# Ennis, Inc.: Form 10-Q for the period ended Nov 30, 2011

- Company: [Ennis, Inc.](/companies/ebf.md) (CIK 33002)
- Form: 10-Q
- Filed: 2011-12-29
- Accepted by EDGAR: Dec 29, 2011, 16:10 ET
- Period: 2011-11-30
- Accession: 0001193125-11-354936
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/33002/000119312511354936/d274596d10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/33002/000119312511354936/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2011-11-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2011-09-01 to 2011-11-30 | $121.8m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2011-03-01 to 2011-11-30 | $395.5m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2011-09-01 to 2011-11-30 | $91.7m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2011-03-01 to 2011-11-30 | $291.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2011-09-01 to 2011-11-30 | $30.2m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2011-03-01 to 2011-11-30 | $104.0m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2011-09-01 to 2011-11-30 | $19.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2011-03-01 to 2011-11-30 | $58.4m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2011-09-01 to 2011-11-30 | $11.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2011-03-01 to 2011-11-30 | $45.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2011-09-01 to 2011-11-30 | $405.0k | us-gaap:InterestExpense |
| Interest expense | 9 months, 2011-03-01 to 2011-11-30 | $1.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2011-09-01 to 2011-11-30 | $4.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2011-03-01 to 2011-11-30 | $16.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2011-09-01 to 2011-11-30 | $6.9m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2011-03-01 to 2011-11-30 | $28.0m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2011-09-01 to 2011-11-30 | $0.27 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2011-03-01 to 2011-11-30 | $1.08 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2011-09-01 to 2011-11-30 | $0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2011-03-01 to 2011-11-30 | $1.08 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2011-09-01 to 2011-11-30 | 25,954,399 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2011-03-01 to 2011-11-30 | 25,955,104 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2011-03-01 to 2011-11-30 | $27.0m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2011-03-01 to 2011-11-30 | $5.3m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2011-03-01 to 2011-11-30 | $12.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2011-03-01 to 2011-11-30 | $2.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2011-11-30 | $16.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2011-11-30 | $197.6m | us-gaap:AssetsCurrent |
| Total assets | at 2011-11-30 | $484.5m | us-gaap:Assets |
| Current liabilities | at 2011-11-30 | $94.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2011-11-30 | $122.2m | us-gaap:Liabilities |
| Long-term debt | at 2011-11-30 | $0 | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2011-11-30 | $50.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2011-11-30 | $362.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 82,685 characters.

### Overview

Ennis, Inc. (formerly Ennis Business Forms, Inc.) was organized under the laws of Texas in 1909. Ennis, Inc. and its subsidiaries (collectively known as the “Company,” “Registrant,” “Ennis,” or “we,” “us,” or “our”) 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. Distribution of business products and forms throughout the United States is 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 13 of the Notes to the Consolidated Financial Statements beginning on page 16 included elsewhere herein, which information is incorporated herein by reference.

### Print Segment

The Print Segment, which represented 57% and 52% of our consolidated net sales for the three and nine months ended November 30, 2011, 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 40 manufacturing locations throughout the United States in 17 strategically located domestic 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®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphicsSM and Calibrated Forms®. 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 and General Financial Supply also sell to a small number of direct customers. Northstar has continued its focus with large banking organizations on a direct basis (where a distributor is not acceptable or available to the end-user) and has acquired several of the top 25 banks in the United States as customers and is actively working on other large banks within the top 25 tier of banks in the United States. Adams-McClure sales are generally through advertising agencies.

The printing industry generally sells its products in two ways. One market direction is to sell predominately to end users, and is dominated by a few large manufacturers, such as Moore Wallace (a subsidiary of R.R. Donnelley), Standard Register, and Cenveo. The other market direction, which the Company primarily serves, sells forms and other business products through a variety of independent distributors and distributor groups. While it is not possible, because of the lack of adequate statistical information, to determine Ennis’ share of the total business products market, management believes Ennis is one of the largest producers of business forms in the United States distributing primarily through independent dealers and that its business forms offering is more diversified than that of most companies in the business forms industry.

There are a number of competitors that operate in this segment, ranging in size from single employee-owner operations to multi-plant organizations. 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 recent downturn in the economy and credit markets which created highly competitive conditions in an already over-supplied, price-competitive industry, continue to present challenges today. Thus, we believe we are facing the following challenges in the Print Segment of our business:

- 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 opportunities for growth for us, such as print-on-demand services and product offerings that assist customers in their transition to digital business environments. We currently have many innovative products, such as our recently introduced healthcare wristbands, secure document solutions, and innovative in-mold label offerings, which address important business needs, and we feel are positioned for growth. In addition, we will continue to look for new market opportunities and niches, such as our addition of our envelope 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 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. In 2010, we saw our material prices stabilize due to the depressed economic conditions. However, during fiscal 2011 paper mills have returned to their past practices of increasing paper prices. This trend is expected to continue throughout fiscal year 2012.

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 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 of 2009 and 2010, the economic climate has been volatile and challenging. Decreased demand and intense price competition resulted in a significant decline in our revenue during those fiscal years as well during most of fiscal year 2011. Although we have seen improvement in some economic indicators, a weak domestic job market, global economic instability and protracted anemic domestic economic recovery will continue to present a challenging environment for revenue growth. As we cannot predict the pace of the economic recovery or its continuance or the affects of global economic instability, we will continue to be focused 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 and wouldn’t expect this to change in the future.

### Apparel Segment

The Apparel Segment represented 43% and 48% of our consolidated net sales for the three and nine months ended November 30, 2011, and operates under the name of Alstyle Apparel (“Alstyle”). Alstyle markets high quality knitted activewear (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 Alstyle’s revenues are derived from t-shirt sales, with 91% domestic sales. Alstyle’s branded product lines are sold mainly under the AAA® and Murina® brands.

Effective July 2011, the Apparel Segment operates in one manufacturing facility located in Agua Prieta, Mexico. Previously the Apparel Segment operated in two manufacturing facilities, one in California (leased), and one in Mexico (owned). In addition, the Apparel Segment currently has five cut/sew facilities in Mexico (1 in Agua Prieta, 2 in Ensenada, and 2 in Hermosillo). In addition to its own cut and sew facilities, Alstyle also uses outsourced manufacturers located in El Salvador from time to time to supplement a portion of the cut and sew needs. After sewing and packaging is completed, the product is shipped to one of Alstyle’s nine distribution centers located across the United States, Canada, and Mexico.

Alstyle utilizes a customer-focused internal sales team comprised of 20 sales representatives assigned to specific geographic territories in the United States, Canada, and Mexico. Sales representatives are allocated performance objectives for their respective territories and are provided financial incentives for achievement of their target objectives. Sales representatives are responsible for developing business with large accounts and spend approximately 60% of their time in the field.

