UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Quarterly Period Ended May 31, 2013
OR
¨ | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the Transition Period from to
Commission File Number 1-5807
ENNIS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Texas |
75-0256410 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
2441 Presidential Pkwy., Midlothian, Texas |
76065 | |
(Address of Principal Executive Offices) | (Zip code) |
(972) 775-9801
(Registrants Telephone Number, Including Area Code)
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of June 28, 2013, there were 26,216,476 shares of the Registrants common stock outstanding.
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
2
ENNIS, INC. AND SUBSIDIARIES
(Dollars in thousands)
May 31, 2013 |
February 28, 2013 |
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(unaudited | ) | |||||||
Assets |
||||||||
Current assets |
||||||||
Cash |
$ | 14,396 | $ | 6,232 | ||||
Accounts receivable, net of allowance for doubtful receivables of $2,707 at May 31, 2013 and $3,952 at February 28, 2013 |
63,784 | 60,071 | ||||||
Prepaid expenses |
6,819 | 7,425 | ||||||
Prepaid income taxes |
775 | 4,170 | ||||||
Inventories |
97,975 | 109,698 | ||||||
Deferred income taxes |
5,820 | 5,820 | ||||||
Assets held for sale |
710 | | ||||||
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|
|
|
|||||
Total current assets |
190,279 | 193,416 | ||||||
Property, plant and equipment, at cost |
||||||||
Plant, machinery and equipment |
154,718 | 155,093 | ||||||
Land and buildings |
79,903 | 80,438 | ||||||
Other |
23,234 | 23,252 | ||||||
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|
|
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Total property, plant and equipment |
257,855 | 258,783 | ||||||
Less accumulated depreciation |
167,812 | 166,870 | ||||||
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Net property, plant and equipment |
90,043 | 91,913 | ||||||
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Goodwill |
121,809 | 121,809 | ||||||
Trademarks and trade names, net |
63,378 | 63,378 | ||||||
Customer lists, net |
19,371 | 20,134 | ||||||
Deferred finance charges, net |
485 | 522 | ||||||
Other assets |
4,052 | 4,120 | ||||||
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Total assets |
$ | 489,417 | $ | 495,292 | ||||
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See accompanying notes to consolidated financial statements.
3
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except for par value and share amounts)
May 31, 2013 |
February 28, 2013 |
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(unaudited | ) | |||||||
Liabilities and Shareholders Equity |
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Current liabilities |
||||||||
Accounts payable |
$ | 20,966 | $ | 22,256 | ||||
Accrued expenses |
||||||||
Employee compensation and benefits |
14,081 | 17,003 | ||||||
Taxes other than income |
798 | 582 | ||||||
Income taxes payable |
1,693 | 621 | ||||||
Other |
2,446 | 2,577 | ||||||
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Total current liabilities |
39,984 | 43,039 | ||||||
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Long-term debt |
45,000 | 57,500 | ||||||
Liability for pension benefits |
9,861 | 9,341 | ||||||
Deferred income taxes |
23,276 | 23,184 | ||||||
Other liabilities |
1,020 | 1,012 | ||||||
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Total liabilities |
119,141 | 134,076 | ||||||
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Commitments and contingencies |
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Shareholders equity |
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Preferred stock $10 par value, authorized 1,000,000 shares; none issued |
| | ||||||
Common stock $2.50 par value, authorized 40,000,000 shares; issued 30,053,443 shares at May 31 and February 28, 2013 |
75,134 | 75,134 | ||||||
Additional paid-in capital |
121,599 | 122,186 | ||||||
Retained earnings |
260,219 | 251,713 | ||||||
Accumulated other comprehensive income (loss): |
||||||||
Foreign currency translation, net of taxes |
721 | 571 | ||||||
Minimum pension liability, net of taxes |
(15,474 | ) | (15,474 | ) | ||||
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|
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Total accumulated other comprehensive income (loss) |
(14,753 | ) | (14,903 | ) | ||||
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Treasury stock |
(71,923 | ) | (72,914 | ) | ||||
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Total shareholders equity |
370,276 | 361,216 | ||||||
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Total liabilities and shareholders equity |
$ | 489,417 | $ | 495,292 | ||||
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See accompanying notes to consolidated financial statements.
4
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except share and per share amounts)
(Unaudited)
Three months ended May 31, |
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2013 | 2012 | |||||||
Net sales |
$ | 138,466 | $ | 142,528 | ||||
Cost of goods sold |
102,671 | 114,279 | ||||||
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Gross profit margin |
35,795 | 28,249 | ||||||
Selling, general and administrative |
22,205 | 22,026 | ||||||
Gain from disposal of assets |
(7 | ) | (4 | ) | ||||
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|
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Income from operations |
13,597 | 6,227 | ||||||
Other income (expense) |
||||||||
Interest expense |
(251 | ) | (469 | ) | ||||
Other, net |
157 | 350 | ||||||
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(94 | ) | (119 | ) | |||||
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Earnings before income taxes |
13,503 | 6,108 | ||||||
Provision for income taxes |
4,997 | 2,229 | ||||||
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Net earnings |
$ | 8,506 | $ | 3,879 | ||||
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Weighted average common shares outstanding |
||||||||
Basic |
26,038,068 | 25,963,369 | ||||||
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Diluted |
26,055,869 | 25,983,907 | ||||||
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Per share amounts |
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Net earningsbasic |
$ | 0.33 | $ | 0.15 | ||||
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Net earningsdiluted |
$ | 0.33 | $ | 0.15 | ||||
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Cash dividends per share |
$ | | $ | 0.175 | ||||
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See accompanying notes to consolidated financial statements.
5
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)
Three months ended May 31, |
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2013 | 2012 | |||||||
Net earnings |
$ | 8,506 | $ | 3,879 | ||||
Foreign currency translation adjustment, net of deferred taxes |
150 | (2,107 | ) | |||||
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Comprehensive income |
$ | 8,656 | $ | 1,772 | ||||
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See accompanying notes to consolidated financial statements.
6
ENNIS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)
Three months ended | ||||||||
May 31, | ||||||||
2013 | 2012 | |||||||
Cash flows from operating activities: |
||||||||
Net earnings |
$ | 8,506 | $ | 3,879 | ||||
Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
Depreciation |
2,387 | 2,572 | ||||||
Amortization of deferred finance charges |
37 | 37 | ||||||
Amortization of trade names, customer lists, and patent |
795 | 832 | ||||||
Gain from disposal of assets |
(7 | ) | (4 | ) | ||||
Bad debt expense |
1,099 | 287 | ||||||
Stock based compensation |
405 | 316 | ||||||
Deferred income taxes |
(1 | ) | 2 | |||||
Changes in operating assets and liabilities: |
||||||||
Accounts receivable |
(4,850 | ) | (300 | ) | ||||
Prepaid expenses |
4,100 | 1,913 | ||||||
Inventories |
11,683 | 14,876 | ||||||
Other assets |
36 | 3 | ||||||
Accounts payable and accrued expenses |
(3,167 | ) | (9,873 | ) | ||||
Other liabilities |
8 | (313 | ) | |||||
Liability for pension benefits |
520 | 539 | ||||||
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Net cash provided by operating activities |
21,551 | 14,766 | ||||||
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Cash flows from investing activities: |
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Capital expenditures |
(669 | ) | (133 | ) | ||||
Proceeds from disposal of plant and property |
7 | 7 | ||||||
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Net cash used in investing activities |
(662 | ) | (126 | ) | ||||
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Cash flows from financing activities: |
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Repayment of debt |
(12,500 | ) | (5,000 | ) | ||||
Dividends |
| (4,560 | ) | |||||
Purchase of treasury stock |
(1 | ) | (1 | ) | ||||
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Net cash used in financing activities |
(12,501 | ) | (9,561 | ) | ||||
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Effect of exchange rate changes on cash |
(224 | ) | (522 | ) | ||||
Net change in cash |
8,164 | 4,557 | ||||||
Cash at beginning of period |
6,232 | 10,410 | ||||||
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Cash at end of period |
$ | 14,396 | $ | 14,967 | ||||
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See accompanying notes to consolidated financial statements.
7
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
1. Significant Accounting Policies and General Matters
Basis of Presentation
These unaudited consolidated financial statements of Ennis, Inc. and its subsidiaries (collectively referred to as the Company, Registrant, Ennis, or we, us, or our) for the quarter ended May 31, 2013 have been prepared in accordance with generally accepted accounting principles for interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended February 28, 2013, from which the accompanying consolidated balance sheet at February 28, 2013 was derived. All significant intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial information have been included and are of a normal recurring nature. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the disclosure and reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, pension plan, accrued liabilities, and income taxes. The Company bases estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of operations for any interim period are not necessarily indicative of the results of operations for a full year.
2. Accounts Receivable and Allowance for Doubtful Receivables
Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible. Substantially all of the Companys receivables are due from customers in North America. The Company extends credit to its customers based upon its evaluation of the following factors: (i) the customers financial condition, (ii) the amount of credit the customer requests, and (iii) the customers actual payment history (which includes disputed invoice resolution). The Company does not typically require its customers to post a deposit or supply collateral. The Companys allowance for doubtful receivables is based on an analysis that estimates the amount of its total customer receivable balance that is not collectible. This analysis includes assessing a default probability to customers receivable balances, which is influenced by several factors including (i) current market conditions, (ii) periodic review of customer credit worthiness, and (iii) review of customer receivable aging and payment trends.
The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance in the period the payment is received. Credit losses from continuing operations have consistently been within managements expectations.
The following table presents the activity in the Companys allowance for doubtful receivables for the three months ended May 31, 2013 and May 31, 2012 (in thousands):
Three months ended May 31, |
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2013 | 2012 | |||||||
Balance at beginning of period |
$ | 3,952 | $ | 4,403 | ||||
Bad debt expense |
1,099 | 287 | ||||||
Recoveries |
5 | 6 | ||||||
Accounts written off |
(2,349 | ) | (217 | ) | ||||
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Balance at end of period |
$ | 2,707 | $ | 4,479 | ||||
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3. Inventories
The Company uses the lower of last-in, first-out (LIFO) cost or market to value certain of its business forms inventories and the lower of first-in, first-out (FIFO) cost or market to value its remaining forms and apparel inventories. The Company regularly reviews inventories on hand, using specific aging categories, and writes down
8
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
3. Inventories -continued
the carrying value of its inventories for excess and potentially obsolete inventories based on historical usage and estimated future usage. In assessing the ultimate realization of its inventories, the Company is required to make judgments as to future demand requirements. As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventories may be required.
