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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended May 31, 2018

OR

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period from                  to                 

Commission File Number 1-5807

 

ENNIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

 

75-0256410

(State or Other Jurisdiction of
Incorporation or Organization)

 

(I.R.S. Employer
Identification No.)

 

 

 

2441 Presidential Pkwy., Midlothian, Texas

 

76065

(Address of Principal Executive Offices)

 

(Zip code)

(972) 775-9801

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes      No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

 

 

 

Accelerated filer

 

 

 

 

 

 

 

 

Non-accelerated filer

 

(Do not check if a smaller reporting company)

 

 

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

As of June 29, 2018, there were 25,456,559 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


ENNIS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE PERIOD ENDED MAY 31, 2018

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

 

 

Unaudited Consolidated Balance Sheets at May 31, 2018 and February 28, 2018

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three months ended May 31, 2018 and
May 31, 2017

 

5

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended
May 31, 2018 and May 31, 2017

 

6

 

 

 

 

 

Unaudited Consolidated Statement of Changes in Shareholders’ Equity for the three months ended  May 31, 2018

 

7

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended May 31, 2018 and May 31, 2017

 

8

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

9

 

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

18

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

23

 

 

 

 

 

Item 4. Controls and Procedures

 

24

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

25

 

 

 

 

 

Item 1A. Risk Factors

 

25

 

 

 

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

25

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

25

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

25

 

 

 

 

 

Item 5. Other Information

 

25

 

 

 

 

 

Item 6. Exhibits

 

26

 

 

 

SIGNATURES

 

27

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

May 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

96,420

 

 

$

96,230

 

Accounts receivable, net of allowance for doubtful receivables of $1,298 at May 31, 2018 and $1,194 at February 28, 2018

 

 

36,241

 

 

 

35,654

 

Prepaid expenses

 

 

1,227

 

 

 

1,305

 

Prepaid income taxes

 

 

312

 

 

 

3,600

 

Inventories

 

 

30,971

 

 

 

26,480

 

Assets held for sale

 

 

75

 

 

 

75

 

Total current assets

 

 

165,246

 

 

 

163,344

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Plant, machinery and equipment

 

 

134,678

 

 

 

133,222

 

Land and buildings

 

 

55,164

 

 

 

54,318

 

Other

 

 

23,299

 

 

 

23,208

 

Total property, plant and equipment

 

 

213,141

 

 

 

210,748

 

Less accumulated depreciation

 

 

166,770

 

 

 

164,840

 

Net property, plant and equipment

 

 

46,371

 

 

 

45,908

 

Goodwill

 

 

70,603

 

 

 

70,603

 

Intangible assets, net

 

 

49,805

 

 

 

49,254

 

Other assets

 

 

302

 

 

 

330

 

Total assets

 

$

332,327

 

 

$

329,439

 

 

See accompanying notes to consolidated financial statements.

 

3


ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands, except for par value and share amounts)

 

 

 

May 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,290

 

 

$

12,168

 

Accrued expenses

 

 

16,622

 

 

 

17,403

 

Total current liabilities

 

 

27,912

 

 

 

29,571

 

Long-term debt

 

 

30,000

 

 

 

30,000

 

Liability for pension benefits

 

 

735

 

 

 

735

 

Deferred income taxes

 

 

6,257

 

 

 

6,189

 

Other liabilities

 

 

1,647

 

 

 

1,240

 

Total liabilities

 

 

66,551

 

 

 

67,735

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Shareholders’ equity

 

 

 

 

 

 

 

 

Preferred stock $10 par value, authorized 1,000,000 shares; none issued

 

 

 

 

 

 

Common stock $2.50 par value, authorized 40,000,000 shares; issued 30,053,443 shares at May 31, 2018 and February 28, 2018

 

 

75,134

 

 

 

75,134

 

Additional paid-in capital

 

 

120,270

 

 

 

121,333

 

Retained earnings

 

 

168,341

 

 

 

164,177

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Minimum pension liability, net of taxes

 

 

(16,167

)

 

 

(16,428

)

Total accumulated other comprehensive income (loss)

 

 

(16,167

)

 

 

(16,428

)

Treasury stock

 

 

(81,802

)

 

 

(82,512

)

Total shareholders’ equity

 

 

265,776

 

 

 

261,704

 

Total liabilities and shareholders' equity

 

$

332,327

 

 

$

329,439

 

 

See accompanying notes to consolidated financial statements.