Alstyle employs a staff of customer service representatives that handle call-in orders from smaller customers. Sales personnel sell directly to Alstyle’s customer base, which consists primarily of screen printers, embellishers, retailers, and mass marketers.

A majority of Alstyle’s sales are branded products, with the remainder customer private label products. Generally, sales to screen printers and mass marketers are driven by price and the availability of products, which directly impact inventory level requirements. Sales in the private label business are characterized by slightly higher customer loyalty.

Alstyle’s most popular styles are produced based on demand management forecasts to permit quick shipment and to level production schedules. Alstyle offers same-day shipping and uses third party carriers to ship products to its customers.

Alstyle’s sales are seasonal, with sales in the first and second 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. Alstyle’s strategy is to provide the best value to its customers by delivering a consistent, high-quality product at a competitive price. Alstyle’s competitive disadvantage is that its brand name, Alstyle Apparel, is not as well known as the brand names of its largest competitors, such as Gildan, Delta, Hanes, and Russell. While it is not possible to calculate precisely, based on public information available, management believes that Alstyle is one of the top three providers of blank t-shirts in North America.

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 purchased during the current quarter approximately 67% of our cotton and yarn from one supplier.

***Our Apparel Business Challenges –*** In our Apparel segment, our market niche is highly competitive, commodity driven and is generally dominated by a limited number of players. 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 had improved some, 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 some recent softness in the market due to destocking strategies and current economic uncertainties both domestically and internationally. Whether the current softness in the market is just a temporary situation or one we will have to manage through for an extended period of time is unknown. However, such uncertainty and volatility in the marketplace could have unanticipated adverse effects on our business during the remainder of fiscal 2012 and beyond. In addition, the current spot price of cotton has contributed negatively to an already competitive marketplace and made it even more difficult for large manufacturers to maintain their margins given the high cost of cotton in their finished goods inventory. While current spot prices on various input costs are down somewhat from comparable periods, most larger manufacturers costs in their finished goods inventory are at pricing points considerable higher. These higher input costs will need to be worked through before the current lower costs can start having a positive impact on our operational results. Until then, we will continue to see an increase in these costs in our operational results until we are able to work through the existing inventories, which will continue to present a challenging environment for the remainder of fiscal year 2012 and into the first part of fiscal 2013. The duration of this time period will be impacted by any continued softness in the market. As such, our operational costs are subject to significant swings, which may or may not be passed on to the marketplace due to competitive or current economic conditions, competitors’ pricing strategies, etc. Thus, we believe we are facing the following challenges in our Apparel Segment business in fiscal 2012 and 2013:

- Cotton prices
- New manufacturing facility
- Continued economic uncertainties

**Cotton prices –** Cotton, which represents a significant portion of our cost, is a commodity product and subject to volatile fluctuations in price. During calendar year 2010, cotton prices hit their highest levels in 140 years. While there has been some abatement in prices of late, spot and future prices are still at levels significantly higher than historical averages. Whether or not prices will stay at current levels for a sustained period of time, or continue to recede, is unknown. For the current quarter, our effective cost of cotton flowing into our operational results was 100% higher than during the comparable period last year. 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. 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. Due to the high price of cotton during calendar year 2010, Alstyle, like most large manufacturers, was relatively short with respect to their cotton purchases entering calendar year 2011. However, during the middle part of the calendar year 2011 most large manufacturers locked in cotton contracts in order to guarantee an uninterrupted supply of cotton and price stability. Unfortunately, these locked in prices are now significantly higher than the current spot price of cotton. While we believe we are competitive with other large apparel manufacturers in the United States, with the recent influx of cotton from India and other global markets, many of the smaller manufacturers who didn’t have the financial capacity to enter into longer term contracts are now able to compete on a favorable basis due to their lower input cost. We view this as a short-term event, as the costs incurred for materials are capitalized into inventory and impacts a company’s operating results as the inventory is sold. As such, Alstyle’s and most large manufacturers’ peak cotton costs should be flowing into their operational results currently and over the next few quarters depending on their inventory turns. We feel this is a temporary situation, and one that all large manufacturers like Alstyle will need to manage through. Over the past year, while never fully offsetting the input cost increases, the market had absorbed a certain level of price increase. However, recently competitive pressures have started to have a negative impact of selling prices in the market place. In order to protect market share and production levels, some large manufacturers have instituted stock-restock rebate programs and announced price decreases. At the same time, they will have to manage their highest cost of cotton in their finished goods inventory. These factors, along with domestic and international economic uncertainties will make the next several quarters extremely challenging to navigate through, and definite margin compression should be expected until the current spot cotton pricing starts to flow through larger manufacturers cost of sales.

**New manufacturing facility –** The new manufacturing facility in Agua Prieta, Mexico (“AP”) is fully operational and all production has now been transitioned from our Anaheim, CA (“Anaheim”) facility to this facility. We began producing fabric from this facility during the first quarter of this fiscal year and current production levels are on target with our original estimates. We estimate the negative impact associated with the start-up/ramp-up of the new facility and the shut-down of the Anaheim facility was in line with our previous estimates of approximately $7.5 to $8.5 million ($3.2 to $3.9 million impacting the current year’s operational results). We believe the negative operational impact of this facility during the current quarter was minimal. While the transition from Anaheim to AP has been completed, much still needs to be accomplished, such as the installation of transitioned equipment and improving the operational efficiency factors, which we believe will continue to occur over the coming quarters as experience and production levels increase.

**Continued economic uncertainties –** As a result of the recessionary conditions of 2009 and 2010, the economic climate has been and continues to be volatile and challenging both domestically and internationally. Decreased demand and intense price competition resulted in significant declines in revenues during fiscal year 2009 and 2010. Although we saw an increase in our apparel revenues during fiscal year 2011 due to improving economic conditions, we have of late seen some softness in the market. Whether this is due to the protracted domestic economic recovery, recent international uncertainties or destocking of retailers/distributors and screen-printers in anticipation of lower pricing is unknown at this time. International instability and continued domestic economic issues (i.e., high unemployment, housing sector weakness, etc.) continue to take a toll on the already fragile domestic economic environment. In addition to the foregoing, the recent decline in spot pricing of cotton has also given some retailers/distributors and screen-printers reason to pause or be judicious with their replenishment orders. As such, we have seen some softness in the market during the current and previous quarter. Whether this is temporary or one we will have to manage through for sometime is unknown. A prolonged softness in the market could have a negative impact on our revenues, operational results and lengthen the time it takes us to manage through our current inventory position.

### Risk Factors

In addition to the factors indicated above, you should carefully consider the risks described below, as well as the other information included or incorporated by reference in the Annual Report on Form 10-K, before making an investment in our common stock. The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed. In such an event, our common stock could decline in price and you may lose all or part of your investment.