The following table summarizes the components of inventories at the different stages of production as of the dates indicated (in thousands):
May 31, | February 28, | |||||||
2013 | 2013 | |||||||
Raw material |
$ | 14,481 | $ | 14,470 | ||||
Work-in-process |
6,233 | 11,238 | ||||||
Finished goods |
77,261 | 83,990 | ||||||
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$ | 97,975 | $ | 109,698 | |||||
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4. Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses and is not amortized. Goodwill and indefinite-lived intangibles are evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. Fair values of reporting units are typically calculated using a factor of expected earnings before interest, taxes, depreciation, and amortization. The Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets in assessing the recoverability of its goodwill and other intangibles. If these estimates or the related assumptions change, the Company may be required to record impairment charges for these assets in the future.
The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 1 and 10 years). Trademarks with indefinite lives are evaluated for impairment on an annual basis, or more frequently if impairment indicators arise. The Company assesses the recoverability of its definite-lived intangible assets primarily based on its current and anticipated future undiscounted cash flows.
The carrying amount and accumulated amortization of the Companys intangible assets at each balance sheet date are as follows (in thousands):
As of May 31, 2013 |
Weighted Average Remaining Life (in years) |
Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||||||
Amortized intangible assets |
||||||||||||||||
Trade names |
| $ | 1,234 | $ | 1,234 | $ | | |||||||||
Customer lists |
6.1 | 37,887 | 18,516 | 19,371 | ||||||||||||
Noncompete |
| 500 | 500 | | ||||||||||||
Patent |
4.8 | 773 | 166 | 607 | ||||||||||||
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Total |
6.0 | $ | 40,394 | $ | 20,416 | $ | 19,978 | |||||||||
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9
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
4. Goodwill and Other Intangible Assets -continued
As of February 28, 2013 |
Weighted Average Remaining Life (in years) |
Gross Carrying Amount |
Accumulated Amortization |
Net | ||||||||||||
Amortized intangible assets |
||||||||||||||||
Trade names |
| $ | 1,234 | $ | 1,234 | $ | | |||||||||
Customer lists |
6.4 | 37,887 | 17,753 | 20,134 | ||||||||||||
Noncompete |
| 500 | 500 | | ||||||||||||
Patent |
5.0 | 773 | 134 | 639 | ||||||||||||
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Total |
6.2 | $ | 40,394 | $ | 19,621 | $ | 20,773 | |||||||||
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May 31, 2013 |
February 28, 2013 |
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Non-amortizing intangible assets |
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Trademarks |
$ | 63,378 | $ | 63,378 | ||||||||||||
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Aggregate amortization expense for the three months ended May 31, 2013 and May 31, 2012 was $0.8 million.
The Companys estimated amortization expense for the current and next five fiscal years ending in February of the stated year is as follows (in thousands):
2014 |
$ | 3,180 | ||
2015 |
3,063 | |||
2016 |
3,004 | |||
2017 |
3,004 | |||
2018 |
2,765 | |||
2019 |
2,302 |
Changes in the net carrying amount of goodwill as of the dates indicated are as follows (in thousands):
Print Segment Total |
Apparel Segment Total |
Total | ||||||||||
Balance as of February 29, 2012 |
$ | 47,085 | $ | 74,549 | $ | 121,634 | ||||||
Goodwill acquired adjustment |
175 | | 175 | |||||||||
Goodwill impairment |
| | | |||||||||
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Balance as of February 28, 2013 |
47,260 | 74,549 | 121,809 | |||||||||
Goodwill acquired |
| | | |||||||||
Goodwill impairment |
| | | |||||||||
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Balance as of May 31, 2013 |
$ | 47,260 | $ |
74,549 |
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$ | 121,809 | |||||
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During the fiscal year ended February 28, 2013, an adjustment of $0.2 million reflects a revised estimate in accounts receivable, inventories, accrued expenses, and property, plant and equipment, net of adjustment to the purchase price, related to the acquisition of PrintXcel and Printegra assets from Cenveo Corporation (Cenveo) and its subsidiaries.
10
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
5. Other Accrued Expenses
The following table summarizes the components of other accrued expenses as of the dates indicated (in thousands):
May 31, 2013 |
February 28, 2013 |
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Accrued taxes |
$ | 352 | $ | 361 | ||||
Accrued legal and professional fees |
620 | 777 | ||||||
Accrued interest |
104 | 120 | ||||||
Accrued utilities |
66 | 96 | ||||||
Accrued phantom stock obligation |
499 | 467 | ||||||
Accrued acquisition related obligations |
159 | 163 | ||||||
Other accrued expenses |
646 | 593 | ||||||
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$ | 2,446 | $ | 2,577 | |||||
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6. Long-Term Debt
Long-term debt consisted of the following as of the dates indicated (in thousands):
May 31, 2013 |
February 28, 2013 |
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Revolving credit facility |
$ | 45,000 | $ | 57,500 |
On February 22, 2012, the Company entered into the Second Amendment to Second Amended and Restated Credit Agreement (the Facility) with a group of lenders led by Bank of America, N.A. (the Lenders). The Facility provides the Company access to $150.0 million in revolving credit, which the Company may increase to $200.0 million in certain circumstances, and matures on August 16, 2016. The Facility bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 1.0% to 2.25% (LIBOR + 1.5% or 1.69% at May 31, 2013 and 1.74% at May 31, 2012), depending on the Companys ratio of total funded debt to the sum of net earnings plus interest, tax, depreciation and amortization (EBITDA). As of May 31, 2013, the Company had $45.0 million of borrowings under the revolving credit line and $4.1 million outstanding under standby letters of credit arrangements, leaving the Company availability of approximately $100.9 million. The Facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset dispositions, and additional debt, as well as other customary covenants, such as a minimum tangible equity level and the total funded debt to EBITDA ratio. The Company was in compliance with these covenants as of May 31, 2013. The Facility is secured by substantially all of the Companys domestic assets as well as all capital securities of each of the Companys U.S. subsidiaries and 65% of all capital securities of each of the Companys direct foreign subsidiaries.
7. Shareholders Equity
Changes in shareholders equity accounts for the three months ended May 31, 2013 are as follows (in thousands, except share amounts):
Common Stock | Additional Paid-in |
Retained | Accumulated Other Comprehensive |
Treasury Stock | ||||||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | Shares | Amount | Total | |||||||||||||||||||||||||
Balance February 28, 2013 |
30,053,443 | $ | 75,134 | $ | 122,186 | $ | 251,713 | $ | (14,903 | ) | (4,084,765 | ) | $ | (72,914 | ) | $ | 361,216 | |||||||||||||||
Net earnings |
| | | 8,506 | | | | 8,506 | ||||||||||||||||||||||||
Foreign currency translation, net of deferred tax of $93 |
| | | | 150 | | | 150 | ||||||||||||||||||||||||
Stock based compensation |
| | 405 | | | | | 405 | ||||||||||||||||||||||||
Exercise of stock options and restricted stock grants |
| | (992 | ) | | | 55,530 | 992 | | |||||||||||||||||||||||
Stock repurchases |
| | | | | (49 | ) | (1 | ) | (1 | ) | |||||||||||||||||||||
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Balance May 31, 2013 |
30,053,443 | $ | 75,134 | $ | 121,599 | $ | 260,219 | $ | (14,753 | ) | (4,029,284 | ) | $ | (71,923 | ) | $ | 370,276 | |||||||||||||||
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11
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
7. Shareholders Equity -continued
On October 20, 2008, the Board of Directors authorized the repurchase of up to $5.0 million of the common stock through a stock repurchase program. Under the board-approved repurchase program, share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors, and such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations. These repurchases may be commenced or suspended at any time or from time to time without prior notice. While no shares have been repurchased during the last three fiscal years or during the current fiscal year under the program, there have been a total of 96,000 shares of common stock that have been purchased under the repurchase program since its inception at an average price per share of $10.45. On April 20, 2012, the Board increased the authorized amount available to repurchase our shares by an additional $5.0 million, bringing the total available to repurchase the Companys common stock to approximately $9.0 million. Unrelated to the stock repurchase program, the Company purchased 49 shares of common stock during the three months ended May 31, 2013.
8. Stock Option Plan and Stock Based Compensation
The Company grants stock options and restricted stock to key executives and managerial employees and non-employee directors. At May 31, 2013, the Company had one stock option plan, the 2004 Long-Term Incentive Plan of Ennis, Inc., as amended and restated as of June 30, 2011, formerly the 1998 Option and Restricted Stock Plan amended and restated as of May 14, 2008 (the Plan). The Company has 858,742 shares of unissued common stock reserved under the Plan for issuance. The exercise price of each stock option granted under the Plan equals a referenced price of the Companys common stock as reported on the New York Stock Exchange on the date of grant, and an options maximum term is ten years. Stock options and restricted stock may be granted at different times during the year and vest ratably over various periods, from grant date up to five years. The Company uses treasury stock to satisfy option exercises and restricted stock awards.
The Company recognizes compensation expense for stock options and restricted stock grants on a straight-line basis over the requisite service period. For the three months ended May 31, 2013 and May 31, 2012, the Company included in selling, general and administrative expenses, compensation expense related to share based compensation of $0.4 million ($0.3 million net of tax), and $0.3 million ($0.2 million net of tax), respectively.
Stock Options
The Company had the following stock option activity for the three months ended May 31, 2013:
Number of Shares (exact quantity) |
Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Aggregate Intrinsic Value(a) (in thousands) |
|||||||||||||
Outstanding at February 28, 2013 |
363,000 | $ | 15.79 | 6.4 | $ | 421 | ||||||||||
Granted |
36,155 | 14.05 | ||||||||||||||
Terminated |
(3,750 | ) | 11.67 | |||||||||||||
Exercised |
| | ||||||||||||||
|
|
|||||||||||||||
Outstanding at May 31, 2013 |
395,405 | $ | 15.67 | 6.5 | $ | 762 | ||||||||||
|
|
|||||||||||||||
Exercisable at May 31, 2013 |
283,194 | $ | 15.73 | 5.5 | $ | 572 | ||||||||||
|
|
(a) | Intrinsic value is measured as the excess fair market value of the Companys common stock as reported on the New York Stock Exchange over the applicable exercise price. |
12
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
8. Stock Option Plan and Stock Based Compensation -continued
The following is a summary of the assumptions used and the weighted average grant-date fair value of the stock options granted during the three months ended May 31, 2013 and May 31, 2012:
May 31, | ||||||||
2013 | 2012 | |||||||
Expected volatility |
30.41 | % | 37.02 | % | ||||
Expected term (years) |
3 | 3 | ||||||
Risk free interest rate |
0.35 | % | 0.43 | % | ||||
Dividend yield |
4.63 | % | 4.42 | % | ||||
Weighted average grant-date fair value |
$ | 1.96 | $ | 2.83 |
There were no stock options exercised or tax benefits realized from stock based compensation during the three months ended May 31, 2013 and May 31, 2012.