 

4


 

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)

 

 

 

Three months ended

 

 

 

May 31,

 

 

 

2018

 

 

2017

 

Net sales

 

$

93,419

 

 

$

94,590

 

Cost of goods sold

 

 

63,228

 

 

 

64,598

 

Gross profit margin

 

 

30,191

 

 

 

29,992

 

Selling, general and administrative

 

 

17,735

 

 

 

17,316

 

(Gain) loss from disposal of assets

 

 

(4

)

 

 

15

 

Income from operations

 

 

12,460

 

 

 

12,661

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(261

)

 

 

(190

)

Other, net

 

 

130

 

 

 

(116

)

              Total other income (expense)

 

 

(131

)

 

 

(306

)

Earnings before income taxes

 

 

12,329

 

 

 

12,355

 

Income tax expense

 

 

3,082

 

 

 

4,571

 

Net earnings

 

$

9,247

 

 

$

7,784

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

25,333,673

 

 

 

25,422,856

 

Diluted

 

 

25,363,772

 

 

 

25,436,787

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

 

$

0.31

 

Diluted

 

$

0.36

 

 

$

0.31

 

Cash dividends per share

 

$

0.200

 

 

$

0.175

 

 

 

See accompanying notes to consolidated financial statements.

 

5


ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three months ended

 

 

 

May 31,

 

 

 

2018

 

 

2017

 

Net earnings

 

$

9,247

 

 

$

7,784

 

Adjustment to pension, net of deferred taxes

 

 

261

 

 

 

248

 

Comprehensive income

 

$

9,508

 

 

$

8,032

 

 

See accompanying notes to consolidated financial statements.

 

6


ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

Treasury Stock

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Income (Loss)

 

 

Shares

 

 

Amount

 

 

Total

 

Balance March 1, 2018

 

30,053,443

 

 

$

75,134

 

 

$

121,333

 

 

$

164,177

 

 

$

(16,428

)

 

 

(4,789,228

)

 

$

(82,512

)

 

$

261,704

 

Net earnings

 

 

 

 

 

 

 

 

 

 

9,247

 

 

 

 

 

 

 

 

 

 

 

 

9,247

 

Adjustment to pension, net of deferred tax of $87

 

 

 

 

 

 

 

 

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

261

 

Dividends paid ($0.20 per share)

 

 

 

 

 

 

 

 

 

 

(5,083

)

 

 

 

 

 

 

 

 

 

 

 

(5,083

)

Stock based compensation

 

 

 

 

 

 

 

327

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

327

 

Exercise of stock options

   and restricted stock

 

 

 

 

 

 

 

(1,390

)

 

 

 

 

 

 

 

 

80,692

 

 

 

1,390

 

 

 

 

Common stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,943

)

 

 

(680

)

 

 

(680

)

Balance May 31, 2018

 

30,053,443

 

 

$

75,134

 

 

$

120,270

 

 

$

168,341

 

 

$

(16,167

)

 

 

(4,746,479

)

 

$

(81,802

)

 

$

265,776

 

 

See accompanying notes to consolidated financial statements.

 

7


ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Three months ended

 

 

 

May 31,

 

 

 

 

2018

 

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

9,247

 

 

$

7,784

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

2,035

 

 

 

1,996

 

Amortization of deferred finance charges

 

 

28

 

 

 

28

 

Amortization of intangible assets

 

 

1,415

 

 

 

1,525

 

(Gain) loss from disposal of assets

 

 

(4

)

 

 

15

 

Bad debt expense, net of recoveries

 

 

135

 

 

 

(166

)

Stock based compensation

 

 

327

 

 

 

333

 

Changes in operating assets and liabilities, net of the effects of acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

453

 

 

 

1,175

 

Prepaid expenses and income taxes

 

 

3,391

 

 

 

1,165

 

Inventories

 

 

(3,505

)

 

 

(1,284

)

Other assets

 

 

 

 

 

1

 

Accounts payable and accrued expenses

 

 

(1,964

)

 

 

(543

)

Other liabilities

 

 

3

 

 

 

(83

)

Liability for pension benefits

 

 

329

 

 

 

400

 