***Our results and financial condition are affected by global and local market conditions, and competitors’ pricing strategies, which can adversely affect our sales, margins, and net income.***

Our results of operations are substantially affected not only by global economic conditions, but also by local market conditions, and competitors’ pricing strategies, which can vary substantially by market. Unfavorable conditions can depress sales in a given market and may prompt promotional or other actions that adversely affect our margins, constrain our operating flexibility or result in charges. Certain macroeconomic events, such as the recent crisis in the financial markets, could have a more wide-ranging and prolonged impact on the general business environment, which could also adversely affect us. Whether we can manage these risks effectively depends mainly on the following:

- Our ability to manage upward pressure on commodity prices and the impact of government actions to manage national economic conditions such as consumer spending, inflation rates and unemployment levels, particularly given the current volatility in the global financial markets;
- The impact on our margins of labor costs given our labor-intensive business model, the trend toward higher wages in both mature and developing markets and the potential impact of union organizing efforts on day-to-day operations of our manufacturing facilities.

### Declining economic conditions could negatively impact our business.

Our operations are affected by local, national and worldwide economic conditions. Markets in the United States and elsewhere have been experiencing extreme volatility and disruption due in part to the financial stresses affecting the liquidity of the banking system and the financial markets generally. The consequences of a potential or prolonged recession or protracted recovery from an economic recession may include a lower level of economic activity and uncertainty regarding energy prices and the capital and commodity markets, all of what we have seen of late. A lower level of economic activity might result in a decline in demand for our products, which may adversely affect our revenues and future growth. Instability in the financial markets, as a result of recession or otherwise, also may affect our cost of capital and our ability to raise capital.

***The terms and conditions of our credit facility impose certain restrictions on our operations. We may not be able to raise additional capital, if needed, for proposed expansion projects.***

The terms and conditions of our credit facility impose certain restrictions on our ability to incur additional debt, make capital expenditures, acquisitions, asset dispositions, as well as other customary covenants, such as minimum equity level and total funded debt to EBITDA, as defined. Our ability to comply with the covenants may be affected by events beyond our control, such as distressed and volatile financial markets which could trigger an impairment charge to our recorded intangible assets. A breach of any of these covenants could result in a default under our credit facility. In the event of a default, the bank could elect to declare the outstanding principal amount of our credit facility, all interest thereon, and all other amounts payable under our credit facility to be immediately due and payable. As of November 30, 2011, we were in compliance with all terms and conditions of our credit facility, which matures on August 18, 2012.

***Declining financial market conditions could adversely impact the funding status of our pension plan.***

We maintain a defined-benefit pension plan covering approximately 11% of our employees. Included in our financial results are pension costs that are measured using actuarial valuations. The actuarial assumptions used may differ from actual results. In addition, as our pension assets are invested in marketable securities, severe fluctuations in market values could potentially negatively impact our funding status, recorded pension liability, and future required minimum contribution levels.

***We may be required to write down goodwill and other intangible assets which could cause our financial condition and results of operations to be negatively affected in the future.***

When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets. The amount of the purchase price which is allocated to goodwill and other intangible assets is the excess of the purchase price over the net identifiable tangible assets acquired. The annual impairment test is based on several factors requiring judgment. A decline in market conditions caused by a recession, protracted recovery there from, or other factors may indicate a potential impairment of goodwill. An impairment test was completed for our fiscal year ended February 28, 2011, and we concluded that no impairment charge was necessary. At November 30, 2011, our goodwill and other intangible assets were approximately $117.3 million and $74.5 million, respectively.

***Digital technologies will continue to erode the demand for our printed business documents.***

The increasing sophistication of software, internet technologies, and digital equipment combined with our customers’ general preference, as well as governmental influences, for paperless business environments will continue to reduce the number of traditional printed documents sold. Moreover, the documents that will continue to coexist with software applications will likely contain less value-added print content.

Many of our custom-printed documents help companies control their internal business processes and facilitate the flow of information. These applications will increasingly be conducted over the internet or through other electronic payment systems. The predominant method of our clients’ communication to their customers is by printed information. As their customers become more accepting of internet communications, our clients may increasingly opt for the less costly electronic option, which would reduce our revenue. The pace of these trends is difficult to predict. These factors will tend to reduce the industry-wide demand for printed documents and require us to gain market share to maintain or increase our current level of print-based revenue.

In response to the gradual obsolescence of our standardized forms business, we continue to develop our capability to provide custom and full-color products. If new printing capabilities and new product introductions do not continue to offset the obsolescence of our standardized business forms products, and we aren’t able to increase our market share, our sales and profits will be affected. Decreases in sales of our standardized business forms and products due to obsolescence could also reduce our gross margins. This reduction could in turn adversely impact our profits, unless we are able to offset the reduction through the introduction of new high margin products and services or realize cost savings in other areas.

***Our distributors face increased competition from various sources, such as office supply superstores. Increased competition may require us to reduce prices or to offer other incentives in order to enable our distributors to attract new customers and retain existing customers.***

Low price, high value office supply chain stores offer standardized business forms, checks and related products. Because of their size, these superstores have the buying power to offer many of these products at competitive prices. These superstores also offer the convenience of “one-stop” shopping for a broad array of office supplies that our distributors do not offer. In addition, superstores have the financial strength to reduce prices or increase promotional discounts to expand market share. This could result in us reducing our prices or offering incentives in order to enable our distributors to attract new customers and retain existing customers, which could reduce our profits.

***Technological improvements may reduce our competitive advantage over some of our competitors, which could reduce our profits.***

Improvements in the cost and quality of printing technology are enabling some of our competitors to gain access to products of complex design and functionality at competitive costs. Increased competition from these competitors could force us to reduce our prices in order to attract and retain customers, which could reduce our profits.

***We could experience labor disputes that could disrupt our business in the future.***

As of November 30, 2011, approximately 14% of our domestic employees are represented by labor unions under collective bargaining agreements, which are subject to periodic renegotiations. Three unions represent all of our hourly employees in Mexico. While we feel we have a good working relationship with all the unions, there can be no assurance that any future labor negotiations will prove successful, which may result in a significant increase in the cost of labor, or may break down and result in the disruption of our business or operations.

***We obtain our raw materials from a limited number of suppliers, and any disruption in our relationships with these suppliers, or any substantial increase in the price of raw materials or material shortages could have a material adverse effect on us.***

Cotton yarn is the primary raw material used in Alstyle’s manufacturing processes. Cotton accounts for approximately 68% of the manufactured product cost at current pricing levels. Alstyle acquires its yarn from three major sources that meet stringent quality and on-time delivery requirements. The largest supplier provided 67% of Alstyle’s yarn requirements during the quarter and has an entire yarn mill dedicated to Alstyle’s production. To maintain our high standard of color control associated with our apparel products, we purchase our dyeing chemicals from limited sources. If Alstyle’s relations with its suppliers are disrupted, Alstyle may not be able to enter into arrangements with substitute suppliers on terms as favorable as its current terms, and our results of operations could be materially adversely affected.