A summary of the status of the Companys unvested stock options at February 28, 2013, and changes during the three months ended May 31, 2013 is presented below:
Number of Options |
Weighted Average Grant Date Fair Value |
|||||||
Unvested at February 28, 2013 |
169,954 | $ | 3.20 | |||||
New grants |
36,155 | 1.96 | ||||||
Vested |
(93,898 | ) | 3.08 | |||||
Forfeited |
| | ||||||
|
|
|||||||
Unvested at May 31, 2013 |
112,211 | $ | 2.89 | |||||
|
|
As of May 31, 2013, there was $0.3 million of unrecognized compensation cost related to unvested stock options granted under the Plan. The weighted average remaining requisite service period of the unvested stock options was 2.0 years. The total fair value of shares underlying the options vested during the three months ended May 31, 2013 was $1.6 million.
Restricted Stock
The Company had the following restricted stock grant activity for the three months ended May 31, 2013:
Number of Shares |
Weighted Average Grant Date Fair Value |
|||||||
Outstanding at February 28, 2013 |
187,048 | $ | 16.49 | |||||
Granted |
55,607 | 14.05 | ||||||
Terminated |
| | ||||||
Vested |
(55,530 | ) | 16.55 | |||||
|
|
|||||||
Outstanding at May 31, 2013 |
187,125 | $ | 15.74 | |||||
|
|
As of May 31, 2013, the total remaining unrecognized compensation cost related to unvested restricted stock granted under the Plan was approximately $2.1 million. The weighted average remaining requisite service period of the unvested restricted stock awards was 1.8 years. As of May 31, 2013, the Companys outstanding restricted stock had an underlying fair value at date of grant of $2.9 million.
13
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
9. Pension Plan
The Company and certain subsidiaries have a noncontributory defined benefit retirement plan (the Pension Plan), covering approximately 9% of aggregate employees. Benefits are based on years of service and the employees average compensation for the highest five compensation years preceding retirement or termination. The Companys funding policy is to contribute annually an amount in accordance with the requirements of the Employee Retirement Income Security Act of 1974 (ERISA).
Pension expense is composed of the following components included in cost of goods sold and selling, general and administrative expenses in the Companys consolidated statements of earnings (in thousands):
Three months ended May 31, |
||||||||
2013 | 2012 | |||||||
Components of net periodic benefit cost |
||||||||
Service cost |
$ | 315 | $ | 321 | ||||
Interest cost |
601 | 600 | ||||||
Expected return on plan assets |
(872 | ) | (802 | ) | ||||
Amortization of: |
||||||||
Prior service cost |
(36 | ) | (36 | ) | ||||
Unrecognized net loss |
512 | 456 | ||||||
|
|
|
|
|||||
Net periodic benefit cost |
$ | 520 | $ | 539 | ||||
|
|
|
|
The Company is required to make contributions to the Pension Plan. These contributions are required under the minimum funding requirements of ERISA. Due to the recent enactment of the Moving Ahead for Progress in the 21st Century (MAP-21) in July 2012, plan sponsors can calculate the discount rate used to measure the Pension Plan liability using a 25-year average of interest rates plus or minus a corridor. Prior to MAP-21, the discount rate used in measuring the pension liability was based on the 24-month average of interest rates. As a result of the enactment, which effectively raises the discount rates mandated for determining the value of a pension plans benefit liability and annual cost of accruals, the Companys minimum required contribution to the Pension Plan is zero for the Pension Plan year ending February 28, 2014. However, the Company expects to make a cash contribution to the Pension Plan of between $2.0 million and $3.0 million during fiscal year 2014. The Company contributed $3.0 million to the Pension Plan during fiscal year 2013.
10. Earnings Per Share
Basic earnings per share have been computed by dividing net earnings by the weighted average number of common shares outstanding during the applicable period. Diluted earnings per share reflect the potential dilution that could occur if stock options or other contracts to issue common shares were exercised or converted into common stock.
For the three months ended May 31, 2013 and May 31, 2012, shares related to stock options of 333,405 and 301,150, respectively, were not included in the diluted earnings per share computation because their exercise price exceeded the average fair market value of the Companys stock. The following table sets forth the computation for basic and diluted earnings per share for the periods indicated:
14
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
10. Earnings Per Share -continued
Three months ended May 31, |
||||||||
2013 | 2012 | |||||||
Basic weighted average common shares outstanding |
26,038,068 | 25,963,369 | ||||||
Effect of dilutive options |
17,801 | 20,538 | ||||||
|
|
|
|
|||||
Diluted weighted average common shares outstanding |
26,055,869 | 25,983,907 | ||||||
|
|
|
|
|||||
Per share amounts: |
||||||||
Net earnings basic |
$ | 0.33 | $ | 0.15 | ||||
|
|
|
|
|||||
Net earnings diluted |
$ | 0.33 | $ | 0.15 | ||||
|
|
|
|
|||||
Cash dividends |
$ | | $ | 0.175 | ||||
|
|
|
|
11. Segment Information and Geographic Information
The Company operates in two segmentsthe Print Segment and the Apparel Segment.
The Print Segment, which represented 59% of the Companys consolidated net sales for the three months ended May 31, 2013, 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 47 manufacturing locations throughout the United States in 19 strategically located states. Approximately 97% of the business products manufactured by the Print Segment are custom and semi-custom products, constructed in a wide variety of sizes, colors, number of parts and quantities on an individual job basis depending upon the customers specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, Specialized Printed Forms®, 360º Custom LabelsSM, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphicsSM, Calibrated Forms®, PrintXcel and Printegra®. The Print Segment also sells the Adams-McClure® brand (which provides Point of Purchase advertising for large franchise and fast food chains as well as kitting and fulfillment); the Admore® brand (which provides presentation folders and document folders); Ennis Tag & LabelSM (which provides tags and labels, promotional products and advertising concept products); Atlas Tag & Label® (which provides tags and labels); Trade Envelopes® and Block Graphics® (which provide custom and imprinted envelopes) and Northstar® and General Financial Supply® (which provide financial and security documents).
The Print Segment sells predominantly through private printers and independent distributors. Northstar also sells direct to a small number of 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 Apparel Segment, which accounted for 41% of the Companys consolidated net sales for the three months ended May 31, 2013, consists of Alstyle Apparel. This group is primarily engaged in the production and sale of activewear including t-shirts, fleece goods, and other wearables. Alstyle sales are seasonal, with sales in the first and second quarters generally being the highest. Substantially all of the Apparel Segment sales are to customers in the United States.
Corporate information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses related to the Companys corporate headquarters and other administrative costs.
15
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
11. Segment Information and Geographic Information-continued
Segment data for the three months ended May 31, 2013 and May 31, 2012 were as follows (in thousands):
Print Segment |
Apparel Segment |
Corporate | Consolidated Totals |
|||||||||||||
Three months ended May 31, 2013: |
||||||||||||||||
Net sales |
$ | 81,439 | $ | 57,027 | $ | | $ | 138,466 | ||||||||
Depreciation |
1,377 | 970 | 40 | 2,387 | ||||||||||||
Amortization of identifiable intangibles |
428 | 367 | | 795 | ||||||||||||
Segment earnings (loss) before income tax |
13,447 | 4,368 | (4,312 | ) | 13,503 | |||||||||||
Segment assets |
161,672 | 307,420 | 20,325 | 489,417 | ||||||||||||
Capital expenditures |
479 | 150 | 40 | 669 | ||||||||||||
Three months ended May 31, 2012: |
||||||||||||||||
Net sales |
$ | 87,299 | $ | 55,229 | $ | | $ | 142,528 | ||||||||
Depreciation |
1,544 | 955 | 73 | 2,572 | ||||||||||||
Amortization of identifiable intangibles |
465 | 367 | | 832 | ||||||||||||
Segment earnings (loss) before income tax |
12,614 | (2,821 | ) | (3,685 | ) | 6,108 | ||||||||||
Segment assets |
173,150 | 317,813 | 21,918 | 512,881 | ||||||||||||
Capital expenditures |
118 | | 15 | 133 |
Identifiable long-lived assets by country include property, plant, and equipment, net of accumulated depreciation. The Company attributes revenues from external customers to individual geographic areas based on the country where the sale originated. Information about the Companys operations in different geographic areas as of and for the three months ended is as follows (in thousands):
United States | Canada | Mexico | Total | |||||||||||||
Three months ended May 31, 2013: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 81,439 | $ | | $ | | $ | 81,439 | ||||||||
Apparel Segment |
51,702 | 5,262 | 63 | 57,027 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 133,141 | $ | 5,262 | $ | 63 | $ | 138,466 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 39,499 | $ | | $ | | $ | 39,499 | ||||||||
Apparel Segment |
215 | 48 | 46,978 | 47,241 | ||||||||||||
Corporate |
3,303 | | | 3,303 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 43,017 | $ | 48 | $ | 46,978 | $ | 90,043 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Three months ended May 31, 2012: |
||||||||||||||||
Net sales to unaffiliated customers |
||||||||||||||||
Print Segment |
$ | 87,299 | $ | | $ | | $ | 87,299 | ||||||||
Apparel Segment |
49,281 | 5,674 | 274 | 55,229 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 136,580 | $ | 5,674 | $ | 274 | $ | 142,528 | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Identifiable long-lived assets |
||||||||||||||||
Print Segment |
$ | 43,484 | $ | | $ | | $ | 43,484 | ||||||||
Apparel Segment |
168 | 28 | 47,687 | 47,883 | ||||||||||||
Corporate |
3,459 | | | 3,459 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
$ | 47,111 | $ | 28 | $ | 47,687 | $ | 94,826 | |||||||||
|
|
|
|
|
|
|
|
16
ENNIS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MAY 31, 2013
12. Supplemental Cash Flow Information
Net cash flows from operating activities reflect cash payments for interest and income taxes as follows (in thousands):
Three months ended May 31, |
||||||||
2013 | 2012 | |||||||
Interest paid |
$ | 267 | $ | 248 | ||||
Income taxes paid |
$ | 546 | $ | 625 |
13. Concentrations of Risk
Financial instruments that potentially subject the Company to a concentration of credit risk principally consist of cash and trade receivables. Cash is placed with high-credit quality financial institutions. The Company believes its credit risk with respect to trade receivables is limited due to industry and geographic diversification. As disclosed on the Consolidated Balance Sheets, the Company maintains an allowance for doubtful receivables to cover the Companys estimate of credit losses associated with accounts receivable.
The Company, for quality and pricing reasons, purchases its paper, cotton and yarn products from a limited number of suppliers. To maintain its high standard of color control associated with its apparel products, the Company purchases its dyeing chemicals from limited sources. While other sources may be available to the Company to purchase these products, they may not be available at the cost or at the quality the Company has come to expect.
