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;
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 ENDEDNOVEMBER 30, 2020 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, and
Ace FormsSM. 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). We
sell predominantly through independent distributors, as well as occasional sales
of our products to 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 completed two acquisitions in fiscal year 2020. On
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDNOVEMBER 30, 2020
wholly owned subsidiary,
On
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 third quarter, our days' sales in our receivables remained fairly constant at about 35 days, and while our days' sales of inventory (33 days)
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDNOVEMBER 30, 2020
increased slightly from
? Supply Chain:
To date, COVID-19 has not impacted, nor do we 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 in operation, and we have been able to switch from impacted suppliers to non-impacted suppliers in several instances since the outbreak. 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
? 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 continues to be many uncertainties regarding the impact of the COVID-19
pandemic, including the scope of scientific and health issues. The recent
approval of two vaccines in the
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDNOVEMBER 30, 2020
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 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 do acquisitions.
Production capacity and price competition within our industry - Changes in the
value of the
The COVID-19 pandemic has reduced the demand for both coated and uncoated papers faster than previously expected in the first quarter of fiscal 2021 and paper companies have idled some of their mills or converted to linerboard products to adjust supply and reduce inventory levels. As the economy has begun to improve, demand has increased in the third quarter for coated and uncoated freesheet papers which has reduced the excess inventory in the market. It is unclear whether this is a temporary situation or not. 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. Additionally, the possibility of paper shortages in the market is not a 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 reduce our procurement 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.
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.
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ENNIS, INC. AND SUBSIDIARIES FORM 10-Q FOR THE PERIOD ENDEDNOVEMBER 30, 2020
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 nine
months ended
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