We also purchase our paper products from a limited number of sources, which meet stringent quality and on-time delivery standards under long-term contracts. However, fluctuations in the quality of our paper, unexpected price increases or other factors that relate to our paper products could have a material adverse effect on our operating results.

Both cotton and paper are commodities that are subject to periodic increases or decreases in price, sometimes quite significant. There is no effective market to cost-effectively insulate us against unexpected changes in price of paper, and corporate negotiated purchase contracts provide only limited protection against price increases. We generally acquire our cotton yarn under short-term purchase contracts with our suppliers. While we generally do not use derivative instruments, including cotton option contracts, to manage our exposure to movements in cotton market prices, we believe we are competitive with other companies in the United States apparel industry in negotiating the price of cotton. During fiscal year 2010, spot cotton prices increased significantly, however, manufacturers were able to insulate themselves from some of these increases with forward purchase contracts. However, because spot cotton prices have remained at these levels for a sustained period of time, most of these favorable forward contracts have expired and higher cotton costs are starting to impact all manufacturers’ inventory costs. When cotton or paper prices are increased, we attempt to recover the higher costs by raising the prices of our products to our customers. In the price-competitive marketplaces in which we operate, we may not always be able to pass through any or all of the higher costs. As such, any significant increase in the price of paper or cotton or shortages in the availability could have a material adverse effect on our results of operations.

***We face intense competition to gain market share, which may lead some competitors to sell substantial amounts of goods at prices against which we cannot profitably compete.***

Demand for Alstyle’s products is dependent on the general demand for shirts and the availability of alternative sources of supply. Alstyle’s strategy in this market environment is to be a low cost producer and to differentiate itself by providing quality service and quality products to its customers. Even if this strategy is successful, its results may be offset by reductions in demand or price declines due to competitors’ pricing strategies. Our Print Segment also faces the risk of our competition following a strategy of selling their products at or below cost in order to cover some amount of fixed costs, especially in distressed economic times.

### The apparel industry is heavily influenced by general economic cycles.

The apparel industry is cyclical and dependent upon the overall level of discretionary consumer spending, which changes as regional, domestic and international economic conditions change. These include, but are not limited to, employment levels, energy costs, interest rates, tax rates, personal debt levels, and uncertainty about the future. Any deterioration in general economic conditions that creates uncertainty or alters discretionary consumer spending habits could reduce our sales, increase our costs of goods sold or require us to significantly modify our current business practices, and consequently negatively impact our results of operations.

***Our apparel foreign operations could be subject to unexpected changes in regulatory requirements, tariffs and other market barriers, political and economic instability, and social unrest in the countries where it operates, which could negatively impact our operating results.***

Alstyle operates manufacturing facilities in Mexico and sources certain product manufacturing and purchases from El Salvador, Thailand, India, Pakistan, China and other foreign sources. Alstyle’s foreign operations could be subject to unexpected changes in regulatory requirements, tariffs, and other market barriers, political and economic instability, and social unrest in the countries where it operates. The impact of any such events that may occur in the future could subject Alstyle to additional costs or loss of sales, which could adversely affect our operating results. In particular, Alstyle operates its facilities in Mexico pursuant to the “maquiladora” duty-free program established by the Mexican and United States governments. This program enables Alstyle to take advantage of generally lower costs in Mexico, without paying duty on inventory shipped into or out of Mexico. There can be no assurance that the governments of Mexico and the United States will continue the program currently in place or that Alstyle will continue to be able to benefit from this program. The loss of these benefits could have an adverse effect on our business.

In addition, all Alstyle’s knit and dye operations are now located in one facility in Agua Prieta, Mexico. Any disruptions in operations through any of the above factors, as well as others, could have a material adverse effect on the Company’s operational results.

***Our apparel products are subject to foreign competition, which in the past have been faced with significant U.S. government import restrictions.***

Foreign producers of apparel often have significant labor cost advantages. Given the number of these foreign producers, the substantial elimination of import protections that protect domestic apparel producers could materially adversely affect Alstyle’s business. The extent of import protection afforded to domestic apparel producers has been, and is likely to remain, subject to considerable political considerations.

The North American Free Trade Agreement (NAFTA) became effective on January 1, 1994 and has created a free-trade zone among Canada, Mexico, and the United States. NAFTA contains a rule of origin requirement that products be produced in one of the three countries in order to benefit from the agreement. NAFTA has phased out all trade restrictions and tariffs among the three countries on apparel products competitive with those of Alstyle. Alstyle manufactures all of its products in the Agua Prieta manufacturing plant and performs substantially all of its cutting and sewing in five plants located in Mexico in order to take advantage of the NAFTA benefits. Subsequent repeal or alteration of NAFTA could adversely affect our business.

The Central American Free Trade Agreement (CAFTA) became effective May 28, 2004 and retroactive to January 1, 2004 for textiles and apparel. It creates a free trade zone similar to NAFTA by and between the United States and Central American countries (El Salvador, Honduras, Costa Rica, Nicaragua, and Dominican Republic.) Textiles and apparel are duty-free and quota-free immediately if they meet the agreement’s rule of origin, promoting new opportunities for U.S. and Central American fiber, yarn, fabric and apparel manufacturing. The agreement gives duty-free benefits to some apparel made in Central America that contains certain fabrics from NAFTA partners Mexico and Canada. Alstyle did not outsource any of its production to outside contract manufacturers during the quarter, and we do not anticipate that alteration or subsequent repeal of CAFTA would have a material effect on our operations.

The World Trade Organization (WTO), a multilateral trade organization, was formed in January 1995 and is the successor to the General Agreement on Tariffs and Trade (GATT). This multilateral trade organization has set forth mechanisms by which world trade in clothing is being progressively liberalized by phasing-out quotas and reducing duties over a period of time that began in January of 1995. As it implements the WTO mechanisms, the United States government is negotiating bilateral trade agreements with developing countries, which are generally exporters of textile and apparel products, that are members of the WTO to get them to reduce their tariffs on imports of textiles and apparel in exchange for reductions by the United States in tariffs on imports of textiles and apparel.

In January 2005, United States import quotas were removed on knitted shirts from China. The elimination of quotas and the reduction of tariffs under the WTO may result in increased imports of certain apparel products into North America. In May 2005, quotas on three categories of clothing imports, including knitted shirts, from China were re-imposed. A reduction of import quotas and tariffs could make Alstyle’s products less competitive against low cost imports from developing countries.

