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Form 10-Q for ENNIS BUSINESS FORMS INC

24-Jun-2004

Quarterly Report

Overview

Ennis, Inc. was organized under the laws of Texas in 1909. Ennis, Inc. and its subsidiaries (collectively "Ennis" or the "Company") prints and constructs a broad line of business forms and other business products for national distribution. Distribution of business forms and other business products throughout the United States is primarily through independent dealers. These include business forms distributors, stationers, printers, computer software developers and advertising agencies, among others.

On November 14, 2002, the Company acquired all of the outstanding shares of Calibrated Forms Co., (Calibrated). The purchase price for the transaction was $22,038,000, less liabilities excluded of $7,195,000. Calibrated designs, manufactures and markets printed business forms within the wholesale business forms marketplace. Calibrated became part of the Forms Solutions Group.

The Company operates in three business segments. The first segment, the Forms Solutions Group is primarily in the business of manufacturing and selling business forms and other printed business products primarily to distributors located in the United States. The second segment, the Promotional Solutions Group, is comprised of Adams McClure, Admore and Wolfe City and is primarily in the business of manufacturing and selling promotional products. The third segment, the Financial Solutions Group designs, manufactures and markets printed forms and specializes in internal bank forms, secure and negotiable documents and custom products.

Economic pressure and the contraction of the traditional business forms industry continue to impact each segment of the Company. As a result, the Company continues to concentrate on reducing other costs where sales are declining. The installation of the Company's Enterprise Resource Planning Software (ERP) System has decreased the waste in materials in the plants which have the system. The Company is continuing to install the ERP System throughout the organization. The Company is also focusing on increasing sales where the market is expanding. In addition, the Company will continue to search for acquisition opportunities that will expand our mix of products away from traditional forms, as well as strategic acquisitions within the traditional forms industry.

Liquidity and Capital Resources -

Cash Flow

Cash provided by operating activities for the three months ended May 31, 2004 was $11,678,000 and represented an increase of $2,524,000 from the $9,154,000 provided in the comparable period last year. This increase in cash provided by operating activities was due to routine fluctuation due dates in Accounts payable and accrued expenses. Cash flows used in investing activities for the three months ended May 31, 2004 was $2,132,000 and represented an increase use of $1,379,000 from the $753,000 used in the comparable period last year. This increase in cash used was primarily the result of capital expenditures for the new Corporate facility. Cash flows used in financing activities for the three months ended May 31, 2004 was $3,760,000 and represented a decrease of $628,000 from the $4,388,000 used in the comparable period last year. The decrease in financing activities was primarily the result of reduction in quarterly payments of the long term debt and proceeds received from issuance of treasury stock.

Working Capital

The Company has maintained a strong financial position with working capital at May 31, 2004, of $39,589,000, an increase of 3.6% from the beginning of the year, and a current ratio of 2.4 to 1. The increase in current assets is due to operating profits less funds used to pay dividends. The Company has $20,853,000 in cash and cash equivalents.

Credit Facility

The Company has $12,635,000 in long-term debt. The Company made payments of $1,500,000 of the debt financing for the three months ended May 31, 2004. The Company anticipates repaying the long- term debt of $1,500,000 per quarter and a final payment of $1,800,000 in January 2006. The available line of credit at May 31, 2004 was approximately $17,700,000.

Pension

The Company is required to make contributions to its defined benefit pension plan. These contributions are required under the minimum funding requirements of the Employee Retirement Pension Plan Income Security Act (ERISA). The Company anticipates it will pay $2,500,000 for the fiscal year ended 2005. For the current fiscal year ending February 28, 2005, there is not a minimum contribution requirement and no pension payments have been made.

Inventory

The Company believes current inventory levels are sufficient to satisfy customer demand and anticipates having adequate sources of supply of raw materials to meet future business requirements.

Capital Expenditures

Capital expenditures for the three months totaled $2,139,000. For the full fiscal year, capital expenditures are expected to be between $5,000,000 and $6,000,000, which are expected to be financed through internally generated funds. The Company expects to generate sufficient cash flow from its operating activities to more than cover its operating and capital requirements for the foreseeable future.

Commitments

There have been no material changes in our contractual obligations since fiscal year-end 2004 outside the normal course of business.