For the purposes of the Consolidated Statements of Cash Flows, the Company considers cash to include cash on hand and in bank accounts. The Federal Deposit Insurance Corporation (FDIC) insures accounts up to $250,000. At May 31, 2013, cash balances included $12.4 million that was not federally insured because it represented amounts in individual accounts above the federally insured limit for each such account. This at-risk amount is subject to fluctuation on a daily basis. While management does not believe there is significant risk with respect to such deposits, we cannot be assured that we will not experience losses on our deposits. At May 31, 2013, the Company had $0.6 million in Canadian and $0.8 million in Mexican bank accounts.
Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Ennis, Inc. (formerly Ennis Business Forms, Inc.) was organized under the laws of Texas in 1909. Ennis, Inc. and its subsidiaries print and manufacture a broad line of business forms and other business products (the Print Segment) and also manufacture a line of activewear (the Apparel Segment) for distribution throughout North America. The Print Segment distributes business products and forms throughout the United States primarily through independent dealers. This distributor channel encompasses print distributors, stationers, quick printers, computer software developers, and advertising agencies, among others. The Apparel Segment produces and sells activewear, including t-shirts, fleece goods and other wearables. Distribution of our activewear throughout the United States, Canada and Mexico is primarily through sales representatives. The distributor channel encompasses activewear wholesalers and screen printers. We offer a great selection of high-quality activewear apparel and hats with a wide variety of styles and colors in sizes ranging from toddler to 6XL. The apparel line features a wide variety of tees, fleece and shorts.
Business Segment Overview
We are one of the largest providers of business forms to independent distributors in the United States and are also one of the largest providers of blank t-shirts in North America to the activewear market. We operate in two reportable segments: Print and Apparel. For additional financial information concerning segment reporting, please see Note 11 of the Notes to the Consolidated Financial Statements beginning on page 15.
17
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Print Segment
The Print Segment, which represented 59% of our consolidated net sales for the three months ended May 31, 2013, 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 47 manufacturing locations throughout the United States in 19 strategically located states. Approximately 97% of the business products manufactured by the Print Segment are custom and semi-custom products, constructed in a wide variety of sizes, colors, and quantities on an individual job basis depending upon the customers specifications.
The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, Specialized Printed Forms®, 360º Custom LabelsSM, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphicsSM, Calibrated Forms®, PrintXcel and Printegra®. The Print Segment also sells the Adams-McClure® brand (which provides Point of Purchase advertising for large franchise and fast food chains as well as kitting and fulfillment); the Admore® brand (which provides presentation folders and document folders); Ennis Tag & LabelSM (which provides tags and labels, promotional products and advertising concept products); Atlas Tag & Label® (which provides tags and labels); Trade Envelopes® and Block Graphics® (which provide custom and imprinted envelopes) and Northstar® and General Financial Supply® (which provide financial and security documents).
The Print Segment sells predominantly through private printers and independent distributors. Northstar also sells direct to a small number of customers, generally large banking organizations (where a distributor is not acceptable or available to the end-user), as does Adams-McClure, where sales are generally through advertising agencies.
The printing industry generally sells its products either through sales made predominantly to end users, a market dominated by a few large manufacturers, such as R.R. Donnelley, Standard Register, and Cenveo, or, like the Company, through a variety of independent distributors and distributor groups. While it is not possible, because of the lack of adequate public statistical information, to determine the Companys share of the total business products market, management believes the Company is one of the largest producers of business forms in the United States distributing primarily through independent dealers and that its business forms offering is more diversified than that of most companies in the business forms industry.
There are a number of competitors that operate in this segment, ranging in size from single employee-owner operations to multi-plant organizations. We believe our strategic locations and buying power permit us to compete on a favorable basis within the distributor market on competitive factors, such as service, quality, and price.
Distribution of business forms and other business products throughout the United States is primarily done through independent dealers, including business forms distributors, stationers, printers, computer software developers, and advertising agencies.
Raw materials of the Print Segment principally consist of a wide variety of weights, widths, colors, sizes, and qualities of paper for business products purchased from a number of major suppliers at prevailing market prices.
Business products usage in the printing industry is generally not seasonal. General economic conditions and contraction of the traditional business forms industry are the predominant factor in quarterly volume fluctuations.
Our Print Business Challenges - In our Print Segment, we are engaged in an industry undergoing significant changes. Technology advances have made electronic distribution of documents, internet hosting, digital printing and print-on-demand valid, cost-effective alternatives to traditional custom printed documents and customer communications. In addition, the economic downturn and the associated credit crunch created highly competitive conditions in an already over-supplied, price-competitive industry, which continues to present challenges today. Thus, we believe we are facing the following challenges in the Print Segment of our business:
18
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
| Transformation of our portfolio of products |
| Excess production capacity and price competition within our industry |
| Continued economic uncertainties |
The following is a discussion of these business challenges and our strategy for managing their effect on our print business.
Transformation of our portfolio of products Traditional business documents are essential in order to conduct business. However, many are being replaced or devalued with advances in digital technologies, causing steady declines in demand for a large portion of our current product line. The same digital advances also introduce potential new growth opportunities, such as print-on-demand services and product offerings that assist customers in their transition to digital business environments. In addition, we will continue to look for new market opportunities and niches, such as the addition of our envelope offerings, healthcare wristbands, secure document solutions, innovative in-mold label offerings and long-run integrated products with high color web printing that provide us with an opportunity for growth and differentiate us from our competition. Transforming our product offerings in order to continue to provide innovative, valuable solutions to our customers on a proactive basis will require us to make investments in new and existing technology and to develop key strategic business relationships.
Excess production capacity and price competition within our industry Paper mills continue to adjust production capacity through downtime and closures to attempt to keep supply in line with demand. Due to the limited number of paper mills, paper prices have been and are expected to remain fairly volatile.
Despite a continued competitive marketplace, we have generally been able to pass through increased paper costs, although it can often take several quarters to push these through due to the custom nature of our products and/or contractual relationships with some of our customers. We expect this trend to continue, however, any new downturn in the economy or continued protraction of the current recovery may limit our ability to recover all these costs. As such, we will continue to focus our efforts on effectively managing and controlling our product costs to minimize the effects of the foregoing on our operational results, primarily through the use of forecasting models and production and costing models. However, an inherent risk in this process is that our assumptions are inaccurate, which could have a negative impact on our reported profit margins.
Continued economic uncertainties As a result of the past recessionary conditions, the economic climate has been volatile and challenging. Decreased demand and intense price competition resulted in a significant decline in our revenue during the past several fiscal years. Although we have seen improvement in some economic indicators within our markets, a generally weak domestic job market, global economic instabilities, a rather anemic domestic economic recovery and domestic policy uncertainties have and will continue to present a challenging environment for revenue growth. As we cannot predict the pace or continuance of the domestic economic recovery, the impact of continued global economic instability, nor the impact of domestic policy decisions, we continue to focus on customer retention, expanding our growth targeted products and continuing to develop new market niches. In addition, we have a proven history of managing our costs during tough economic times and would not expect this to change in the future.
Apparel Segment
The Apparel Segment represented 41% of our consolidated net sales for the three months ended May 31, 2013, and operates under the name of Alstyle Apparel (Alstyle). Alstyle markets high quality knitted activewear (including t-shirts, tank tops and fleece) across all market segments. The main products of Alstyle are standardized shirts manufactured in a variety of sizes and colors. Approximately 98% of Alstyles revenues are derived from t-shirt sales, which make up 91% of domestic sales. Alstyles branded product lines are sold mainly under the AAA® and Murina® brands.
Effective July 2011, Alstyle began operations in an owned manufacturing facility located in Agua Prieta, Mexico. Previously Alstyle operated in a leased manufacturing facility located in Anaheim, CA. Alstyle has three cut and sew facilities in Mexico (Agua Prieta, Ensenada and Hermosillo). In addition to its own cut and sew facilities, Alstyle may also use outsourced manufacturers from time to time to supplement a portion of its cut and sew needs. After sewing and packaging is completed, the product is shipped to one of Alstyles nine distribution centers located across the United States, Canada, and Mexico.
19
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Alstyle utilizes a customer-focused internal sales team comprised of twenty-three sales representatives assigned to specific geographic territories in the United States, Canada, and Mexico. Sales representatives are assigned 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 a majority of their time in the field.
Alstyle employs a staff of customer service representatives that handle call-in orders from smaller customers. Sales personnel sell directly to Alstyles customer base, which consists primarily of screen printers, embellishers, retailers, and mass marketers.
A majority of Alstyles sales are branded products, with the remainder being customer private label products. Generally, sales to screen printers and mass marketers are driven by price and the availability of products, which directly impacts our inventory level requirements. Sales in the private label business are characterized by slightly higher customer loyalty.
Alstyles most popular styles are produced based on demand management forecasts to permit quick shipment and to level production schedules. Alstyle offers same-day shipping and uses third-party carriers to ship products to its customers.
Alstyles sales are seasonal, with sales in the first and second fiscal 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 to which Alstyle sells is generally event driven. Blank t-shirts can be thought of as walking billboards promoting movies, concerts, sports teams, and image brands. Still, the demand for any particular product varies from time to time based largely upon changes in consumer preferences and general economic conditions affecting the apparel industry.
The apparel industry is comprised of numerous companies who manufacture and sell a wide range of products. Alstyle is primarily involved in the activewear market and produces t-shirts and outsources such products as fleece, hats, shorts, pants and other such activewear apparel from China, Thailand, Pakistan, and other foreign sources to sell to its customers through its sales representatives. Alstyle competes with many branded and private label manufacturers of knit apparel in the United States, Canada, and Mexico, some of which are larger in size and have greater financial resources than Alstyle. Alstyle competes on the basis of price, quality, service, and delivery. Alstyles strategy is to provide the best value to its customers by delivering a consistent, high-quality product at a competitive price. Alstyles competitive disadvantage is that its brand name, Alstyle Apparel, is not as well known as the brand names of its largest competitors, such as Gildan, Delta, Hanes, and Russell. While it is not possible to calculate precisely, because of the lack of adequate public statistical information, management believes that Alstyle is one of the top five providers of blank t-shirts in North America.
Raw materials of the Apparel Segment principally consist of cotton and polyester yarn purchased from a number of major suppliers at prevailing market prices, although we purchase 47% of our cotton and yarn from one supplier.