Net cash provided by operating activities

 

 

11,890

 

 

 

12,346

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,205

)

 

 

(731

)

Purchase of businesses, net of cash acquired

 

 

(4,736

)

 

 

 

Proceeds from disposal of plant and property

 

 

4

 

 

 

20

 

Net cash used in investing activities

 

 

(5,937

)

 

 

(711

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(5,083

)

 

 

(4,468

)

Common stock repurchases

 

 

(680

)

 

 

(3,310

)

Net cash used in financing activities

 

 

(5,763

)

 

 

(7,778

)

Net change in cash

 

 

190

 

 

 

3,857

 

Cash at beginning of period

 

 

96,230

 

 

 

80,466

 

Cash at end of period

 

$

96,420

 

 

$

84,323

 

 

 

See accompanying notes to consolidated financial statements.

 

8


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

1. Significant Accounting Policies and General Matters

Basis of Presentation

These unaudited consolidated financial statements of Ennis, Inc. and its subsidiaries (collectively referred to as the “Company,” “Registrant,” “Ennis,” or “we,” “us,” or “our”) for the period ended May 31, 2018 have been prepared in accordance with generally accepted accounting principles for interim financial reporting.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended February 28, 2018, from which the accompanying consolidated balance sheet at February 28, 2018 was derived.  All intercompany balances and transactions have been eliminated in consolidation.  In the opinion of management, all adjustments considered necessary for a fair presentation of the interim financial information have been included and are of a normal recurring nature. In preparing the financial statements, the Company is required to make estimates and assumptions that affect the disclosure and reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company evaluates these estimates and judgments on an ongoing basis, including those related to bad debts, inventory valuations, property, plant and equipment, intangible assets, pension plan, accrued liabilities, and income taxes. The Company bases estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of operations for any interim period are not necessarily indicative of the results of operations for a full year.

Recent Accounting Pronouncements

 

In March 2017, the FASB issued ASU No. 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”).  The update requires the service cost component of net benefit costs to be reported in the same line of the income statement as other compensation costs and the other components of net benefit costs (non-service costs) to be presented separately from the service cost component, outside a subtotal of operating income.  Additionally, only the service cost component of net benefit costs will be eligible for capitalization.  The Company retrospectively adopted this guidance as of March 1, 2018.  See Note 11, Pension Plan, for further discussion.  The impact of adoption was a $73,000 decrease in cost of sales, $56,000 decrease in selling, general and administrative expenses and $129,000 increase in other expense-net for the three months ended May 31, 2017 compared to the amount previously reported.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which requires lessees to put most leases on the balance sheet but recognize expense on the income statement in a manner similar to current accounting.  For lessors, ASU 2016-02 also modifies the classification criteria and the accounting for sales-type and direct financing leases.  The standard requires a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements and is effective in the first quarter of fiscal year 2020.  Early adoption of ASU 2016-02 is permitted.  The Company is currently evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”), which institutes a number of modifications to the reporting of financial assets and liabilities. These modifications include: (i) measurement of non-equity method assets and liabilities at fair value, with changes to fair value recognized through net income, (ii) performance of qualitative impairment assessments of equity investments without readily determinable fair values at each reporting period, (iii) elimination of the requirement to disclose methods and significant assumptions used in calculating the fair value of financial instruments measured at amortized cost, (iv) measurement of the fair value of financial instruments measured at amortized cost using the exit price notion consistent with Topic 820, Fair Value Measurement, (v) separate presentation in other comprehensive income of the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk, (vi) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset, and (vii) evaluation of the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. This ASU is effective for financial statements issued with fiscal years beginning after December 15, 2017, including interim periods within that reporting period.  The Company adopted this standard on March 1, 2018.  The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

9


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which it expects to be entitled in exchange for those goods or services.  Our conclusion is that the timing of revenue recognition for our various revenue streams is not materially impacted by the adoption of this standard.  The Company adopted this standard on March 1, 2018 using the modified retrospective approach.  The adoption did not have, and is not expected to have, a significant impact on the consolidated operating results, financial position or cash flows of the Company.  See Note 2, Revenue, below for further disclosures associated with the adoption of this pronouncement.

