apparel Segment |
9,002 | 102 | 2,721 | 11,825 | ||||||||||||
Corporate |
6,941 | — | — | 6,941 | ||||||||||||
| $ | 60,234 | $ | 102 | $ | 2,721 | $ | 63,057 | |||||||||
(17) Commitments and Contingencies
The Company leases certain of its facilities under operating leases that expire on various dates
through fiscal year ended 2014. Future minimum lease commitments and sublease income under
non-cancelable operating leases for each of the fiscal years ending are as follows (in thousands):
| Operating | ||||||||||||
| Lease | Sublease | |||||||||||
| Commitments | Income | Net | ||||||||||
2010 |
$ | 5,409 | $ | (67 | ) | $ | 5,342 | |||||
2011 |
4,049 | — | 4,049 | |||||||||
2012 |
2,354 | — | 2,354 | |||||||||
2013 |
1,615 | — | 1,615 | |||||||||
2014 |
575 | — | 575 | |||||||||
Thereafter |
21 | — | 21 | |||||||||
| $ | 14,023 | $ | (67 | ) | $ | 13,956 | ||||||
Rent expense attributable to such leases totaled $9,389,000, $9,789,000 and $8,913,000 for the
fiscal years ended 2009, 2008 and 2007, respectively.
In the ordinary course of business, the Company also enters into real property leases, which
require the Company as lessee to indemnify the lessor from liabilities arising out of the Company’s
occupancy of the properties. The Company’s indemnification obligations are generally covered under
the Company’s general insurance policies.
From time to time the Company is involved in various litigation matters arising in the ordinary
course of business. The Company does not believe the disposition of any current matter will have a
material adverse effect on its consolidated financial position or results of operations.
F-30
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(18) Supplemental Cash Flow Information
Net cash flows from operating activities reflect cash payments for interest and income taxes as
follows for the three fiscal years ended (in thousands):
| 2009 | 2008 | 2007 | ||||||||||
Interest paid |
$ | 3,838 | $ | 6,048 | $ | 6,646 | ||||||
Income taxes paid |
$ | 24,522 | $ | 25,208 | $ | 26,657 | ||||||
Supplemental disclosure of non-cash investing and financing activities (in thousand):
| 2009 | 2008 | 2007 | ||||||||||
Fair value of assets acquired in acquisitions |
$ | — | $ | 15,752 | $ | 22,236 | ||||||
Liabilities assumed in acquisitions |
$ | — | $ | 614 | $ | 4,608 | ||||||
(19) Quarterly Consolidated Financial Information (Unaudited)
The following table represents the unaudited quarterly financial data of the Company for fiscal
years ended 2009 and 2008 (in thousands, except per share amounts and quarter over quarter
comparison):
| For the Three Months Ended | May 31 | August 31 | November 30 | February 28 | ||||||||||||
Fiscal year ended 2009: |
||||||||||||||||
Net sales |
$ | 163,200 | $ | 161,050 | $ | 142,453 | $ | 117,326 | ||||||||
Gross profit |
40,452 | 39,238 | 37,857 | 25,929 | ||||||||||||
Net earnings (loss) |
10,936 | 9,341 | 9,876 | (62,921 | ) | |||||||||||
Dividends paid |
3,987 | 3,998 | 4,007 | 4,007 | ||||||||||||
Per share of common stock: |
||||||||||||||||
Basic net earnings (loss) |
$ | 0.43 | $ | 0.36 | $ | 0.38 | $ | (2.44 | ) | |||||||
Diluted net earnings (loss) |
$ | 0.42 | $ | 0.36 | $ | 0.38 | $ | (2.44 | ) | |||||||
Dividends |
$ | 0.155 | $ | 0.155 | $ | 0.155 | $ | 0.155 | ||||||||
Fiscal year ended 2008: |
||||||||||||||||
Net sales |
$ | 152,774 | $ | 150,086 | $ | 158,215 | $ | 149,535 | ||||||||
Gross profit |
41,358 | 41,339 | 42,034 | 39,143 | ||||||||||||
Net earnings |
10,796 | 11,138 | 11,568 | 11,088 | ||||||||||||
Dividends paid |
3,967 | 3,976 | 3,986 | 3,987 | ||||||||||||
Per share of common stock: |
||||||||||||||||
Basic net earnings |
$ | 0.42 | $ | 0.44 | $ | 0.45 | $ | 0.43 | ||||||||
Diluted net earnings |
$ | 0.42 | $ | 0.43 | $ | 0.45 | $ | 0.43 | ||||||||
Dividends |
$ | 0.155 | $ | 0.155 | $ | 0.155 | $ | 0.155 | ||||||||
Current Quarter Compared to Same Quarter Last Year
For the quarter ended February 28, 2009, a non-cash impairment charge related to the apparel
segment of $63.2 million and $4.7 million to goodwill and trademarks, respectively, was recorded.