Accounting Standards In December 2002, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 148,

"Accounting    for   Stock-Based   Compensation-Transition    and
Disclosure-an  Amendment to FASB Statement No. 123"  (SFAS  148).
SFAS 148 provides alternate methods of transition for a voluntary
change  to  the fair value based method of accounting for  stock-
based  employee compensation.  In addition, SFAS 148  amends  the
disclosure    requirements   of   "Accounting   for   Stock-Based
Compensation" (SFAS 123) to require prominent disclosures in both
annual  and  interim  financial statements about  the  method  of
accounting  used in reporting results.  To date, the Company  has
not  adopted SFAS 123 utilizing any of the transition methods  of
SFAS  148.   The  FASB  recently issued an  exposure  for  public
comment  and a final standard is expected in the second  half  of
2004.  Tentative decisions by the FASB indicate that expensing of
stock  options will be required for fiscal years beginning  after
December 15, 2004.

Gross profit margins increased from 25.5% in the three months ended May 31, 2003 to 26.0% in the three months ended May 31, 2004. The increase is the result of a combination of factors. The Forms Solutions Group gross profit margin increased from 26.4% in the three months ended May 31, 2003 to 27.0% in the three months ended May 31, 2004. While the general weakness in the economy and the decline in the forms industry contributed to decreased volume, prices were able to be increased in the Forms Solutions Group, while controlling variable costs and maintaining efficient fixed cost absorption. The Financial Solutions Group and the Promotional Solutions Group had relatively consistent gross profit margins for the three months ended May 31, 2004 and 2003.

Selling, general and administrative expenses decreased 2.8% for the three months ended May 31, 2004 when compared to the corresponding period in the prior year. Reduced administrative personnel in the Forms and financial groups accounted for the reduction.

Interest expense decreased from $287,000 in the three months ended May 31, 2003 to $134,000 in the three months ended May 31, 2004 primarily as a result of the reduction of long-term financial debt.

The Company's effective federal and state income tax rate remained relatively constant from May 31, 2004 to May 31, 2003.

Critical Accounting Policies and Judgments In preparing our financial statements, we are required to make estimates and assumptions that affect the disclosures and reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following accounting policies are the most critical due to their affect on the Company's more significant estimates and judgments used in preparation of its consolidated financial statements.

The Company maintains a defined-benefit pension plan for employees. Included in our financial results are pension costs which are measured using actuarial valuations. The actuarial assumptions used may differ from actual results.

We exercise judgment in evaluating our long-lived assets for impairment. The Company assesses the impairment of long-lived assets, which includes other intangible assets, goodwill and plant and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company assesses the impairment of goodwill annually. In performing tests of impairment, the Company estimates future cash flows that are expected to result from the operating segments. Actual results could differ from assumptions made by management. We believe our businesses will generate sufficient undiscounted cash flow to more than recover the investments we have made in property, plant and equipment, as well as the goodwill and other intangibles recorded as a result of our acquisitions. The Company cannot predict the occurrence of future impairment triggering events nor the impact such events might have on its reported asset values.

Revenue is recognized upon shipment for all printed products.

Derivative instruments are recognized on the balance sheet at fair value. Changes in fair values of derivatives are accounted for based upon their intended use and designation. The Company's interest rate swaps are held for purposes other than trading. The Company utilized swap agreements related to its term and revolving loans to effectively fix the interest rate for a specified principal amount of the loans. Amounts receivable or payable under interest rate swap agreements are recorded as adjustments to interest expense. This swap has been designated as a cash flow hedge and the after tax effect of the mark-to- market valuation that relates to the effective amount of derivative financial instrument is recorded as an adjustment to accumulated other comprehensive income with the offset included in accrued expenses.

Critical Accounting Policies and Judgments (continued) As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate that imposes a tax on income. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and 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 income. In the event that accrual results differ from these estimates, our provision for income taxes could be materially impacted.

Certain Factors That May Affect Future Results The Forms Solutions Group sells a mature product line of business forms and other printed business products. The demand for this product line may decrease with increasing electronic and paperless forms and filings.

The Promotional and Financial Solutions Groups are dependent upon certain major customers. The loss of such customers may affect the revenue and earnings of the Groups.

The Company has various contracts with suppliers that are subject to change upon renewal and may not provide the same cost ratios for future periods.

Forward looking statement - Management's result of operations contains forward-looking statements that reflect the Company's current view with respect to future revenues and earnings. These statements are subject to numerous uncertainties, including (but not limited to) the rate at which the business forms market is contracting, the application of technology to the production of business forms, demand for the Company's products in the context of a contracting market, variability in the prices of paper and other raw materials, and competitive conditions in the business forms market. Because of such uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements, which speak only as of June 23, 2004.

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