2. Revenue

On March 1, 2018, the Company adopted ASU 2014-09 using the modified retrospective method applied to those contracts which were not completed as of March 1, 2018. Results for reporting periods beginning after March 1, 2018 are presented under ASU 2014-09, while prior period amounts are not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, and no adjustment has been recorded to beginning retained earnings due to there being no change in revenue recognition for prior periods.

The adoption did not have, and is not expected to have, a significant effect on the Company’s consolidated results of operations, financial position or cash flows.

Nature of Revenues

Substantially all of the Company’s revenue from contracts with customers consist of the sale of commercial printing products in the continental United States and is primarily recognized at a point in time in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods.  Revenue from the sale of commercial printing products, including shipping and handling fees billed to customers, is recognized upon the transfer of control to the customer, which is generally upon shipment to the customer when the terms of the sale are freight on board (“FOB”) shipping point, or, to a lesser extent, upon delivery to the customer if the terms of the sale are FOB destination.

In some cases and upon customer request, the Company prints and stores commercial printing product for customer specified future delivery, generally within the same year as the product is manufactured. In this case, revenue is recognized upon the transfer of control when manufacturing is complete and title and risk of ownership is passed to the customer, which for certain customers may be recognized over time rather than at a point in time.  As the output method for measure of progress is determined to be appropriate, the Company recognizes revenue in the amount for which it has the right to invoice for revenue that is recognized over time and for which it demonstrates that the invoiced amount corresponds directly with the value to the customer for the performance completed to date.

The Company does not disaggregate revenue and operates in one sales category consisting of commercial printed product revenue, which is reported as net sales on the consolidated statements of operations. The Company does not have material contract assets and contract liabilities as of May 31, 2018.

Significant Judgments

Generally, the Company’s contracts with customers are comprised of a written quote and customer purchase order or statement of work, and governed by the Company’s trade terms and conditions.  In certain instances, it may be further supplemented by separate pricing agreements and customer incentive arrangements, which typically only affect the contract’s transaction price. Contracts do not contain a significant financing component as payment terms on invoiced amounts are typically between 30 to 90 days, based on the Company’s credit assessment of individual customers, as well as industry expectations.  Product returns are not significant.

From time to time, the Company may offer incentives to its customers considered to be variable consideration including volume-based rebates or early payment discounts.   Customer incentives considered to be variable consideration are recorded as a reduction to revenue as part of the transaction price at contract inception when there is a basis to reasonably estimate the amount of the incentive and only to the extent that it is probable that a significant reversal of any incremental revenue will not occur.  Customer incentives are allocated entirely to the single performance obligation of transferring printed product to the customer.

10


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

For customers with terms of FOB shipping point, the Company accounts for shipping and handling activities performed after the control of the printed product has been transferred to the customer as a fulfillment cost. The Company accrues for the costs of shipping and handling activities if revenue is recognized before contractually agreed shipping and handling activities occur.

The Company’s contracts with customers generally have a duration of one year or less.  Accordingly, the Company does not disclose the value of unsatisfied performance obligations nor the timing of revenue recognition.

3. Accounts Receivable and Allowance for Doubtful Receivables

Accounts receivable are reduced by an allowance for an estimate of amounts that are uncollectible. Substantially all of the Company’s receivables are due from customers in the United States.  The Company extends credit to its customers based upon its evaluation of the following factors: (i) the customer’s financial condition, (ii) the amount of credit the customer requests, and (iii) the customer’s actual payment history (which includes disputed invoice resolution).  The Company does not typically require its customers to post a deposit or supply collateral.  The Company’s allowance for doubtful receivables is based on an analysis that estimates the amount of its total customer receivable balance that is not collectible.  This analysis includes assessing a default probability to customers’ receivable balances, which is influenced by several factors including (i) current market conditions, (ii) periodic review of customer creditworthiness, and (iii) review of customer receivable aging and payment trends.

The Company writes off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance in the period the payment is received.

