ENNIS, INC. Cautionary Note Regarding Forward-Looking Statements
The following "Management's Discussion and Analysis of Financial Condition and
Results of Operations" should be read together with the unaudited consolidated
financial statements and related notes of
All of the statements in this report, other than historical facts, are forward-looking statements, including, without limitation, the statements made in this "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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, the Company 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 the Company. 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. The Company 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 the Company 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 and volatile;
uninsured losses, including those from natural disasters, catastrophes,
pandemics, theft or sabotage; the impact of the novel coronavirus (COVID-19)
pandemic or future pandemics on the
Overview
For a discussion regarding the impact of the ongoing novel coronavirus (COVID-19) pandemic on our business, please see Business Challenges-COVID-19 Pandemic and Results of Operations, below.
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDAUGUST 31, 2021 Business Overview
Our management believes we are the largest provider of business forms,
pressure-seal forms, labels, tags, envelopes, and presentation folders to
independent distributors in
We are in the business of manufacturing, designing, and selling business forms
and other printed business products primarily to distributors located in
The products we sell 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, ColorWorx®, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Ad
ConceptsSM, FormSource LimitedSM, Star Award Ribbon Company®, Witt Printing®,
B&D Litho®, Genforms®, PrintGraphics®, Calibrated Forms®, PrintXcel®,
Printegra®, Falcon Business FormsSM, Forms ManufacturersSM, Mutual Graphics®,
TRI-C Business FormsSM, Major Business SystemsSM, Independent PrintingSM,
Hoosier Data Forms®, Hayes Graphics®, Wright Business GraphicsSM, Wright 360SM,
Integrated Print & GraphicsSM, the Flesh CompanySM, Impressions DirectSM, Ace
FormsSM, and AmeriPrintSM. We also sell 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®, Folder Express®, and Independent
Folders® brands (which provide presentation folders and document folders); Ennis
Tag & LabelSM (which provides custom printed, high performance labels and custom
and stock tags); Allen-Bailey Tag & LabelSM, Atlas Tag & Label®, Kay Toledo
Tag®, and Special Service Partners® (SSP) (which provides custom and stock tags
and labels); Trade Envelopes®, Block Graphics®, Wisco®, and National Imprint
Corporation® (which provide custom and imprinted envelopes) and Northstar® and
General Financial Supply® (which provide financial and security documents);
InfosealSM and PrintXcel® (which provide custom and stock pressure seal
documents). We sell predominantly through independent distributors, as well as
to many of our competitors.
The printing industry generally sells its products either predominantly to end
users, a market dominated by a few large manufacturers, such as R.R. Donnelley
and Sons, Staples, Inc.,
There are a number of competitors that operate in this segment, ranging in size from single employee-owned 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
Raw materials principally consist of a wide variety of weights, widths, colors, sizes, and qualities of paper for business products purchased primarily from one major supplier at favorable prices based on the volume of business.
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 factors in quarterly volume fluctuations.
Recent Acquisitions
We have completed a number of acquisitions in recent years. In the prior year on
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDAUGUST 31, 2021
On
Our Business Challenges
Our industry is currently experiencing consolidation of traditional supply channels, product obsolescence, paper supplier capacity adjustments, and increased pricing and potential supply allocations due to demand/supply curve imbalance. 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. Improved equipment has become more accessible to our competitors due to the continued low interest rate environment. We face highly competitive conditions throughout our supply chain in an already over-supplied, price-competitive print industry. The challenges of our business include the following:
COVID-19 Pandemic - The global spread of the novel strain of COVID-19 has
significantly impacted health and economic conditions throughout
The following is a summary of our recent and anticipated actions in response to COVID-19 and its impact on our business.
?
Cash/Liquidity:
We believe our strong liquidity position will help us mitigate the ongoing
adverse impacts of COVID-19. On
?
Receivable and Inventory Management:
We continue to closely monitor and manage our outstanding trade receivables and inventories. During the current quarter, our days' sales in our receivables decreased from 39 days to 35 days, while our days' sales of inventory increased from 34 to 37 days. The Company continues to monitor incoming orders and is adjusting its raw material purchases accordingly.
? Supply Chain:
To date, COVID-19 has not materially impacted, nor do we currently expect it to materially impact, the supply chain for the products we sell. Most of our products are sourced domestically from suppliers deemed "essential" by the government, and therefore currently remain in operation. However, if one or more of our major suppliers are negatively impacted by the COVID-19 pandemic, through plant closures, deteriorating financial condition, or otherwise, it could adversely affect our operational results and financial condition.
