Attached files

file filename
EX-32.2 - EX-32.2 - ENNIS, INC.ebf-ex322_6.htm
EX-32.1 - EX-32.1 - ENNIS, INC.ebf-ex321_8.htm
EX-31.2 - EX-31.2 - ENNIS, INC.ebf-ex312_9.htm
EX-31.1 - EX-31.1 - ENNIS, INC.ebf-ex311_7.htm
EX-10.1 - EX-10.1 - ENNIS, INC.ebf-ex101_101.htm

 

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 August 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 every Interactive Date File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit 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

 

 

 

 

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 September 28, 2018, there were 26,321,309 shares of the Registrant’s common stock outstanding.

 

 

 

 

 


ENNIS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE PERIOD ENDED AUGUST 31, 2018

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

 

 

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

 

3

 

 

 

 

 

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

 

5

 

 

 

 

 

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

 

6

 

 

 

 

 

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

 

7

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the six months ended August 31, 2018 and August 31, 2017

 

8

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

9

 

 

 

 

 

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

 

19

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

26

 

 

 

 

 

Item 4. Controls and Procedures

 

26

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

27

 

 

 

 

 

Item 1A. Risk Factors

 

27

 

 

 

 

 

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

 

27

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

27

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

27

 

 

 

 

 

Item 5. Other Information

 

27

 

 

 

 

 

Item 6. Exhibits

 

28

 

 

 

SIGNATURES

 

29

 

 

 

2


 

PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

August 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

79,483

 

 

$

96,230

 

Accounts receivable, net of allowance for doubtful receivables of $1,326 at August 31, 2018 and $1,194 at February 28, 2018

 

 

43,531

 

 

 

35,654

 

Prepaid expenses

 

 

989

 

 

 

1,305

 

Prepaid income taxes

 

 

806

 

 

 

3,600

 

Inventories

 

 

34,912

 

 

 

26,480

 

Assets held for sale

 

$

 

 

 

75

 

Total current assets

 

 

159,721

 

 

 

163,344

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Plant, machinery and equipment

 

 

145,158

 

 

 

133,222

 

Land and buildings

 

 

56,541

 

 

 

54,318

 

Other

 

 

23,646

 

 

 

23,208

 

Total property, plant and equipment

 

 

225,345

 

 

 

210,748

 

Less accumulated depreciation

 

 

169,452

 

 

 

164,840

 

Net property, plant and equipment

 

 

55,893

 

 

 

45,908

 

Goodwill

 

 

80,944

 

 

 

70,603

 

Intangible assets, net

 

 

65,470

 

 

 

49,254

 

Other assets

 

 

372

 

 

 

330

 

Total assets

 

$

362,400

 

 

$

329,439

 

 

See accompanying notes to consolidated financial statements.

 

3


 

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS-Continued

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

 

 

 

August 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,420

 

 

$

12,168

 

Accrued expenses

 

 

16,585

 

 

 

17,403

 

Total current liabilities

 

 

32,005

 

 

 

29,571

 

Long-term debt

 

 

30,000

 

 

 

30,000

 

Liability for pension benefits

 

 

735

 

 

 

735

 

Deferred income taxes

 

 

11,623

 

 

 

6,189

 

Other liabilities

 

 

1,541

 

 

 

1,240

 

Total liabilities

 

 

75,904

 

 

 

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 August 31, 2018 and February 28, 2018

 

 

75,134

 

 

 

75,134

 

Additional paid-in capital

 

 

122,353

 

 

 

121,333

 

Retained earnings

 

 

172,180

 

 

 

164,177

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

 

 

Minimum pension liability, net of taxes

 

 

(15,920

)

 

 

(16,428

)

Total accumulated other comprehensive income (loss)

 

 

(15,920

)

 

 

(16,428

)

Treasury stock

 

 

(67,251

)

 

 

(82,512

)

Total shareholders’ equity

 

 

286,496

 

 

 

261,704

 

Total liabilities and shareholders' equity

 

$

362,400

 

 

$

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

 

 

Six months ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net sales

 

$

98,591

 

 

$

94,887

 

 

$

192,010

 

 

$

189,477

 

Cost of goods sold

 

 

68,268

 

 

 

64,028

 

 

 

131,496

 