### Environmental regulations may impact our future operating results.

We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, and may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal. We may be subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability at any of our facilities, or at facilities we may acquire.

***Our new manufacturing facility in Mexico is subject to certain risks regarding sales growth and cost savings, as well as transition risks associated with moving the current production.***

Our new manufacturing facility was built to capture anticipated future growth and savings in production costs over our cost structure in Anaheim, CA. Should such growth or production savings not materialize, such events may impact our ability to achieve our expected return and/or could negatively impact our operational results and financial condition.

***We are exposed to the risk of non-payment by our customers on a significant amount of our sales.***

Our extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history. We monitor our credit risk exposure by periodically obtaining credit reports and updated financials on our customers. We saw a heightened amount of bankruptcies by our customers, especially retailers, during the recent economic downturn. While we maintain an allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, in times of economic turmoil, there is heightened risk that our historical indicators may prove to be inaccurate. The inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our results of operations.

### Our business incurs significant freight and transportation costs.

We incur significant freight costs to transport our goods, especially as it relates to our Apparel Segment where we transport our product from our domestic textile plant to foreign sewing facilities and then to bring our goods back into the United States. In addition, we incur transportation expenses to ship our products to our customers. Significant increases in the costs of freight and transportation could have a material adverse effect on our results of operations, as there can be no assurance that we could pass these increased costs to our customers.

### The price of energy is prone to significant fluctuations and volatility.

Our apparel manufacturing operations require high inputs of energy, and therefore changes in energy prices directly impact our gross profit margins. We are focusing on manufacturing methods that will reduce the amount of energy used in the production of our apparel products to mitigate the rising costs of energy. Significant increases in energy prices could have a material adverse effect on our results of operations, as there can be no assurance that we could pass these increased costs to our customers given the competitive environment in which our Apparel segment operates.

***We depend upon the talents and contributions of a limited number of individuals, many of whom would be difficult to replace.***

The loss or interruption of the services of our Chief Executive Officer, Executive Vice President, Vice President of Apparel or Chief Financial Officer could have a material adverse effect on our business, financial condition or results of operations. Although we maintain employment agreements with these individuals, it cannot be assured that the services of such individuals will continue.

***Increases in the cost of employee benefits could impact the Company’s financial results and cash flow.***

The Company’s expenses relating to employee health benefits are significant. Unfavorable changes in the cost of such benefits could impact the Company’s financial results and cash flow. Healthcare costs have risen significantly in recent years, and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system. The Company is not able at this time to determine the impact that healthcare reform could have on the Company-sponsored medical plans.

### Cautionary Statements

You should read this discussion and analysis in conjunction with our Consolidated Financial Statements and the related notes appearing elsewhere in this Report. In addition, certain statements in this Report, and in particular, statements found in Management’s Discussion and Analysis of Financial Condition and Results of Operations, constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. We believe these forward-looking statements are based upon reasonable assumptions within the bounds of our knowledge of Ennis. All such statements involve risks and uncertainties, and as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including but not limited to, general economic, business and labor conditions; the ability to implement our strategic initiatives; the ability to be profitable on a consistent basis; dependence on sales that are not subject to long-term contracts; dependence on suppliers; the ability to recover the rising cost of key raw materials in markets that are highly price competitive; the ability to meet customer demand for additional value-added products and services; the ability to timely or adequately respond to technological changes in the industry; the impact of the Internet and other electronic media on the demand for forms and printed materials; postage rates; the ability to manage operating expenses; the ability to manage financing costs and interest rate risk; a decline in business volume and profitability could result in an impairment of goodwill; the ability to retain key management personnel; the ability to identify, manage or integrate future acquisitions; the costs associated with and the outcome of outstanding and future litigation; and changes in government regulations.

In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements may prove to be inaccurate and speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

### 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 pension plan for employees. Included in our financial results are pension costs that are measured using actuarial valuations. The actuarial assumptions used may differ from actual results. As our pension assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status and associated liability recorded.

Amounts allocated to 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 annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In performing tests of impairment, we must make assumptions regarding the estimated future cash flows and other factors to determine the fair value of the respective assets in assessing the recoverability of our long lived assets. If these estimates or the related assumptions change, we may be required to record impairment charges for these assets in the future. Actual results could differ from assumptions made by management. At November 30, 2011, our goodwill and other intangible assets were approximately $117.3 million and $74.5 million, 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 $2.8 million and $7.7 million of revenue were recognized under these agreements during the three and nine months ended November 30, 2011 as compared to $2.7 million and $8.7 million during the three and nine months ended November 30, 2010.

We maintain an allowance for doubtful receivables to reflect estimated losses resulting from the inability of customers to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based upon historical collection trends, current economic factors, and the assessment of the collectability of specific accounts. We evaluate the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition and credit scores, recent payment history, current economic environment, discussions with our project managers, and discussions with the customers directly.

Our inventories are valued at the lower of cost or market. We regularly review inventory values on hand, using specific aging categories, and write down inventory deemed obsolete and/or slow-moving based on historical usage and estimated future usage to its estimated market value. As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income. To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the consolidated statements of earnings. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.

In addition to the above, we also have to make assessments as to the adequacy of our accrued liabilities, more specifically our liabilities recorded in connection with our workers compensation and health insurance, as these plans are self funded. To help us in this evaluation process, we routinely get outside third party assessments of our potential liabilities under each plan.

In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

### 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. This analysis is presented in the following sections:

- *Consolidated Summary —* this section provides an overview of our consolidated results of operations for the three and nine months ended November 30, 2011 and 2010.
- *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 Earnings — Data | Three Months Ended November 30, 2011 |  | 2010 |  | Nine Months Ended November 30, 2011 |  | 2010 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $121,846 | 100.0% | $134,817 | 100.0% | $395,488 | 100.0% | $418,592 | 100.0% |
| Cost of goods sold | 91,663 | 75.2 | 98,298 | 72.9 | 291,510 | 73.7 | 300,185 | 71.7 |
| Gross profit margin | 30,183 | 24.8 | 36,519 | 27.1 | 103,978 | 26.3 | 118,407 | 28.3 |
| Selling, general and administrative | 19,094 | 15.7 | 20,971 | 15.6 | 58,398 | 14.7 | 62,494 | 14.9 |
| Gain from disposal of assets | (8) | — | — | — | (133) | — | — | — |
| Income from operations | 11,097 | 9.1 | 15,548 | 11.5 | 45,713 | 11.6 | 55,913 | 13.4 |
| Other expense, net | (87) | (0.1) | (362) | (0.2) | (1,574) | (0.4) | (1,091) | (0.3) |
| Earnings before income taxes | 11,010 | 9.0 | 15,186 | 11.3 | 44,139 | 11.2 | 54,822 | 13.1 |
| Provision for income taxes | 4,118 | 3.3 | 5,543 | 4.1 | 16,111 | 4.1 | 20,010 | 4.8 |
| Net earnings | $6,892 | 5.7% | $9,643 | 7.2% | $28,028 | 7.1% | $34,812 | 8.3% |