The following table presents the activity in the Company’s allowance for doubtful receivables (in thousands):

 

 

 

Three months ended

 

 

 

May 31,

 

 

 

2018

 

 

2017

 

Balance at beginning of period

 

$

1,194

 

 

$

1,674

 

Bad debt expense, net of recoveries

 

 

135

 

 

 

(166

)

Accounts written off

 

 

(31

)

 

 

(66

)

Balance at end of period

 

$

1,298

 

 

$

1,442

 

 

4. Inventories

The Company uses the lower of last-in, first-out (“LIFO”) cost or market to value certain of its business forms inventories and the lower of first-in, first-out (“FIFO”) cost or market to value its remaining forms inventories.  The Company regularly reviews inventories on hand, using specific aging categories, and writes down the carrying value of its inventories for excess and potentially obsolete inventories based on historical usage and estimated future usage.  In assessing the ultimate realization of its inventories, the Company is required to make judgments as to future demand requirements.  As actual future demand or market conditions may vary from those projected by the Company, adjustments to inventories may be required.

The following table summarizes the components of inventories at the different stages of production as of the dates indicated (in thousands):

 

 

 

May 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Raw material

 

$

19,264

 

 

$

15,854

 

Work-in-process

 

 

3,381

 

 

 

3,114

 

Finished goods

 

 

8,326

 

 

 

7,512

 

 

 

$

30,971

 

 

$

26,480

 

 

11


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

5. Acquisitions

 

On April 30, 2018, the Company acquired the assets of a tag and label operation located in New York for $4.7 million in cash plus the assumption of trade payables, subject to a working capital adjustment.  In addition, contingent consideration of up to $500,000 is payable to the sellers if certain sales levels are maintained over the next three years.  On July 7, 2017, the Company acquired the assets of a tag operation located in Ohio for $1.4 million in cash plus the assumption of certain accrued liabilities.  Management considers both of these acquisitions immaterial.

6. Goodwill and Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of net assets of acquired businesses and is not amortized.  Goodwill and other intangible assets are tested for impairment at a reporting unit level.  The annual impairment test of goodwill and intangible assets is performed as of November 30 of each fiscal year.

The Company uses qualitative factors to determine whether it is more likely than not (likelihood of more than 50%) that the fair value of a reporting unit exceeds its carrying amount, including goodwill. Some of the qualitative factors considered in applying this test include consideration of macroeconomic conditions, industry and market conditions, cost factors affecting the business, overall financial performance of the business, and performance of the share price of the Company.

If qualitative factors are not deemed sufficient to conclude that the fair value of the reporting unit more likely than not exceeds its carrying value, then a one-step approach is applied in making an evaluation. The evaluation utilizes multiple valuation methodologies, including a market approach (market price multiples of comparable companies) and an income approach (discounted cash flow analysis). The computations require management to make significant estimates and assumptions, including, among other things, selection of comparable publicly traded companies, the discount rate applied to future earnings reflecting a weighted average cost of capital, and earnings growth assumptions. A discounted cash flow analysis requires management to make various assumptions about future sales, operating margins, capital expenditures, working capital, and growth rates. If the evaluation results in the fair value of the goodwill for the reporting unit being lower than the carrying value, an impairment charge is recorded.

Beginning March 1, 2017, given the general declining trend line of print sales, and its expected continuance into the foreseeable future, the Company elected to treat the recorded value of trademarks/trade names as no longer being an indefinite-lived asset. As such, as of March 1, 2017, the Company began amortizing the carrying value of these assets over their estimated remaining useful life, approximately 17 - 19 years.

The carrying amount and accumulated amortization of the Company’s intangible assets at each balance sheet date are as follows (in thousands):

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

Life

 

 

Carrying

 

 

Accumulated

 

 

 

 

 

As of May 31, 2018

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

15.5

 

 

$

20,558

 

 

$

2,715

 

 

$

17,843

 

Customer lists

 

 

7.9

 

 

 

58,973

 

 

 

27,136

 

 

 

31,837

 

Noncompete

 

 

4.1

 

 

 

275

 

 

 

151

 

 

 

124

 

Patent

 

 

0.2

 

 

 

783

 

 

 

782

 

 

 

1

 

Total

 

 

10.6

 

 

$

80,589

 

 

$

30,784

 

 

$

49,805

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of February 28, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

16.0

 

 

$

19,625

 

 

$

2,408

 

 

$

17,217

 

Customer lists

 

 

8.1

 

 

 

58,040

 

 

 

26,039

 

 

 

32,001

 

Noncompete

 

 

1.1

 

 

 

175

 

 

 

140

 

 

 

35

 

Patent

 

 

0.4

 

 

 

783

 

 

 

782

 

 

 

1

 

Total

 

 

10.8

 

 

$

78,623

 

 

$

29,369

 

 

$

49,254

 

 

12


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

Aggregate amortization expense for the three months ended May 31, 2018 and May 31, 2017 was $1.4 million and $1.5 million, respectively.