Our Apparel Business ChallengesIn our Apparel Segment, our market niche is highly competitive, commodity driven, and is generally dominated by a limited number of companies. The downturn in the economy and turmoil in the credit markets in 2009 and 2010 created an over-supply situation which further increased competitive pressures in this market. While the economic environment improved somewhat in 2011, which led to increased demand for our product during the later part of fiscal year 2011 and the start of fiscal year 2012, we have seen softness in the market due to domestic and global economic uncertainties over approximately the last twelve months. Whether the impact in the market associated with this instability is behind us or will still need to be dealt with for quarters to come is unknown. Such uncertainty and volatility in the economy is normally not a positive influence on the marketplace. In addition, a significant reduction in the spot price of cotton added additional complexities to an already competitive marketplace during fiscal year 2013. The divergence between the current purchase cost of cotton and the cost residing in most manufacturers finished goods inventories were at historical levels, creating
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
market valuation issues for some and sale side pressure for others. However, at this point, most of the higher cost of cotton has worked through our finished goods inventory and the divergence between the current purchase cost of cotton and the average costs in our finished goods inventory has returned to a more normalized spread. Thus, we believe we are facing the following challenges in our Apparel Segment in fiscal 2014:
| Cotton prices and market pricing |
| New manufacturing facility |
| Continued economic uncertainties |
Cotton prices Cotton is a commodity product and subject to volatile fluctuations in price. Costs for cotton yarn and cotton-based textiles vary based upon the fluctuating cost of cotton, which is affected by, among other factors, weather, consumer demand, commodities market speculation, currency fluctuations, international actions and other factors that are generally unpredictable and beyond our control. The United States is the largest exporter of cotton in the world. Therefore, domestic prices can be significantly influenced by foreign governments actions. Over the past several years, we have seen cotton prices reach the highest historical levels and have recently seen the prices recede back to levels that, while still high, are more in line with historical averages. We are able to lock in the cost of cotton reflected in the price we pay for yarn from our primary suppliers in an attempt to protect our business from the volatility of the market price of cotton. However, our business can be affected by dramatic movements in cotton prices. The cost incurred for materials, i.e., yarn, thread, etc. is capitalized into inventory and impacts the Companys operating results as this inventory is sold, which could take as long as six months plus after the materials were purchased, depending on inventory turns. Consequently, significant and rapid increases or decreases in cotton costs can have a significant impact on the Companys operational results for many quarters. Given the decreasing divergence between the current cost of cotton in our finished goods inventory and the current purchase price of cotton, we do not anticipate the price of cotton to have a significant impact on our operational results for the quarters to come, absent some economic disruption (see below), or market abnormalities. We expect to see continued improvement in our apparel margins, as the divergence factor between the cost of cotton in our finished goods inventory and cotton purchase prices continues to shrink and our operational production levels increase.
Agua Prieta manufacturing facility The manufacturing facility in Agua Prieta, Mexico (AP) became operational in July 2011, and all production has now been transitioned from our Anaheim, CA (Anaheim) facility to the AP facility. We began producing fabric from this facility during the first quarter of fiscal year 2012. Production levels at the plant are running at required levels to satisfy demand, but below originally estimated levels due to lower revenues, which can be attributed to market softness, economic conditions and the non-competitive cost position of our finished goods inventory during fiscal year 2013. In addition, from time-to-time we have had disruptions in our utility services which impacted our manufacturing through-put. However, given the improved cost position of our finished goods inventory and current level of utility services and absent some economic disruption, we expect to increase production at this facility fairly significantly during the coming year. This should allow us to realize savings through improved efficiency and utilization gains. However, the increase in production levels is dependent on economic (see below) and services stability.
Continued economic uncertainties As a result of the past recessionary conditions, the economic climate has been and continues to be volatile and challenging both domestically and internationally. Although we saw an increase in our apparel revenues during fiscal year 2011 due to improving economic conditions, we saw a significant drop in our sales during the latter half of fiscal year 2012 due to competitive pricing pressures, which we attribute to softness in the market. International instability and continued domestic policy and economic issues continue to have an impact on the domestic economic environment and on domestic apparel sales. We are concerned with how our governments economic decisions may impact our next fiscal year. The economy is already feeling the impact of sequestration, which has had a direct impact on our domestic GDP. How further actions or inactions will impact businesses, consumers and our economy in general over the short term and long term remains to be seen.
Cautionary Statements Regarding Forward-Looking Statements
You should read this discussion and analysis in conjunction with our Consolidated Financial Statements and the related notes appearing elsewhere in this Report. All of the statements in this Report, other than historical facts, are forward-looking statements, including, without limitation, the statements made in the Managements Discussion
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FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
and Analysis of Financial Condition and Results of Operations, particularly under the caption Overview. As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations, and beliefs relating to matters that are not historical in nature. The words could, should, feel, anticipate, aim, preliminary, expect, believe, estimate, intend, intent, plan, will, foresee, project, forecast, or the negative thereof or variations thereon, and similar expressions identify forward-looking statements.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for these forward-looking statements. In order to comply with the terms of the safe harbor, Ennis, Inc. notes that forward-looking statements are subject to known and unknown risks, uncertainties and other factors relating to its operations and business environment, all of which are difficult to predict and many of which are beyond the control of Ennis, Inc. These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements.
These statements reflect the current views and assumptions of management with respect to future events. Ennis, Inc. does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. The inclusion of any statement in this report does not constitute an admission by Ennis, Inc. or any other person that the events or circumstances described in such statement are material.
We believe these forward-looking statements are based upon reasonable assumptions. 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 and the potential impact on our operations; our ability to implement our strategic initiatives and control our operational costs; dependence on a limited number of key suppliers; our ability to recover the rising cost of raw materials and other costs (i.e., energy, freight, labor, benefit costs, etc.) in markets that are highly price competitive; our 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; the impact of foreign competition, tariffs and import restrictions; customer credit risk; competitors pricing strategies; a decline in business volume and profitability could result in an impairment in our reported goodwill negatively impacting our operational results; our ability to retain key management personnel; our ability to identify, manage or integrate acquisitions; and changes in government regulations. In addition to the factors indicated above, you should carefully consider the risks described in and incorporated by reference herein and in the risk factors in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013 before making an investment in our common stock.
Critical Accounting Policies and Estimates
In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the disclosures and reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis, including those related to allowance for doubtful receivables, inventory valuations, property, plant and equipment, intangible assets, pension plan obligations, accrued liabilities and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We believe the following accounting policies are the most critical due to their effect on our more significant estimates and judgments used in preparation of our consolidated financial statements.
We maintain a defined benefit retirement plan (the Pension Plan) for employees. Included in our financial results are Pension Plan costs that are measured using actuarial valuations. The actuarial assumptions used may differ from actual results. As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status and associated liability recorded.
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FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Amounts allocated to amortizable 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 a triggering event has occurred during the year that would indicate potential impairment.
We exercise judgment in evaluating our long-lived assets for impairment. We assess the impairment of long-lived assets that include other intangible assets, goodwill, and property, plant, and equipment at least annually or earlier if events or changes in circumstances indicate that the carrying value may not be recoverable. In performing tests of impairment, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets in assessing the recoverability of our long-lived assets. If these estimates or the related assumptions change, we may be required to record impairment charges for these assets in the future. Actual results could differ from assumptions made by management. At May 31, 2013, our goodwill and other intangible assets were approximately $121.8 million and $83.4 million (includes $0.6 million relating to patents included in other long-term assets), respectively. We believe our businesses will generate sufficient undiscounted cash flow to more than recover the investments we have made in property, plant and equipment, as well as the goodwill and other intangibles recorded as a result of our acquisitions. However, we cannot predict the occurrence of future impairments or specific triggering-events, nor the impact such events might have on our reported asset values.
Revenue is generally recognized upon shipment of products. Net sales consist of gross sales invoiced to customers, less certain related charges, including discounts, returns and other allowances. Returns, discounts and other allowances have historically been insignificant. In some cases and upon customer request, we print and store custom print product for customer specified future delivery, generally within twelve months. In this case, risk of loss from obsolescence passes to the customer, the customer is invoiced under normal credit terms and revenue is recognized when manufacturing is complete. Approximately $3.1 million of revenue was recognized under these agreements during the three months ended May 31, 2013 and May 31, 2012.
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.
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FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Results of Operations
The discussion that follows provides information which we believe is relevant to an understanding of our results of operations and financial condition. The discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto, which are incorporated herein by reference. This analysis is presented in the following sections:
| Consolidated Summary this section provides an overview of our consolidated results of operations for the three months ended May 31, 2013 and May 31, 2012. |
| Segment Operating Results this section provides an analysis of our net sales, gross profit margin and operating income by segment. |
Consolidated Summary
Consolidated Statements of | Three Months Ended May 31, | |||||||||||||||
EarningsData (Dollars in thousands) |
2013 | 2012 | ||||||||||||||
Net sales |
$ | 138,466 | 100.0 | % | $ | 142,528 | 100.0 | % | ||||||||
Cost of goods sold |
102,671 | 74.1 | 114,279 | 80.2 | ||||||||||||
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Gross profit margin |
35,795 | 25.9 | 28,249 | 19.8 | ||||||||||||
Selling, general and administrative |
22,205 | 16.0 | 22,026 | 15.4 | ||||||||||||
Gain from disposal of assets |
(7 | ) | | (4 | ) | | ||||||||||
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Income from operations |
13,597 | 9.9 | 6,227 | 4.4 | ||||||||||||
Other expense, net |
(94 | ) | (0.1 | ) | (119 | ) | (0.1 | ) | ||||||||
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Earnings before income taxes |
13,503 | 9.8 | 6,108 | 4.3 | ||||||||||||
Provision for income taxes |
4,997 | 3.7 | 2,229 | 1.6 | ||||||||||||
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Net earnings |
$ | 8,506 | 6.1 | % | $ | 3,879 | 2.7 | % | ||||||||
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Three months ended May 31, 2013 compared to three months ended May 31, 2012
Net Sales. Our consolidated net sales were $138.5 million for the first quarter ended May 31, 2013, compared to $142.5 million for same quarter last year, or a decrease of 2.8%. On a sequential quarter basis, consolidated net sales increased $14.9 million, or 12.1%, from $123.6 million. Print sales declined by 6.8% on a comparable quarter basis, from $87.3 million to $81.4 million, but increased 2.0% on a sequential quarter basis from $79.8 million. Our apparel sales on a comparable quarter basis increased 3.3%, from $55.2 million to $57.0 million, and increased 29.8% on a sequential quarter basis from $43.9 million. The divergence factor between the cost of cotton in our finished goods inventory and cotton purchase prices continues to shrink. The lower purchase price of cotton has allowed us to transition from a higher priced apparel inventory position and our apparel sales volume is beginning to improve as we are able to be more price competitive in the marketplace.