 

 

128,626

 

Gross profit margin

 

 

30,323

 

 

 

30,859

 

 

 

60,514

 

 

 

60,851

 

Selling, general and administrative

 

 

17,567

 

 

 

17,038

 

 

 

35,302

 

 

 

34,354

 

(Gain) loss from disposal of assets

 

 

(2

)

 

 

48

 

 

 

(6

)

 

 

63

 

Income from operations

 

 

12,758

 

 

 

13,773

 

 

 

25,218

 

 

 

26,434

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(287

)

 

 

(204

)

 

 

(548

)

 

 

(394

)

Other, net

 

 

285

 

 

 

(13

)

 

 

415

 

 

 

(129

)

              Total other income (expense)

 

 

(2

)

 

 

(217

)

 

 

(133

)

 

 

(523

)

Earnings before income taxes

 

 

12,756

 

 

 

13,556

 

 

 

25,085

 

 

 

25,911

 

Income tax expense

 

 

3,189

 

 

 

5,016

 

 

 

6,271

 

 

 

9,587

 

Net earnings

 

$

9,567

 

 

$

8,540

 

 

$

18,814

 

 

$

16,324

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

25,671,643

 

 

 

25,342,747

 

 

 

25,510,356

 

 

 

25,388,292

 

Diluted

 

 

25,685,514

 

 

 

25,366,001

 

 

 

25,522,831

 

 

 

25,405,863

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

 

$

0.34

 

 

$

0.74

 

 

$

0.64

 

Diluted

 

$

0.37

 

 

$

0.34

 

 

$

0.74

 

 

$

0.64

 

Cash dividends per share

 

$

0.225

 

 

$

0.200

 

 

$

0.425

 

 

$

0.375

 

 

 

See accompanying notes to consolidated financial statements.

 

5


 

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

 

 

 

Three months ended

 

 

Six months ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net earnings

 

$

9,567

 

 

$

8,540

 

 

$

18,814

 

 

$

16,324

 

Adjustment to pension, net of taxes

 

 

247

 

 

 

248

 

 

 

508

 

 

 

496

 

Comprehensive income

 

$

9,814

 

 

$

8,788

 

 

$

19,322

 

 

$

16,820

 

 

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

 

 

 

 

 

 

 

 

 

 

18,814

 

 

 

 

 

 

 

 

 

 

 

 

18,814

 

Adjustment to pension, net of deferred tax of $169

 

 

 

 

 

 

 

 

 

 

 

 

 

508

 

 

 

 

 

 

 

 

 

508

 

Dividends paid ($0.425 per share)

 

 

 

 

 

 

 

 

 

 

(10,811

)

 

 

 

 

 

 

 

 

 

 

 

(10,811

)

Stock based compensation

 

 

 

 

 

 

 

674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

674

 

Exercise of stock options

   and restricted stock

 

 

 

 

 

 

 

(1,528

)

 

 

 

 

 

 

 

 

110,139

 

 

 

1,597

 

 

 

69

 

Common stock issued for acquisition of business

 

 

 

 

 

 

 

1,874

 

 

 

 

 

 

 

 

 

829,126

 

 

 

14,344

 

 

 

16,218

 

Common stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(37,943

)

 

 

(680

)

 

 

(680

)

Balance August 31, 2018

 

30,053,443

 

 

$

75,134

 

 

$

122,353

 

 

$

172,180

 

 

$

(15,920

)

 

 

(3,887,906

)

 

$

(67,251

)

 

$

286,496

 

 

See accompanying notes to consolidated financial statements.

 

7


 

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

 

 

Six months ended

 

 

 

August 31,

 

 

 

 

2018

 

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

18,814

 

 

$

16,324

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

4,308

 

 

 

3,996

 

Amortization of deferred finance charges

 

 

57

 

 

 

57

 

Amortization of intangible assets

 

 

2,920

 

 

 

3,077

 

(Gain) loss from disposal of assets

 

 

(6

)

 

 

63

 

Bad debt expense, net of recoveries

 

 

196

 

 

 

(248

)

Stock based compensation

 

 

674

 

 

 

667

 

Net periodic benefit cost

 

 

659

 

 

 

800

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,708

)

 

 

(555

)

Prepaid expenses and income taxes

 