31

### Three Months ended November 30, 2011 compared to Three Months ended November 30, 2010

*Net Sales.* Our sales decreased by $13.0 million, or 9.6% from $134.8 million for the three months ended November 30, 2010 to $121.8 million for the current quarter. The drop in our sales during the quarter related to our apparel sales, which were off $12.7 million. Our apparel sales during the quarter were impacted by economic uncertainties and negative consumer sentiment. This coupled with the current spot price of cotton caused the destocking of inventories at the retail/distributor and screen-printers levels, which had the effect of putting downward pressure on unit selling prices as manufacturers attempted to maintain capacity utilization.

*Cost of Goods Sold.* Our manufacturing costs decreased by $6.6 million from $98.3 million for the three months ended November 30, 2010 to $91.7 million for the current quarter, or 6.7%. Our gross profit margin decreased from 27.1% for the three months ended November 30, 2010 to 24.8% for the three months ended November 30, 2011 due to the decline on our apparel margin during the quarter which decreased from 26.3% to 20.8%. The decline on our apparel margin during the quarter was caused by higher input costs (i.e., mainly cotton) and competitive pressures on selling prices.

*Selling, general and administrative expense.* For the three months ended November 30, 2011, our selling, general and administrative expenses were $19.1 million, or 15.7% of sales, compared to $21.0 million, or 15.6% of sales for the three months ended November 30, 2010, or a decrease of approximately $1.9 million, or 9.0%. We were able to reduce our selling, general and administrative expenses on both a dollar and percent of sales basis during the current quarter through various cost reduction initiatives and a reduction in our bad debt expense, due to increased collection efforts and an overall improved aging of our accounts receivables.

*Gain from disposal of assets.* The gain from disposal of assets of $8,000 during the quarter related to the sale of unused manufacturing equipment. There was no gain or loss from the disposal of assets for the three months ended November 30, 2010.

*Income from operations.* Our income from operations for the three months ended November 30, 2011 was $11.1 million or 9.1% of sales, as compared to $15.5 million, or 11.5% of sales for the three months ended November 30, 2010, a decrease of $4.4 million, or 28.4%. The decrease in our operational earnings during the current period was primarily related to our decreased apparel revenues and apparel gross profit margin.

*Other income and expense.* Interest expense increased from $0.2 million for the three months ended November 30, 2010 to $0.4 million for the three months ended November 30, 2011. The increase in our interest expense on a comparable basis related to the portion of our interest capitalized in connection with the construction of our manufacturing facility. For the quarter ended November 30, 2010, we capitalized $0.5 million in interest, whereas during the current quarter, as construction was complete, we did not capitalize any of our interest expense.

*Provision for income taxes.* Our effective tax rate was 37.4% for the three months ended November 30, 2011 compared to 36.5% for the three months ended November 30, 2010. The increase in our effective tax rate during the current period related to a reduction in the benefit associated with our Domestic Production Activities Deduction, which was caused by the moving of our apparel manufacturing from the United States to Mexico.

*Net earnings.* Due to the above factors, our net earnings for the three months ended November 30, 2011 was $6.9 million, or 5.7% of sales, as compared to $9.6 million, or 7.2% of sales for the three months ended November 30, 2010. Our basic earnings per share were $0.27 per share for the three months ended November 30, 2011, as compared to $0.37 per share for the three months ended November 30, 2010. Our diluted earnings per share were $0.27 per share for the three months ended November 30, 2011, as compared to $0.37 per share for the three months ended November 30, 2010.

### Nine Months ended November 30, 2011 compared to Nine Months ended November 30, 2010

*Net Sales.* Net sales for the nine months ended November 30, 2011 were $395.5 million compared to $418.6 million for the nine months ended November 30, 2010, a decrease of $23.1 million, or 5.5%. Our sales decline for the period related primarily to the decline in our apparel sales which was off $22.2 million, or 10.5% due to factors previously discussed.

*Cost of Goods Sold.* Our manufacturing costs decreased by $8.7 million from $300.2 million, or 71.7% of sales for the nine months ended November 30, 2010 to $291.5 million, or 73.7% of sales for the comparable period this year. Our gross margins, as a percentage of sales, decreased from 28.3% for the nine months ended November 30, 2010 to 26.3% for the nine months ended November 30, 2011 due to continued higher input costs and competitive pressures on selling prices associated with our Apparel Segment.

*Selling, general and administrative expense.* For the nine months ended November 30, 2011, our selling, general and administrative expenses were $58.4 million compared to $62.5 million for the nine months ended November 30, 2010, or a decrease of approximately $4.1 million or 6.6% due to various cost control initiatives and lower bad debt expense, which is the result of increased collection efforts and improved accounts receivable aging. As such, as a percentage of sales, selling, general and administrative expenses decreased from 14.9% to 14.7% for the periods ended November 30, 2010 and 2011, respectively.

*Gain from disposal of assets.* The gain from disposal of assets of $133,000 for the nine months ended November 30, 2011 resulted primarily from the sale of unused manufacturing equipment during the period. There was no gain or loss from the disposal of assets for the nine months ended November 30, 2010.

*Income from operations.* Our income from operations for the nine months ended November 30, 2011 was $45.7 million, or 11.6% of sales compared to $55.9 million, or 13.4% of sales for the same period last year, or a decrease of $10.2 million, or 18.2%. The decrease in our operational earnings during the current period was primarily related to our decreased apparel sales and apparel gross profit margin.

*Other income and expense.* Our interest expense increased from $1.0 million for the nine months ended November 30, 2010 to $1.9 million for the nine months ended November 30, 2011. For the period ended November 30, 2010, we capitalized $1.2 million in interest expense relating to our Agua Prieta, Mexico construction project, whereas during the current period, as construction was complete, we did not capitalize any of our interest expense.

*Provision for income taxes.* Our effective tax rate was 36.5% for the nine months ended November 30, 2010 and 2011.

*Net earnings.* Due to the above factors, our net earnings for the nine months ended November 30, 2011 was $28.0 million, or 7.1% of sales, compared to $34.8 million, or 8.3% of sales for the nine months ended November 30, 2010. Our basic earnings per share for the nine months ended November 30, 2011 was $1.08 per share compared to $1.35 per share for the nine months ended November 30, 2010. Our diluted earnings per share for the nine months ended November 30, 2011 was $1.08 per share compared to $1.34 for the nine months ended November 30, 2010.