Cost of Goods Sold. Our manufacturing costs decreased by $11.6 million from $114.3 million for the three months ended May 31, 2012 to $102.7 million for the three months ended May 31, 2013, or 10.1%. Our consolidated gross profit margin (margin) increased from 19.8% to 25.9% for the quarters ended May 31, 2012 and May 31, 2013, respectively. Our print margin increased from 27.9% to 29.7%, due to increased efficiencies, and our apparel margin, due to lower cotton costs, increased from 7.0% to 20.3% for the quarter. Now that the negative impact of higher raw material costs has made its way through our apparel finished goods inventory and the divergence between the current purchase cost of cotton and the average cost in our finished goods inventory has returned to a more normalized spread, we expect to see a continued improvement in our apparel margin over the next several quarters, absent some economic/market disruption.
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Selling, general and administrative expense. For the three months ended May 31, 2013, our selling, general and administrative expenses were $22.2 million, or 16.0% of sales, compared to $22.0 million, or 15.4% of sales for the three months ended May 31, 2012, a slight increase of approximately $0.2 million, or 0.9%. Selling, general and administrative (SG&A) expenses were up slightly over the comparable period last year on both a dollar and percentage of sales basis due to an increase in our provision for bad debts. Our provision for bad debts was increased this quarter to cover the impact of two apparel accounts which entered bankruptcy during the quarter. We have reviewed the status of each of our accounts and, while we do not anticipate that this will be a recurring event, the two bankruptcies did impact SG&A for the quarter by approximately $800,000, or 0.6% of sales. We have completed the installation of our Enterprise Resource Planning (ERP) system in each of the acquired Printegra/PrintXcel plants and as such we expect to be able to eliminate some duplicate SG&A costs residing in these plants over the next several quarters.
Gain from disposal of assets. The gain from disposal of assets of $7,000 during the quarter related to the sale of a used vehicle. The gain from disposal of assets of $4,000 for the three months ended May 31, 2012 resulted primarily from the sale of miscellaneous manufacturing equipment.
Income from operations. Our income from operations for the three months ended May 31, 2013 was $13.6 million or 9.9% of sales, as compared to $6.2 million, or 4.4% of sales for the three months ended May 31, 2012, an increase of $7.4 million, or 119.4%. The increase in our operational earnings related primarily to our increased apparel margin during the quarter.
Other income and expense. Interest expense decreased from $0.5 million for the three months ended May 31, 2012 to $0.3 million for the three months ended May 31, 2013. This was as a result of our average outstanding borrowings being lower during the current quarter when compared to the same quarter last year.
Provision for income taxes. Our effective tax rate was 37.0% for the three months ended May 31, 2013 compared to 36.5% for the three months ended May 31, 2012. The increase in our effective tax rate related to a decrease in the impact associated with our domestic production activity credit and an increase in our estimated state income tax liability.
Net earnings. Due to the above factors, our net earnings for the three months ended May 31, 2013 were $8.5 million, or 6.1% of sales, as compared to $3.9 million, or 2.7% of sales for the three months ended May 31, 2012. Our basic earnings per share were $0.33 per share for the three months ended May 31, 2013, as compared to $0.15 per share for the three months ended May 31, 2012. Our diluted earnings per share were $0.33 per share for the three months ended May 31, 2013, as compared to $0.15 per share for the three months ended May 31, 2012.
Segment Operating Results
Three months ended | ||||||||
May 31, | ||||||||
Net Sales by Segment (in thousands) |
2013 | 2012 | ||||||
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$ | 81,439 | $ | 87,299 | ||||
Apparel |
57,027 | 55,229 | ||||||
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Total |
$ | 138,466 | $ | 142,528 | ||||
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Print Segment. Our net print sales, which represented 59% of our consolidated sales during the three months ended May 31, 2013, were approximately $81.4 million, compared to $87.3 million for the comparable quarter last year, or a decrease of 6.8%, but increased 2.0% from $79.8 million on a sequential quarter basis. The decrease in our print sales on a comparable quarter basis related primarily to the following: (i) a continued decline in our traditional long-run business due to a combined transition away from continuous forms and increased competition from major competitors (i.e., R.R. Donnelley, Standard Register, etc.); (ii) fewer sales days; (iii) in connection with the implementation of our ERP system at the new plants, sales declined in several of these recently acquired
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
facilities, as we began to better align pricing to market and the value offered to the end use customer; and (iv) normal transition of business loss associated with acquired businesses, either due to pricing, concentration of business, or other factors.
Apparel Segment. Our net apparel sales, which represented 41% of our consolidated sales for the three months ended May 31, 2013, increased by 3.3% on a comparable quarter basis from $55.2 million to $57.0 million and 29.8% on a sequential quarter basis from $43.9 million. The current market remains highly competitive and challenging from a pricing perspective. However, as the current price of cotton in our apparel finished goods inventory is now more in line with historical divergence trends with current cotton pricing, we were able to be more competitive from a pricing perspective on the large volume programs. As a result, we saw our volume increase 10.6% during the quarter. This increase was offset by a comparative 7.3% decline in our average selling price during the quarter.
Three months ended | ||||||||
May 31, | ||||||||
Gross Profit by Segment (in thousands) |
2013 | 2012 | ||||||
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$ | 24,227 | $ | 24,367 | ||||
Apparel |
11,568 | 3,882 | ||||||
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Total |
$ | 35,795 | $ | 28,249 | ||||
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Print Segment. Our print gross profit margin for the three months ended May 31, 2013 was $24.2 million, or 29.7%, as compared to $24.4 million, or 27.9% for the three months ended May 31, 2012. Print margins increased on a comparative basis due to the continued elimination of duplicate costs by the further integration of our recent acquisitions.
Apparel Segment. Our apparel gross profit margin for the three months ended May 31, 2013 was $11.6 million, or 20.3%, as compared to $3.9 million, or 7.0%, for the three months ended May 31, 2012. Our apparel margin for the second consecutive quarter increased as the impact of higher input costs continued to decline. Sequentially, our apparel margin improved 240 basis points last quarter and 270 basis points this quarter. We expect to continue to see improvement in our apparel margin, as lower priced cotton should continue to have a positive impact on our operational results and increased sales volumes should result in improved operational efficiencies.
Three months ended | ||||||||
May 31, | ||||||||
Profit by Segment (in thousands) |
2013 | 2012 | ||||||
|
$ | 13,447 | $ | 12,614 | ||||
Apparel |
4,368 | (2,821 | ) | |||||
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Total |
17,815 | 9,793 | ||||||
Less corporate expenses |
4,312 | 3,685 | ||||||
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Earnings before income taxes |
$ | 13,503 | $ | 6,108 | ||||
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Print Segment. As a result of improved margin, our print profit for the three months ended May 31, 2013 was $13.4 million, or 16.5%, as compared to $12.6 million, or 14.4%, for the three months ended May 31, 2012.
Apparel Segment. As a result of the increase in our apparel sales and margin, our apparel profit increased approximately $7.2 million, from a loss of $2.8 million, or -5.1%, for the three months ended May 31, 2012 to a gain of $4.4 million, or 7.7%, for the three months ended May 31, 2013.
26
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Liquidity and Capital Resources
(Dollars in thousands) |
May 31, 2013 |
February 28, 2013 |
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Working Capital |
$ | 150,295 | $ | 150,377 | ||||
Cash |
$ | 14,396 | $ | 6,232 |
Working Capital. Our working capital decreased slightly from $150.4 million at February 28, 2013 to $150.3 million at May 31, 2013. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.5 to 1.0 at February 28, 2013 to 4.8 to 1.0 at May 31, 2013. Our current ratio increased primarily because on a percentage basis, our current liabilities decreased by a larger percentage than our current assets, 7.1% and 1.6%, respectively.
Three months ended May 31, | ||||||||
(Dollars in thousands) |
2013 | 2012 | ||||||
Net Cash provided by operating activities |
$ | 21,551 | $ | 14,766 | ||||
Net Cash used in investing activities |
$ | (662 | ) | $ | (126 | ) | ||
Net Cash used in financing activities |
$ | (12,501 | ) | $ | (9,561 | ) |
Cash flows from operating activities. Cash provided by operating activities increased by $6.8 million from $14.8 million for the three months ended May 31, 2012 to $21.6 million for the three months ended May 31, 2013. Our higher operational profits for the comparable three month period was primarily due to the increase in our net earnings of $4.6 million, from $3.9 million for the three months ended May 31, 2012 to $8.5 million for the three months ended May 31, 2013. In addition, accounts payable and accrued expenses favorably impacted our operational cash flows by $6.7 million, which was offset by an increase in our receivables which negatively impacted our operational cash flows by $4.6 million.
Cash flows from investing activities. Cash used in investing activities increased $0.6 million, from $0.1 million to $0.7 million for the three months ended May 31, 2012 and 2013, respectively. The increase in cash used related to the increase in our capital expenditures for the three month comparable period.
Cash flows from financing activities. We used $12.5 million in cash for financing activities during the quarter, compared to $9.6 million for the same three month period last year, or an increase of $2.9 million. This related primarily to the repayment of an additional $7.5 million of outstanding debt on our credit line from $5.0 million to $12.5 million for the three months ended May 31, 2012 and 2013, respectively. This was offset by the fact that rather than paying the fourth quarter dividends of the previous fiscal year in the first quarter of the following fiscal year as has been customarily done, we paid the dividends in December of last fiscal year. This payment was authorized by the Board of Directors, who at the time believed that with future fiscal and federal tax rate uncertainty, it would be in the best interest of our shareholders to accelerate the dividend payment for the last two quarters of last fiscal year.
Credit Facility. On February 22, 2012, we entered into the Second Amendment to Second Amended and Restated Credit Agreement (the Facility) with a group of lenders led by Bank of America, N.A. The Facility provides us access to $150.0 million in revolving credit, which we may increase to $200.0 million in certain circumstances, and matures on August 16, 2016. The Facility bears interest at the London Interbank Offered Rate (LIBOR) plus a spread ranging from 1.0% to 2.25% (LIBOR + 1.5% or 1.69% at May 31, 2013 and 1.74% at May 31, 2012), depending on our ratio of total funded debt to the sum of net earnings plus interest, tax, depreciation and amortization (EBITDA). As of May 31, 2013, we had $45.0 million of borrowings under the revolving credit line and $4.1 million outstanding under standby letters of credit arrangements, leaving us availability of approximately $100.9 million. The Facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset dispositions, and additional debt, as well as other customary covenants, such as our minimum tangible equity level and total funded debt to EBITDA ratio. We were in compliance with all these covenants as of May 31, 2013. The Facility is secured by substantially all of our domestic assets as well as all capital securities of each of the Companys U.S. subsidiaries and 65% of all capital securities of each of the Companys direct foreign subsidiaries.
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ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
It is anticipated that the available line of credit is sufficient to cover working capital requirements for the foreseeable future, should it be required.