? Cost Savings:
COVID-19 has severely impacted global economic activity, including the printing
industry in
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDAUGUST 31, 2021
locations with excess capacity to reduce future costs and improve our
operational efficiency. We will continue to monitor incoming order volume so
that we can proactively adjust our costs accordingly. We believe the
modifications to our cost structure in response to the sales impact of the
COVID-19 pandemic will not materially impact our ability to service increased
customer demand as economic conditions improve. During the six months ended
? Capital Expenditures:
We continue to make capital expenditures for operational maintenance purposes, as may be required. Additionally, we will carefully review and make new capital expenditures for equipment to the extent such expenditures make economic sense by improving our operations and not jeopardizing our strong liquidity position.
There continue to be many uncertainties regarding the impact of the COVID-19
pandemic, including the scope of scientific and health issues. We continue to
closely monitor the impact of the COVID-19 pandemic, including emerging
variants, on all aspects of our business, including how it is affecting our
employees, customers, supply chain and distribution network. The overall
magnitude of the impact of the pandemic on our operating and financial results
remains uncertain and will largely depend on the duration of the pandemic and
the measures implemented in response, as well as the effect on our customers and
suppliers. Given these factors, we are unable to reliably forecast the ultimate
impact of COVID-19 on our business, including due to factors discussed under the
caption "Risk Factors" in Item 1A of our Annual Report on Form 10-K for the
fiscal year ended
Transformation of our portfolio of products - While traditional business documents are essential in order to conduct business, many are being replaced through the use of cheaper paper grades or imported paper, or devalued with advances in digital technologies, causing steady declines in demand for a portion of our current product line. In addition, the impact of COVID-19 on the speed of this transformation is unknown, but it is expected to accelerate the decline for some of our products. Transforming our product offerings in order to continue to provide innovative, valuable solutions through lower labor and fixed charges 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, 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 through acquisitions, such as the addition of our envelope offerings, tag offerings, folder offerings, healthcare wristbands, specialty packaging, direct mail, pressure seal products, secure document solutions, innovative in-mold label offerings and long-run integrated products with high color web printing, which provide us with an opportunity for growth and differentiate us from our competition. The ability to make investments in new and existing technology and/or to acquire new market opportunities through acquisitions is dependent on the Company's liquidity and operational results. While currently the pandemic has not materially impacted our liquidity and it is not currently expected to, a protracted delay in the economy recovering could have a negative impact on our continued ability to make the aforementioned investments or to consummate acquisitions.
Production capacity and price competition within our industry - Changes in the
value of the
Paper production declined last year due to the pandemic and, as the economy improved, increased demand initially was satisfied with existing inventory at the paper mills. While paper mills now are operating at a very high capacity, they are basically producing to fill orders rather than stock inventory, which is contributing to the tight market in some grades of paper. Paper prices have also increased due to global logistics issues that have delayed and reduced imports that have typically filled gaps in domestic supply. While the availability of paper in the North American market is very low, our strong vendor relationship with our paper supplier allows us to meet customer demand for their business product needs. We have been adjusting our pricing to cover paper inflation during the year, but the impact of inflation with most of our other vendors, as well as the labor market, has had a slight impact on gross profit margin. We
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDAUGUST 31, 2021
anticipate additional pricing adjustments to cover all aspects of our supply chain and our labor force to maintain our gross profit margins at their historical levels. As such, pricing during the second half of fiscal 2022 is currently expected to increase.
As the economy has improved, demand has increased in 2021 for coated and uncoated freesheet papers which has reduced the excess inventory in the market along with the reduction in supply from the closing of several paper mills. Regardless of these factors, many of which are cyclical, we continue to believe paper pricing will remain in a range which will not unfavorably impact our margins over the long term. Additionally, the possibility of paper shortages in the market is not a major concern due to our primary material supplier's commitment to the Company. Consistent with our historical practice, we intend to continue to focus on effectively managing and controlling our product costs through the use of forecasting, production and costing models, as well as working closely with our domestic suppliers to manage our procurement and logistics costs, in order to minimize effects on our operational results. In addition, we will continue to look for ways to reduce and leverage our fixed costs as we consolidate plants where leases expire and sell unused real estate where we have the opportunity to relocate the business to another facility.
Continued consolidation of our customers - Our customers are distributors, many of which are consolidating or are being acquired by competitors. We continue to maintain a majority of the business we have had with our customers historically, but it is possible that these consolidations and acquisitions, which we expect to continue in the future, ultimately will impact our margins and sales.
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 our accounting policies
related to the aforementioned items are the most critical due to their effect on
our more significant estimates and judgments used in preparation of our
consolidated financial statements. For additional information, reference is made
to the Critical Accounting Policies and Estimates section of our Annual Report
on Form 10-K for the fiscal year ended
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. The operating results of the Company for the three and six
months ended
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