### Segment Operating Results

| Net Sales by Segment (in thousands) | Three months ended November 30, 2011 | 2010 | Nine months ended November 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Print | $69,216 | $69,516 | $205,542 | $206,452 |
| Apparel | 52,630 | 65,301 | 189,946 | 212,140 |
| Total | $121,846 | $134,817 | $395,488 | $418,592 |

***Print Segment***. Our net print sales, which represented 57% and 52% of our consolidated sales during the three and nine months ended November 30, 2011, were approximately $69.2 million and $205.5 million, respectively, compared to $69.5 million and $206.5 million for the three and nine months ended November 30, 2010, a decrease of $0.3 million for the quarter and a decrease of $1.0 million for the period. While our print sales continue to be challenged by technological and economic factors, we did see revenue growth in this segment on a sequential basis, which related principally to our acquisition and relative stability on a comparable quarter/period basis.

***Apparel Segment***. Our net apparel sales, which represented 43% and 48% of our consolidated sales for the three and nine months ended November 30, 2011, were approximately $52.6 million and $189.9 million compared to approximately $65.3 million and $212.1 million for the three and nine months ended November 30, 2010, or a decrease of $12.7 million and $22.2 million, or 19.4% and 10.5%, respectively. Our apparel sales decreased during the current quarter due to decreased unit sales resulting from soft market conditions associated with reduced retail and consumer sentiment attributed to the protracted and volatile economic recovery. In addition, we feel short term sales are being impacted by unrealistic retail and consumer expectations regarding selling prices due to the recent drop in commodity prices, which has caused the destocking of inventories at the retail/distributor and screen-print levels and added to competitive pressures in the marketplace as manufacturers try to maintain capacity utilization.

| Gross Profit by Segment (in thousands) | Three months ended November 30, 2011 | 2010 | Nine months ended November 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Print | $19,239 | $19,375 | $58,340 | $59,386 |
| Apparel | 10,944 | 17,144 | 45,638 | 59,021 |
| Total | $30,183 | $36,519 | $103,978 | $118,407 |

***Print Segment***. Our print gross profit margin (“margin”) as a percentage of sales decreased slightly from 27.9% to 27.8% for the three months ended November 30, 2010 and November 30, 2011, respectively. For the period our print margins declined from 28.8% to 28.4% for the nine months ended November 30, 2010 and November 30, 2011, respectively, due to product mix changes and higher raw material prices, which have not been fully passed along to our customers due to timing and market conditions, nor fully offset through continued operational improvements.

***Apparel Segment***. Our apparel gross profit margin (“margin”), as a percentage of sales, was 20.8% and 24.0% for the three and nine months ended November 30, 2011, respectively, as compared to 26.3% and 27.8% for the three and nine months ended November 30, 2010, respectively. Our apparel margin, as expected and as previously discussed, continues to be compressed through higher input costs and competitive pressures in the marketplace. While in previous quarters our apparel margins were also impacted by inefficiencies associated with the start-up of our new manufacturing facility in Agua Prieta, Mexico, we feel this had a minimal impact on our reported margins during the current quarter. Cotton, our largest input cost, during the quarter increased 100% over the comparable quarter in fiscal 2011. In addition, due to the current spot price of cotton the market saw inventory levels being adjusted down at the retail/distributor and screen-print levels which placed additional sell-side pressures on the marketplace as some manufacturers attempted to maintain their capacity utilization all of this at a time when the cost of cotton sitting in their finished goods inventory was at its highest level. As we have previously discussed, we anticipate margins will continue to be challenged in quarters to come as Alstyle and other large manufacturers manage their way through their current high cotton costs finished goods inventory level. The length of time it takes to manage through this higher cost position will be dependent upon how quickly these manufacturers can turn their finished goods inventory and start to recognize the current costing of cotton through their cost of sales.

| Profit by Segment (in thousands) | Three months ended November 30, 2011 | 2010 | Nine months ended November 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Print | $11,027 | $11,342 | $33,970 | $35,705 |
| Apparel | 4,098 | 8,240 | 21,728 | 32,363 |
| Total | 15,125 | 19,582 | 55,698 | 68,068 |
| Less corporate expenses | 4,115 | 4,396 | 11,559 | 13,246 |
| **Earnings before income taxes** | $11,010 | $15,186 | $44,139 | $54,822 |

***Print Segment***. Our print profit for the three and nine months ended November 30, 2011 was $11.0 million and $34.0 million, respectively, compared to $11.3 million and $35.7 million for the three and nine months ended November 30, 2010, respectively. As a percent of sales, our print profits decreased from 16.3% to 15.9% for the three months ended November 30, 2010 and 2011, respectively. Our Print profit decreased approximately $1.7 million, or 4.8%, from $35.7 million for the nine months ended November 30, 2010, to $34.0 million for the nine months ended November 30, 2011. As a percentage of sales, our print profits were 16.5% for the nine months ended November 30, 2011, as compared to 17.3% for the nine months ended November 30, 2010 due to our slightly lower print margin during the period.

***Apparel Segment***. As a result of the decrease in our apparel sales and margin, our apparel profit decreased approximately $4.1 million, from $8.2 million for the three months ended November 30, 2010 to $4.1 million for the three months ended November 30, 2011. As a percent of sales, our apparel profits were 7.8% for the three months ended November 30, 2011, compared to 12.6% for the comparable quarter last year. Our apparel profit decreased approximately $10.7 million, from $32.4 million for the nine months ended November 30, 2010 to $21.7 million for the nine months ended November 30, 2011 due to the same factors impacting our quarter. As a percent of sales, our apparel profits were 11.4% for the nine months ended November 30, 2011, compared to 15.3% for the nine months ended November 30, 2010.

### Liquidity and Capital Resources

*(Dollars in thousands)*

|  | November 30, November 30, 2011 | November 30, February 28, 2011 | November 30, Change |
| --- | ---: | ---: | ---: |
| Working Capital | $103,532 | $135,300 | -23.5% |
| Cash | $16,761 | $12,305 | 36.2% |

***Working Capital.*** Our working capital decreased by approximately $31.8 million, or 23.5% from $135.3 million at February 28, 2011 to $103.5 million at November 30, 2011. Our current ratio, calculated by dividing our current assets by our current liabilities, decreased from 3.9 to 1.0 at February 28, 2011 to 2.1 to 1.0 at November 30, 2011. Both of these are related to the reclassification of our outstanding borrowings under our line of credit facility from long-term to short-term. We consider this to be a temporary situation and one that will be cured once we either renew our borrowing arrangement with our current lender or obtain financing from a new lender.