The Company’s estimated amortization expense for the current and next four fiscal years ending in February of the stated fiscal year is as follows (in thousands):

 

2019

 

$

5,730

 

2020

 

 

5,682

 

2021

 

 

5,612

 

2022

 

 

5,569

 

2023

 

 

4,781

 

 

Changes in the net carrying amount of goodwill as of the dates indicated are as follows (in thousands):

 

Balance as of March 1, 2017

 

$

70,603

 

Goodwill acquired

 

 

 

Goodwill impairment

 

 

 

Balance as of February 28, 2018

 

 

70,603

 

Goodwill acquired

 

 

 

Goodwill impairment

 

 

 

Balance as of May 31, 2018

 

$

70,603

 

 

7. Accrued Expenses

The following table summarizes the components of accrued expenses as of the dates indicated (in thousands):

 

 

 

May 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Employee compensation and benefits

 

$

14,472

 

 

$

15,597

 

Taxes other than income

 

 

769

 

 

 

296

 

Accrued legal and professional fees

 

 

201

 

 

 

282

 

Accrued interest

 

 

170

 

 

 

143

 

Accrued utilities

 

 

90

 

 

 

148

 

Accrued acquisition related obligations

 

 

624

 

 

 

654

 

Accrued credit card fees

 

 

127

 

 

 

115

 

Other accrued expenses

 

 

169

 

 

 

168

 

 

 

$

16,622

 

 

$

17,403

 

 

8. Long-Term Debt

Long-term debt consisted of the following as of the dates indicated (in thousands):

 

 

 

May 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Revolving credit facility

 

$

30,000

 

 

$

30,000

 

 

The Company has entered into a Second Amended and Restated Credit Agreement, which has been amended from time to time, pursuant to which a credit facility has been extended to the Company (the “Credit Facility”) until August 11, 2020 that provides the Company and its subsidiaries with up to $100.0 million in revolving credit, as well as a $20.0 million sublimit for the issuance of letters of credit and a $15.0 million sublimit for swing-line loans.  Under the Credit Facility, the Company or any of its subsidiaries also can request up to three increases in the aggregate commitments in an aggregate amount not to exceed $50.0 million.  Under the Credit Facility: (i) the Company’s net leverage ratio may not exceed 3.00:1.00, (ii) the Company’s fixed charge coverage ratio may not be less than 1.25:1.00, and (iii) the Company may make dividends or distributions to shareholders so long as (a) no event of default has occurred and is continuing and (b) the Company’s net leverage ratio both before and after giving effect to any such

13


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

dividend or distribution is equal to or less than 2.50:1.00.  As of May 31, 2018, the Company was in compliance with all terms and conditions of the Credit Facility.

The Credit Facility bears interest at the LIBOR rate plus a spread ranging from 1.0% to 2.0%, which rate was 3.3% (3 month LIBOR + 1.0%) at May 31, 2018 and 3.0% (3 month LIBOR + 1.0%) at February 28, 2018.  The rate is determined by our fixed charge coverage ratio of total funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”).  As of May 31, 2018, we had $30.0 million of borrowings under the revolving credit line and $1.2 million outstanding under standby letters of credit arrangements, leaving approximately $68.8 million available in borrowing capacity.  The Credit Facility is secured by substantially all of our assets (other than real property), as well as all capital securities of each of our subsidiaries.

9. Shareholders’ Equity

The Board has authorized the repurchase of up to an aggregate of $40.0 million of the Company’s outstanding common stock through a stock repurchase program.  Under the repurchase program, share purchases may be made from time to time in the open market or through privately negotiated transactions depending on market conditions, share price, trading volume and other factors.  Such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations.  These repurchases may be commenced or suspended at any time or from time to time without prior notice.

During the three months ended May 31, 2018 the Company, under the program, repurchased 37,943 shares of common stock at an average price of $17.92 per share.  Since the program’s inception in October 2008, there have been 1,480,179 common shares repurchased at an average price of $15.07 per share. As of May 31, 2018 there was $17.7 million available to repurchase shares of the Company’s common stock under the program.