Pension Plan We are required to make contributions to our Pension Plan. These contributions are required under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (ERISA). Due to the recent enactment of the Moving Ahead for Progress in the 21st Century (MAP-21) in July 2012, which effectively raises the discount rates mandated for determining the value of a plans benefit liability and annual cost of accruals, our minimum required contribution to the Pension Plan is zero for the Pension Plan year ending February 28, 2014. However, we expect to make a cash contribution to the Pension Plan of between $2.0 million and $3.0 million during the fourth quarter of fiscal year 2013. We made contributions of $3.0 million to our Pension Plan during fiscal 2013. As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status, associated liabilities recorded and future required minimum contributions. At May 31, 2013, we had an unfunded pension liability recorded on our balance sheet of $9.9 million.
Inventories We believe our 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 with paper and yarn suppliers that govern prices, but do not require minimum purchase commitments. Certain of our rebate programs do, however, require minimum purchase volumes. Management anticipates meeting the required volumes.
Capital Expenditures We expect our capital requirements for our current fiscal year, exclusive of capital required for possible acquisitions, will be below our historical levels of between $4.0 million and $5.0 million, as to date we have spent approximately $0.7 million on capital expenditures. We expect to fund these expenditures through existing cash flows.
We rely on our cash flows generated from operations and the borrowing capacity under our Facility to meet cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, debt repayments and related interest payments, contributions to our pension plan, and the payment of dividends to our shareholders. We expect to generate sufficient cash flows from operations supplemented by our Facility as required to cover our operating and capital requirements for the foreseeable future.
Contractual Obligations & Off-Balance Sheet Arrangements There have been no significant changes in our contractual obligations since February 28, 2013 that have, or are reasonably likely to have, a material impact on our results of operations or financial condition. We had no off-balance sheet arrangements in place as of May 31, 2013.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
Interest Rates
We are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. 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. Our variable rate financial instruments, including the outstanding credit facility, totaled $45.0 million at May 31, 2013. The impact on our results of operations of a one-point interest rate change on the outstanding balance of the variable rate financial instruments as of May 31, 2013 would be approximately $0.5 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.
28
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Dollar). Such translation adjustments are reported as a separate component of consolidated statements of comprehensive income. In future periods, foreign exchange rate fluctuations could have an increased impact on our reported results of operations.
This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.
Item 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. A review and evaluation were 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 and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Quarterly Report on Form 10-Q, pursuant to Exchange Act Rule 13a-15. Based upon that review and evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures as of May 31, 2013 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 Securities and Exchange Commissions 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 Rule 13a-15 that occurred during our fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting ended May 31, 2013.
There are no material pending proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of their property is subject.
There have been no material changes in our Risk Factors as previously discussed in our Annual Report on Form 10-K for the year ended February 28, 2013.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Under the Companys stock repurchase plan which was approved by our Board of Directors on October 20, 2008, the Company was authorized to repurchase up to $5.0 million of the Companys common stock. On April 20, 2012, the Board increased the authorized amount available to repurchase our shares by an additional $5.0 million, bringing the total to $10.0 million. As of July 2, 2013, the Company has repurchased 96,000 shares under the repurchase program since its inception at an average price per share of $10.45. No repurchases were made under the repurchase plan during the first quarter ended May 31, 2013. There is a maximum amount of approximately $9.0 million available to purchase shares under the program. Unrelated to the stock repurchase program, the Company purchased 49 shares of common stock during the three months ended May 31, 2013.
29
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Period |
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Programs |
Maximum Amount that May Yet Be Used to Purchase Shares Under the Program |
||||||||||||
March 1, 2013 - March 31, 2013 |
| $ | | | $ | 8,997,084 | ||||||||||
April 1, 2013 - April 30, 2013 |
| $ | | | $ | 8,997,084 | ||||||||||
May 1, 2013 - May 31, 2013 |
| $ | | | $ | 8,997,084 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
| $ | | | $ | 8,997,084 |
Items 3, 4 and 5 are not applicable and have been omitted
The following exhibits are filed as part of this report.
Exhibit Number |
Description | |
Exhibit 3.1(a) | Restated Articles of Incorporation, as amended through June 23, 1983 with attached amendments dated June 20, 1985, July 31, 1985 and June 16, 1988, incorporated herein by reference to Exhibit 5 to the Registrants Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (File No. 001-05807). | |
Exhibit 3.1(b) | Amendment to Articles of Incorporation, dated June 17, 2004, incorporated herein by reference to Exhibit 3.1(b) to the Registrants Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 001-05807). | |
Exhibit 3.2 | Second Amended and Restated Bylaws of Ennis, Inc., dated September 21, 2012, incorporated herein by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on September 27, 2012 (File No. 001-05807). | |
Exhibit 31.1 | Certification Pursuant to Rule 13a-14(a) of Chief Executive Officer.* | |
Exhibit 31.2 | Certification Pursuant to Rule 13a-14(a) of Chief Financial Officer.* | |
Exhibit 32.1 | Section 1350 Certification of Chief Executive Officer.** | |
Exhibit 32.2 | Section 1350 Certification of Chief Financial Officer.** | |
Exhibit 101 | The following information from Ennis, Inc.s Quarterly Report on Form 10-Q for the quarter ended May 31, 2013, filed on July 2, 2013, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*** |
* | Filed herewith |
** | Furnished herewith |
*** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
30
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ENNIS, INC. | ||||||
Date: July 2, 2013 | /s/ Keith S. Walters | |||||
Keith S. Walters | ||||||
Chairman, Chief Executive Officer and President | ||||||
Date: July 2, 2013 | /s/ Richard L. Travis, Jr. | |||||
Richard L. Travis, Jr. | ||||||
V.P. Finance and CFO, Treasurer and Principal Financial and Accounting Officer |
31
INDEX TO EXHIBITS
Exhibit Number |
Description | |
Exhibit 3.1(a) | Restated Articles of Incorporation, as amended through June 23, 1983 with attached amendments dated June 20, 1985, July 31, 1985 and June 16, 1988, incorporated herein by reference to Exhibit 5 to the Registrants Annual Report on Form 10-K for the fiscal year ended February 28, 1993 (File No. 001-05807). | |
Exhibit 3.1(b) | Amendment to Articles of Incorporation, dated June 17, 2004, incorporated herein by reference to Exhibit 3.1(b) to the Registrants Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (File No. 001-05807). | |
Exhibit 3.2 | Second Amended and Restated Bylaws of Ennis, Inc., dated September 21, 2012, incorporated herein by reference to Exhibit 3.1 to the Registrants Current Report on Form 8-K filed on September 27, 2012 (File No. 001-05807). | |
Exhibit 31.1 | Certification Pursuant to Rule 13a-14(a) of Chief Executive Officer.* | |
Exhibit 31.2 | Certification Pursuant to Rule 13a-14(a) of Chief Financial Officer.* | |
Exhibit 32.1 | Section 1350 Certification of Chief Executive Officer.** | |
Exhibit 32.2 | Section 1350 Certification of Chief Financial Officer.** | |
Exhibit 101 | The following information from Ennis, Inc.s Quarterly Report on Form 10-Q for the quarter ended May 31, 2013, filed on July 2, 2013, formatted in XBRL: (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Earnings, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to Consolidated Financial Statements, tagged as blocks of text and in detail.*** |
* | Filed herewith |
** | Furnished herewith |
*** | As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
Exhibit 31.1
RULE 13a-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Keith S. Walters, Chief Executive Officer of Ennis, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Ennis, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants first fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Keith S. Walters |
Keith S. Walters |
Chief Executive Officer |
July 2, 2013 |
ENNIS, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE PERIOD ENDED MAY 31, 2013
Exhibit 31.2
RULE 13a-14(a) CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Richard L. Travis, Jr., Chief Financial Officer of Ennis, Inc., certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Ennis, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; |
4. | The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants first fiscal quarter) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
/s/ Richard L. Travis, Jr. |
Richard L. Travis, Jr. |
Chief Financial Officer |
July 2, 2013 |
1
EXHIBIT 32.1
SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Keith S. Walters, Chairman of the Board and Chief Executive Officer of Ennis, Inc. (the Company), certify, that pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code:
(1) | The Quarterly Report on Form 10-Q of the Company for the period ended May 31, 2013, as filed with the Securities Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition, and results of operations of the Company as of the dates and for the periods expressed in the Report. |
/s/ Keith S. Walters |
Keith S. Walters |
Chairman of the Board and Chief Executive Officer |
Date: July 2, 2013 |
The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350; it is not being filed for purposes of Section 18 of the Securities Exchange Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation languages in such filing.
EXHIBIT 32.2
SECTION 1350 CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Richard L. Travis, Jr., Chief Financial Officer of Ennis, Inc. (the Company), certify, that pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code:
(1) | The Quarterly Report on Form 10-Q of the Company for the period ended May 31, 2013, as filed with the Securities Exchange Commission on the date hereof (the Report) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition, and results of operations of the Company as of the dates and for the periods expressed in the Report. |
/s/ Richard L. Travis, Jr. |
Richard L. Travis, Jr. |
Chief Financial Officer |
Date: July 2, 2013 |
The foregoing Certification is being furnished solely pursuant to 18 U.S.C. Section 1350; it is not being filed for purposes of Section 18 of the Securities Exchange Act, and is not to be incorporated by reference into any filing of the Company, whether made before or after the date hereof, regardless of any general incorporation languages in such filing.
Segment Information and Geographic Information
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Segment Reporting [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Segment Information and Geographic Information | 11. Segment Information and Geographic Information The Company operates in two segments–the Print Segment and the Apparel Segment. The Print Segment, which represented 59% of the Company’s consolidated net sales for the three months ended May 31, 2013, 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 47 manufacturing locations throughout the United States in 19 strategically located states. Approximately 97% of the business products manufactured by the Print Segment are custom and semi-custom products, constructed in a wide variety of sizes, colors, number of parts and quantities on an individual job basis depending upon the customers’ specifications. The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, Specialized Printed Forms®, 360º Custom LabelsSM, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphicsSM, Calibrated Forms®, PrintXcel™ and Printegra®. The Print Segment also sells the Adams-McClure® brand (which provides Point of Purchase advertising for large franchise and fast food chains as well as kitting and fulfillment); the Admore® brand (which provides presentation folders and document folders); Ennis Tag & LabelSM (which provides tags and labels, promotional products and advertising concept products); Atlas Tag & Label® (which provides tags and labels); Trade Envelopes® and Block Graphics® (which provide custom and imprinted envelopes) and Northstar® and General Financial Supply® (which provide financial and security documents). The Print Segment sells predominantly through private printers and independent distributors. Northstar also sells direct to a small number of 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 Apparel Segment, which accounted for 41% of the Company’s consolidated net sales for the three months ended May 31, 2013, consists of Alstyle Apparel. This group is primarily engaged in the production and sale of activewear including t-shirts, fleece goods, and other wearables. Alstyle sales are seasonal, with sales in the first and second quarters generally being the highest. Substantially all of the Apparel Segment sales are to customers in the United States. Corporate information is included to reconcile segment data to the consolidated financial statements and includes assets and expenses related to the Company’s corporate headquarters and other administrative costs.