 

3,562

 

 

 

(126

)

Inventories

 

 

(3,081

)

 

 

(1,182

)

Other assets

 

 

(4

)

 

 

67

 

Accounts payable and accrued expenses

 

 

(1,941

)

 

 

(4,122

)

Other liabilities

 

 

(200

)

 

 

358

 

Net cash provided by operating activities

 

 

24,250

 

 

 

19,176

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(2,546

)

 

 

(1,590

)

Purchase of businesses, net of cash acquired

 

 

(27,035

)

 

 

(1,350

)

Proceeds from disposal of plant and property

 

 

6

 

 

 

25

 

Net cash used in investing activities

 

 

(29,575

)

 

 

(2,915

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(10,811

)

 

 

(9,552

)

Common stock repurchases

 

 

(680

)

 

 

(3,310

)

Proceeds from exercise of stock options

 

 

69

 

 

 

 

Net cash used in financing activities

 

 

(11,422

)

 

 

(12,862

)

Net change in cash and cash equivalents

 

 

(16,747

)

 

 

3,399

 

Cash and cash equivalents at beginning of period

 

 

96,230

 

 

 

80,466

 

Cash and cash equivalents at end of period

 

$

79,483

 

 

$

83,865

 

 

 

See accompanying notes to consolidated financial statements.

 

8


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 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 August 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 $72,000 decrease in cost of sales, $58,000 decrease in selling, general and administrative expenses and $130,000 increase in other expense-net for the three months ended August 31, 2017 compared to the amount previously reported.  The impact of adoption was a $145,000 decrease in cost of sales, $114,000 decrease in selling, general and administrative expenses and $259,000 increase in other expense-net for the six months ended August 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.  Based on a preliminary assessment, the Company expects that most of its operating lease commitments will be subject to the new guidance and recognized as operating lease liabilities and right-of-use assets upon adoption, resulting in a significant increase in the assets and liabilities on its consolidated balance sheets.  The Company is continuing its evaluation, which may identify additional impacts this standard will have on the Company’s financial statements and related disclosures.

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

9


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 31, 2018

 

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 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 August 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.

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.

10


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 31, 2018

 

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

 

 

Six months ended

 

 

 

August 31,

 

 

August 31,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Balance at beginning of period

 

$

1,298

 

 

$

1,442

 

 

$

1,194

 

 

$

1,674

 

Bad debt expense, net of recoveries

 

 

61

 

 

 

(82

)

 

 

196

 

 

 

(248

)

Accounts written off

 

 

(33

)

 

 

(42

)

 

 

(64

)

 

 

(108

)

Balance at end of period

 

$

1,326

 

 

$

1,318

 

 

$

1,326

 

 

$

1,318

 

 

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):

 

 

 

August 31,

 

 

February 28,

 

 

 

2018

 

 

2018

 

Raw material

 

$

20,623

 

 

$

15,854

 

Work-in-process

 

 

4,550

 

 

 

3,114

 

Finished goods

 

 

9,739

 

 

 

7,512

 

 

 

$

34,912

 

 

$

26,480

 

 

11


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 31, 2018

 

5. Acquisitions

 

On July 31, 2018, the Company issued an aggregate of 829,126 shares of common stock of the Company, par value $2.50 per share (the “Shares”), to the former stockholders of Wright Business Forms, Inc., d/b/a Wright Business Graphics (“Wright” or “WBG”), as partial consideration for the acquisition by the Company of all of the outstanding equity interests of WBG by way of a merger of a wholly-owned subsidiary of the Company with and into WBG pursuant to the Agreement and Plan of Merger, dated July 16, 2018 (the “Merger Agreement”).  The Shares paid to the former stockholders of WBG represent aggregate consideration under the Merger Agreement equal to approximately $16.2 million.  An additional $19.7 million was paid in cash to the stockholders of Wright, subject to a final working capital adjustment, and $2.6 million was paid to pay-off outstanding debt.  The issuance of the Shares was exempt from registration pursuant to Section 4(a)(2) under the Securities Act of 1993, as amended, and Regulation D promulgated thereunder.  During the six months ended August 31, 2018, the Company incurred approximately $0.2 million of costs (including legal and accounting fees) related to the acquisition.  These costs were recorded in selling, general and administrative expenses.  Wright is a printing company headquartered in Portland, Oregon with additional locations in Washington and California.  The business produces forms, pressure seal, packaging, direct mail, checks, statement processing and commercial printing and sells mainly through distributors and resellers.  The goodwill recognized as a part of this merger is not deductible for tax purposes.  With this acquisition we will continue to be the preeminent provider of all types of printed products and services to the west coast.  The addition of packaging, statement processing and direct mail will add to the overall capabilities of our existing operations, which should help us to continue to penetrate additional markets throughout the United States.  Wright, which generated approximately $58.0 million in sales for its fiscal year ended March 31, 2018, will continue to operate under its respective brand names.  The purchase price of Wright was as follows (in thousands):