10. Stock Option Plan and Stock Based Compensation

The Company grants stock options and restricted stock to key executives and managerial employees and non-employee directors.  At May 31, 2018, the Company had one stock option plan, the 2004 Long-Term Incentive Plan of Ennis, Inc., as amended and restated as of June 30, 2011, formerly the 1998 Option and Restricted Stock Plan amended and restated as of May 14, 2008 (the “Plan”). The Company has 456,796 shares of unissued common stock reserved under the Plan for issuance as of May 31, 2018.  The exercise price of each stock option granted under the Plan equals a referenced price of the Company’s common stock as reported on the New York Stock Exchange on the date of grant, and an option’s maximum term is ten years. Stock options and restricted stock may be granted at different times during the year and vest ratably over various periods, from grant date up to five years. The Company uses treasury stock to satisfy option exercises and restricted stock awards.

The Company recognizes compensation expense for stock options and restricted stock grants on a straight-line basis over the requisite service period.  For the three months ended May 31, 2018 and May 31, 2017, the Company included compensation expense related to share-based compensation of $0.3 million and $0.3 million, respectively, in selling, general, and administrative expenses.

Stock Options

The Company had the following stock option activity for the three months ended May 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Average

 

 

Aggregate

 

 

 

Number

 

 

Average

 

 

Remaining

 

 

Intrinsic

 

 

 

of Shares

 

 

Exercise

 

 

Contractual

 

 

Value(a)

 

 

 

(exact quantity)

 

 

Price

 

 

Life (in years)

 

 

(in thousands)

 

Outstanding at March 1, 2018

 

 

172,496

 

 

$

15.95

 

 

 

3.2

 

 

$

612

 

Granted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at May 31, 2018

 

 

172,496

 

 

$

15.95

 

 

 

3.0

 

 

$

405

 

Exercisable at May 31, 2018

 

 

172,496

 

 

$

15.95

 

 

 

3.0

 

 

$

405

 

 

(a)

Intrinsic value is measured as the excess of fair market value of the Company’s common stock as reported on the New York Stock Exchange over the applicable exercise price.

14


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2018

 

No stock options were granted or exercised during the three months ended May 31, 2018 and May 31, 2017. 

A summary of the Company’s unvested stock options at May 31, 2018 and the changes during the three months ended May 31, 2018 are presented below:

 

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

 

Average

 

 

 

Number

 

 

Grant Date

 

 

 

of Options

 

 

Fair Value

 

Unvested at March 1, 2018

 

 

1,616

 

 

$

2.24

 

New grants

 

 

 

 

 

 

Vested

 

 

(1,616

)

 

 

2.24

 

Forfeited

 

 

 

 

 

 

Unvested at May 31, 2018

 

 

 

 

 

 

 

Restricted Stock

The Company had the following restricted stock grant activity for the three months ended May 31, 2018:

 

 

 

 

 

 

Weighted

 

 

 

 

 

 

Average

 

 

Number of

 

 

Grant Date

 

 

Shares

 

 

Fair Value

 

Outstanding at March 1, 2018

 

152,675

 

 

$

16.59

 

Granted

 

72,612

 

 

 

20.35

 

Terminated

 

 

 

 

 

Vested

 

(80,692

)

 

 

16.02

 

Outstanding at May 31, 2018

 

144,595

 

 

$

18.80

 

 

As of May 31, 2018, the total remaining unrecognized compensation cost related to unvested restricted stock granted under the Plan was approximately $2.6 million.  The weighted average remaining requisite service period of the unvested restricted stock awards was 2.2 years.

11. Pension Plan

The Company and certain subsidiaries have a noncontributory defined benefit retirement plan (the “Pension Plan”), covering approximately 20% of our aggregate employees.  Benefits are based on years of service and the employee’s average compensation for the highest five compensation years preceding retirement or termination.

Pension expense is composed of the following components included in cost of goods sold and selling, general, and administrative expenses in the Company’s consolidated statements of earnings (in thousands):

 

 

 

Three months ended

 

 

 

May 31,

 

 

 

2018

 

 

2017

 

Components of net periodic benefit cost

 

 

 

 

 

 

 

 

Service cost

 

$

277

 

 

$

271

 

Interest cost

 

 

568

 

 

 

568