In addition, the Company recorded a $2.0 million charge to its inventory reserve related to junior
and fleece products. Without these impacts, the reported diluted earnings per share for the
quarter would have been $.23.
For the quarter ended February 29, 2008, the effective tax rate was 33.2% compared to 37.0% for the
first nine months of fiscal year 2008. The decrease in the effective tax rate had a positive
impact of $476,000 on our earnings for the quarter, or $.02 per diluted share. Without this impact
the reported diluted earnings per share for the quarter would have been $.40.
F-31
Table of Contents
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(20) Subsequent Events
On March 31, 2009, the Company declared a quarterly cash dividend of 15 1/2 cents a share on its
common stock. The dividend was paid May 1, 2009 to shareholders of record on April 13, 2009. May
1, 2009 also has been set as the record date for shareholders entitled to notice of and to vote at
the Annual Meeting of Shareholders to be held on July 1, 2009.
F-32
Table of Contents
INDEX TO EXHIBITS
| Exhibit Number | Description of Document | |
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 Registrant’s Annual Report on Form 10-K for the fiscal year ended February 28, 1993. | |
Exhibit 3.1(b)
|
Amendment to articles of Incorporation dated June 17, 2004 incorporated herein incorporated herein by reference to Exhibit 3.1(b) to the Registrant’s Annual Report on Form 10-K 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 Registrant’s Quarterly Report on Form 10-Q 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 Registrant’s Current Report on Form 8-K 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s 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 Registrant’s Current Report on Form 8-K filed on January 20, 2009. | |
Exhibit 10.6
|
2004 Long-Term Incentive Plan incorporated herein by reference to Exhibit 4.1 of the Registrant’s Current Report on Form S-8 filed on January 5, 2005. | |
Exhibit 10.7
|
Form of Executive Incentive and Non-Qualified Stock Option Agreement granted February 27, 2006 incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 1, 2006. | |
Exhibit 10.8
|
Form of Executive Restricted Stock Agreement granted February 27, 2006 incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on March 1, 2006. | |
Exhibit 10.9
|
Indemnity Agreement dated as of June 25, 2004, by and among Laurence Ashkin, Roger Brown, John McLinden, Arthur Slaven, Ennis, Inc. and Midlothian Holdings LLC incorporated herein by reference to Exhibit 10.7 to the Registrant’s Form S-4 filed on September 3, 2004. | |
Exhibit 10.10
|
UPS Ground, Air Hundredweight and Sonicair Incentive Program Carrier Agreement incorporated herein by reference to Exhibit 10 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 28, 2003. | |
Exhibit 10.11
|
Addendum to UPS Ground, Air and Sonicair Incentive Program Carrier Agreement dated as of August 9, 2004, between Ennis, Inc. and United Parcel Service, Inc. incorporated herein by reference to Exhibit 10.10 to the Registrant’s Form S-4 filed on September 3, 2004.* | |
E-1
Table of Contents
INDEX TO EXHIBITS
| Exhibit Number | Description of Document | |
Exhibit 10.12
|
Carbonless Paper Agreement dated as of July 13, 2004 between Ennis, Inc & MeadWestvaco Corporation incorporated herein by reference to Exhibit 10.11 to the Registrant’s Form S-4 filed on September 3, 2004.* | |
Exhibit 10.13
|
Amended and Restated Credit Agreement dated as of March 31, 2006 among Ennis, Inc., various other parties that sign and become a party to the security agreement and LaSalle Bank National Association, as the Administrative Agent incorporated herein by reference to Exhibit 10.18 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 28, 2006. | |
Exhibit 10.14
|
Amended and Restated Security Agreement dated as of March 31, 2006 among Ennis, Inc. various other parties that sign and become a party to the security agreement and LaSalle Bank National Association, as the Administrative Agent incorporated herein by reference to Exhibit 10.19 to the Registrant’s Annual Report on Form 10-K for the fiscal year ended February 28, 2006. | |
Exhibit 21
|
Subsidiaries of Registrant | |
Exhibit 23
|
Consent of Independent Registered Public Accounting Firm | |
Exhibit 31.1
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Executive Officer) | |
Exhibit 31.2
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a) (Chief Financial Officer) | |
Exhibit 32.1
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
Exhibit 32.2
|
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| * | Portions of Exhibit have been omitted pursuant to a request for confidential treatment filed with the SEC. |
E-2