 

Ennis common stock issued 829,126 shares

 

$

16,218

 

Cash

 

 

22,299

 

Purchase price of Wright Business Graphics

 

$

38,517

 

 

The following is a summary of the preliminary purchase price allocation for Wright (in thousands):

 

Accounts receivable

 

$

5,190

 

Prepaid Expenses

 

 

427

 

Inventories

 

 

4,365

 

Other assets

 

 

88

 

Property, plant & equipment

 

 

10,379

 

Noncompete

 

 

447

 

Customer lists

 

 

12,900

 

Trade names

 

 

3,830

 

Goodwill

 

 

10,341

 

Accounts payable and accrued liabilities

 

 

(4,166

)

Deferred income taxes

 

 

(5,284

)

 

 

$

38,517

 

 

The results of operations for Wright are included in the Company’s consolidated financial statements from the date of acquisition.  The following table represents certain operating information on a pro forma basis as though all Wright operations had been acquired as of March 1, 2017, after the estimated impact of adjustments such as amortization of intangible assets, interest expense and related tax effects (in thousands, except per share amounts).

 

 

 

Three months ended

 

 

Three months ended

 

 

Six months ended

 

 

Six months ended

 

 

 

August 31, 2018

 

 

August 31, 2017

 

 

August 31, 2018

 

 

August 31, 2017

 

Pro forma net sales

 

$

107,807

 

 

$

108,945

 

 

$

215,129

 

 

$

218,364

 

Pro forma net earnings

 

 

10,135

 

 

 

9,124

 

 

 

20,144

 

 

 

18,743

 

Pro forma earnings per share - diluted

 

 

0.39

 

 

 

0.36

 

 

 

0.79

 

 

 

0.74

 

 

The pro forma results are not necessarily indicative of what would have occurred if the acquisition had been in effect for the period presented.

 

12


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 31, 2018

 

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 August 31, 2018

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

14.3

 

 

$

24,385

 

 

$

3,062

 

 

$

21,323

 

Customer lists

 

 

8.6

 

 

 

71,869

 

 

 

28,265

 

 

 

43,604

 

Noncompete

 

 

3.0

 

 

 

722

 

 

 

179

 

 

 

543

 

Patent

 

 

-

 

 

 

783

 

 

 

783

 

 

 

-

 

Total

 

 

10.4

 

 

$

97,759

 

 

$

32,289

 

 

$

65,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

Aggregate amortization expense for the six months ended August 31, 2018 and August 31, 2017 was $2.9 million and $3.1 million, respectively.

13


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED AUGUST 31, 2018

 

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

 

$

6,745

 

2020

 

 

7,410

 

2021

 

 

7,240

 

2022

 

 

7,231

 

2023

 

 

6,334

 

 

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

 

 

10,341

 

Goodwill impairment

 

 

 

Balance as of August 31, 2018

 

$

80,944

 

 

During the six months ended August 31, 2018, $10.3 million was added to goodwill related to the acquisition of Wright.

7. Accrued Expenses

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

 

 

 

August 31,

 

 

February 28,

 

 

 

 

2018

 

 

 

2018

 

Employee compensation and benefits

 

$

13,559

 

 

$

15,597

 

Taxes other than income

 

 

1,248

 

 

 

296

 

Accrued legal and professional fees

 

 

292

 

 

 

282

 

Accrued interest

 

 

185

 

 

 

143

 

Accrued utilities

 

 

115

 

 

 

148

 

Accrued acquisition related obligations

 

 

593