Segment data for the three months ended May 31, 2013 and May 31, 2012 were as follows (in thousands):
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 three months ended is as follows (in thousands):
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Earnings Per Share - Computation for Basic and Diluted Earnings Per Share (Detail) (USD $)
|
3 Months Ended | |
---|---|---|
May 31, 2013
|
May 31, 2012
|
|
Earnings Per Share [Abstract] | ||
Basic weighted average common shares outstanding | 26,038,068 | 25,963,369 |
Effect of dilutive options | 17,801 | 20,538 |
Diluted weighted average common shares outstanding | 26,055,869 | 25,983,907 |
Per share amounts: | ||
Net earnings - basic | $ 0.33 | $ 0.15 |
Net earnings - diluted | $ 0.33 | $ 0.15 |
Cash dividends | $ 0.175 |
CONSOLIDATED STATEMENTS OF EARNINGS (USD $)
In Thousands, except Share data, unless otherwise specified |
3 Months Ended | |
---|---|---|
May 31, 2013
|
May 31, 2012
|
|
Income Statement [Abstract] | ||
Net sales | $ 138,466 | $ 142,528 |
Cost of goods sold | 102,671 | 114,279 |
Gross profit margin | 35,795 | 28,249 |
Selling, general and administrative | 22,205 | 22,026 |
Gain from disposal of assets | (7) | (4) |
Income from operations | 13,597 | 6,227 |
Other income (expense) | ||
Interest expense | (251) | (469) |
Other, net | 157 | 350 |
Total other expense | (94) | (119) |
Earnings before income taxes | 13,503 | 6,108 |
Provision for income taxes | 4,997 | 2,229 |
Net earnings | $ 8,506 | $ 3,879 |
Weighted average common shares outstanding | ||
Basic | 26,038,068 | 25,963,369 |
Diluted | 26,055,869 | 25,983,907 |
Per share amounts | ||
Net earnings - basic | $ 0.33 | $ 0.15 |
Net earnings - diluted | $ 0.33 | $ 0.15 |
Cash dividends per share | $ 0.175 |
Goodwill and Other Intangible Assets
|
3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Goodwill And Intangible Assets Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill and Other Intangible Assets | 4. Goodwill and Other Intangible Assets Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses and is not amortized. Goodwill and indefinite-lived intangibles are evaluated for impairment on an annual basis, or more frequently if impairment indicators arise, using a fair-value-based test that compares the fair value of the asset to its carrying value. Fair values of reporting units are typically calculated using a factor of expected earnings before interest, taxes, depreciation, and amortization. The Company must make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets in assessing the recoverability of its goodwill and other intangibles. If these estimates or the related assumptions change, the Company may be required to record impairment charges for these assets in the future. The cost of intangible assets is based on fair values at the date of acquisition. Intangible assets with determinable lives are amortized on a straight-line basis over their estimated useful life (between 1 and 10 years). Trademarks with indefinite lives are evaluated for impairment on an annual basis, or more frequently if impairment indicators arise. The Company assesses the recoverability of its definite-lived intangible assets primarily based on its current and anticipated future undiscounted cash flows. The carrying amount and accumulated amortization of the Company’s intangible assets at each balance sheet date are as follows (in thousands):
Aggregate amortization expense for the three months ended May 31, 2013 and May 31, 2012 was $0.8 million. The Company’s estimated amortization expense for the current and next five fiscal years ending in February of the stated year is as follows (in thousands):
Changes in the net carrying amount of goodwill as of the dates indicated are as follows (in thousands):
During the fiscal year ended February 28, 2013, an adjustment of $0.2 million reflects a revised estimate in accounts receivable, inventories, accrued expenses, and property, plant and equipment, net of adjustment to the purchase price, related to the acquisition of PrintXcel and Printegra assets from Cenveo Corporation (“Cenveo”) and its subsidiaries.
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Other Accrued Expenses (Tables)
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Text Block [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Components of Other Accrued Expenses | The following table summarizes the components of other accrued expenses as of the dates indicated (in thousands):
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Supplemental Cash Flow Information
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Supplemental Cash Flow Elements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
Supplemental Cash Flow Information | 12. Supplemental Cash Flow Information Net cash flows from operating activities reflect cash payments for interest and income taxes as follows (in thousands):
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Stock Option Plan and Stock Based Compensation - Summary of Unvested Stock Options (Detail) (USD $)
|
3 Months Ended |
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May 31, 2013
|
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Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] | |
Unvested Beginning Balance, Number of Options | 169,954 |
New grants, Number of Options | 36,155 |
Vested, Number of Options | (93,898) |
Forfeited, Number of Options | |
Unvested Ending Balance, Number of Options | 112,211 |
Unvested Beginning Balance, Weighted Average Grant Date Fair Value | $ 3.20 |
New grants, Weighted Average Grant Date Fair Value | $ 1.96 |
Vested, Weighted Average Grant Date Fair Value | $ 3.08 |
Forfeited, Weighted Average Grant Date Fair Value | |
Unvested Ending Balance, Weighted Average Grant Date Fair Value | $ 2.89 |
Supplemental Cash Flow Information - Net Cash Flows from Operating Activities Reflect Cash Payments for Interest and Income Taxes (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | |
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May 31, 2013
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May 31, 2012
|
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Supplemental Cash Flow Elements [Abstract] | ||
Interest paid | $ 267 | $ 248 |
Income taxes paid | $ 546 | $ 625 |
Goodwill and Other Intangible Assets - Changes in Carrying Amount of Goodwill (Detail) (USD $)
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3 Months Ended | 12 Months Ended |
---|---|---|
May 31, 2013
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Feb. 28, 2013
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Finite-Lived Intangible Assets [Line Items] | ||
Balance as of February 29, 2012 | $ 121,809,000 | $ 121,634,000 |
Goodwill acquired | 200,000 | |
Goodwill acquired adjustment | 175,000 | |
Goodwill impairment | ||
Balance as of February 28, 2013 | 121,809,000 | 121,809,000 |
Print Segment [Member]
|
||
Finite-Lived Intangible Assets [Line Items] | ||
Balance as of February 29, 2012 | 47,260,000 | 47,085,000 |
Goodwill acquired | ||
Goodwill acquired adjustment | 175,000 | |
Goodwill impairment | ||
Balance as of February 28, 2013 | 47,260,000 | 47,260,000 |
Apparel Segment [Member]
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Finite-Lived Intangible Assets [Line Items] | ||
Balance as of February 29, 2012 | 74,549,000 | 74,549,000 |
Goodwill acquired | ||
Goodwill impairment | ||
Balance as of February 28, 2013 | $ 74,549,000 | $ 74,549,000 |
Stock Option Plan and Stock Based Compensation (Tables)
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3 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Disclosure Of Compensation Related Costs Sharebased Payments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock Option Activity | The Company had the following stock option activity for the three months ended May 31, 2013:
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Summary of Assumptions Used and Weighted Average Grant-Date Fair Value of Stock Options Granted | The following is a summary of the assumptions used and the weighted average grant-date fair value of the stock options granted during the three months ended May 31, 2013 and May 31, 2012:
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Summary of Unvested Stock Options | A summary of the status of the Company’s unvested stock options at February 28, 2013, and changes during the three months ended May 31, 2013 is presented below:
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Restricted Stock Grant Activity | The Company had the following restricted stock grant activity for the three months ended May 31, 2013:
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Shareholders' Equity (Tables)
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3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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May 31, 2013
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Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Changes in Shareholders' Equity | Changes in shareholders’ equity accounts for the three months ended May 31, 2013 are as follows (in thousands, except share amounts):
|
Goodwill and Other Intangible Assets - Additional Information (Detail) (USD $)
|
3 Months Ended | 12 Months Ended | ||
---|---|---|---|---|
May 31, 2013
|
Feb. 28, 2013
|
May 31, 2012
|
Feb. 28, 2013
|
|
Finite-Lived Intangible Assets [Line Items] | ||||
Estimated useful life of asset | 6 years | 6 years 2 months 12 days | ||
Amortization of trade names, customer lists, and patent | $ 795,000 | $ 832,000 | ||
Goodwill acquired adjustment | $ 200,000 | |||
Minimum [Member]
|
||||
Finite-Lived Intangible Assets [Line Items] | ||||
Estimated useful life of asset | 1 year | |||
Maximum [Member]
|
||||
Finite-Lived Intangible Assets [Line Items] | ||||
Estimated useful life of asset | 10 years |
Long-Term Debt - Summary of Long-term Debt (Detail) (Revolving Credit Facility [Member], USD $)
In Thousands, unless otherwise specified |
May 31, 2013
|
Feb. 28, 2013
|
---|---|---|
Revolving Credit Facility [Member]
|
||
Credit Facilities [Line Items] | ||
Revolving credit facility | $ 45,000 | $ 57,500 |
Stock Option Plan and Stock Based Compensation - Restricted Stock Grant Activity (Detail) (USD $)
|
3 Months Ended | ||
---|---|---|---|
May 31, 2013
|
May 31, 2012
|
May 31, 2013
Restricted Stock [Member]
|
|
Restricted stock grant activity | |||
Outstanding at Beginning, Number of Shares | 187,048 | ||
Number of Shares, Granted | 55,607 | ||
Number of shares, Terminated | |||
Number of Shares, Vested | (55,530) | ||
Outstanding at Ending, Number of Shares | 187,125 | ||
Outstanding at Beginning, Weighted Average Grant Date Fair value | $ 1.96 | $ 2.83 | $ 16.49 |
Weighted Average Grant Date Fair Value, Granted | $ 14.05 | ||
Weighted Average Grant Date Fair Value, Terminated | |||
Weighted Average Grant Date Fair Value, Vested | $ 16.55 | ||
Outstanding at Ending, Weighted Average Grant Date Fair value | $ 1.96 | $ 2.83 | $ 15.74 |
Supplemental Cash Flow Information (Tables)
|
3 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
May 31, 2013
|
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Supplemental Cash Flow Elements [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||
Net Cash Flows from Operating Activities Reflect Cash Payments for Interest and Income Taxes | Net cash flows from operating activities reflect cash payments for interest and income taxes as follows (in thousands):
|
Shareholders' Equity - Changes in Shareholders' Equity (Parenthetical) (Detail) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended |
---|---|
May 31, 2013
|
|
Statement Of Stockholders Equity [Abstract] | |
Deferred Tax on foreign currency Translation | $ 93 |
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