*(Dollars in thousands)*

|  | November 30, Nine months ended November 30, 2011 | November 30, 2010 | November 30, Change |
| --- | ---: | ---: | ---: |
| Net Cash provided by operating activities | $26,964 | $30,642 | -12.0% |
| Net Cash used in investing activities | $(11,061) | $(31,147) | -64.5% |
| Net Cash used in financing activities | $(11,895) | $(2,018) | 489.4% |

***Cash flows from operating activities.*** Cash provided by operating activities decreased by $3.7 million from $30.6 million for the nine months ended November 30, 2010 to $27.0 million for the nine months ended November 30, 2011. Besides the negative impact of our lower earnings on our operational cash flow during the period, we used working capital during the period to increase our apparel inventory which was caused primarily by higher raw material costs. We were able to offset this use of cash through improved management of our receivables and payables. We expect these higher input costs are now behind us and our operational cash should improve as we sell through the higher priced cotton now residing in our apparel inventory and replace it with lower priced cotton.

***Cash flows from investing activities.*** Cash used for investing activities, which related to capital expenditures and the purchase of a certain business operations for $6.0 million, decreased by $20.1 million, from $31.1 million for the nine months ended November 30, 2010 to $11.1 million for the nine months ended November 30, 2011. The decrease in our capital expenditures relates primarily to the fact that our new Apparel manufacturing facility located in Agua Prieta, Mexico was substantially complete at the beginning of this fiscal year.

***Cash flows from financing activities.*** We used $11.9 million in cash for financing activities this period, compared to $2.0 million for the same period last year. This related primarily to the payment of dividends of $12.1 million and $12.0 million for the nine months ending November 30, 2011 and 2010, respectively. In addition, we borrowed (provided) $10.0 million against our revolving credit line during the nine months ended November 30, 2010 which related to our inventory build of finished goods at our Apparel Segment.

***Credit Facility.*** On August 18, 2009, we entered into a 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 us access to $150.0 million in revolving credit, which we may increase to $200.0 million in certain circumstances, and matures on August 18, 2012. The Facility bears interest at the London Interbank Offered Rate (“LIBOR”) plus a spread ranging from 2.0% to 3.5% (LIBOR + 2.25% or 2.52% at November 30, 2011 and 2.51% at November 30, 2010), depending on our total funded debt to EBITDA ratio, as defined. As of November 30, 2011, we had $50.0 million of borrowings under the revolving credit line and $3.5 million outstanding under standby letters of credit arrangements, leaving us availability of approximately $96.5 million. The Facility contains financial covenants, restrictions on capital expenditures, acquisitions, asset dispositions, and additional debt, as well as other customary covenants, such as total funded debt to EBITDA ratio, as defined. We are in compliance with all these covenants as of November 30, 2011. The Facility is secured by substantially all of our domestic assets as well as all capital securities of each Domestic Subsidiary and 65% of all capital securities of each direct Foreign Subsidiary.

We did not pay any additional amounts on the revolver for the nine months ended November 30, 2011. It is anticipated that the available line of credit is sufficient to cover working capital requirements for the foreseeable future should it be required.

We used derivative financial instruments to manage our exposure to interest rate fluctuations on our floating rate $150.0 million revolving credit maturing August 18, 2012. We account for our derivatives as cash flow hedges and record them as either assets or liabilities in the balance sheet, measure those instruments at fair value and recognize changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures, at which time the changes in fair value would be recorded in Accumulated Other Comprehensive Income.

On July 7, 2008, we entered into a three-year Interest Rate Swap Agreement (“Swap”) for a notional amount of $40.0 million which matured on July 22, 2011. The Swap effectively fixed the LIBOR rate at 3.79%. The Swap was designated as a cash flow hedge, and the fair value at February 28, 2011 was $(586,000), $(372,000), net of deferred taxes. The Swap was reported on the Consolidated Balance Sheet in current installments of long-term debt with a related deferred charge recorded as a component of other comprehensive income.

***Pension –*** We are required to make contributions to our defined benefit pension plan. These contributions are required under the minimum funding requirements of the Employee Retirement Pension Plan Income Security Act of 1974 (ERISA). For the current fiscal year ending February 29, 2012, the minimum required contribution to the plan is approximately $1.4 million. We have satisfied the first three quarterly installments towards the minimum required contribution by electing to apply a portion of our available Funding Standard Carryover Balance: thus, no cash contributions have been made to the plan during the first three quarters of the fiscal year. However, we do expect to make a cash contribution to the plan of between $2.0 million and $3.0 million during the fourth quarter of fiscal year 2012, which will be more than sufficient to meet the minimum funding requirement for the year. We made contributions of $3.0 million to our pension plan during fiscal year 2011. As our pension assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status, associated liabilities recorded and future required minimum contributions. At November 30, 2011, we had an unfunded pension liability recorded on our balance sheet of $3.3 million.

***Inventories –*** We believe our current inventory levels are sufficient to satisfy our customer demands and we anticipate having adequate sources of raw materials to meet future business requirements. We have long-term contracts in effect (that govern prices, but do not require minimum volume) with paper and yarn suppliers. Certain of our rebate programs do, however, require minimum purchase volumes. Management anticipates meeting the required volumes.

***Capital Expenditures –*** We expect our capital requirements for the remainder of fiscal 2012, exclusive of capital required for possible acquisitions will be in-line with historical levels and will be funded through existing cash flows. We would expect our capital requirement for fiscal 2013, exclusive of capital required for possible acquisitions to also be in-line with our historical levels of between $4.0 million and $5.0 million, which we would also expect to fund 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. While we expected, the higher input costs associated with our apparel inventory to have a negative impact on our cash flows during the period, we expect to be able to continue to manage our working capital levels and capital expenditure amounts to maintain sufficient levels of liquidity and 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, 2011 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 November 30, 2011.

## Market risk

As filed, 1,855 characters.

### 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 $50.0 million at November 30, 2011. We had entered into a $40.0 million interest rate swap designated as a cash flow hedge related to this debt, but this arrangement expired July 22, 2011, as such the entire balance of our line of credit is subject to fluctuations in the LIBOR rate. 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 November 30, 2011 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. Dollar). Such translation adjustments are reported as a separate component of shareholders’ equity. In future periods, foreign exchange rate fluctuations could have an increased impact on our reported results of operations.

This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

## Controls and procedures

As filed, 2,053 characters.

**Evaluation of Disclosure Controls and Procedures.** An evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design of our “disclosure controls and procedures” (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report, pursuant to Exchange Act Rule 13a-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures as of November 30, 2011 are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes. Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15 or 15d-15 that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 209 characters.

Reference is made to page 24 of this Report on Form 10-Q. 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, 2011.

Filed Dec 29, 2011.
Source: SEC EDGAR, the filing index for accession 0001193125-11-354936. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.