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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, 2020

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)

Registrant’s Telephone Number, Including Area Code: (972) 775-9801

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading

Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $2.50 per share

 

EBF

 

New York Stock Exchange

 

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 June 26, 2020, there were 26,073,122 shares of the Registrant’s common stock outstanding.

 

 

 

 


ENNIS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE PERIOD ENDED MAY 31, 2020

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

 

 

Unaudited Consolidated Balance Sheets at May 31, 2020 and February 29, 2020

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three months ended May 31, 2020 and May 31, 2019

 

5

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended May 31, 2020 and May 31, 2019

 

6

 

 

 

 

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended May 31, 2020 and May 31, 2019

 

7

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended May 31, 2020 and May 31, 2019

 

8

 

 

 

 

 

Notes to Unaudited Consolidated Financial Statements

 

9

 

 

 

 

 

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

 

20

 

 

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

27

 

 

 

 

 

Item 4. Controls and Procedures

 

28

 

 

 

PART II: OTHER INFORMATION

 

 

 

 

 

 

 

Item 1. Legal Proceedings

 

28

 

 

 

 

 

Item 1A. Risk Factors

 

28

 

 

 

 

 

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

 

29

 

 

 

 

 

Item 3. Defaults Upon Senior Securities

 

29

 

 

 

 

 

Item 4. Mine Safety Disclosures

 

29

 

 

 

 

 

Item 5. Other Information

 

29

 

 

 

 

 

Item 6. Exhibits

 

30

 

 

 

SIGNATURES

 

31

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(in thousands)

 

 

 

May 31,

 

 

February 29,

 

 

 

2020

 

 

2020

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

75,832

 

 

$

68,258

 

Accounts receivable, net of allowance for doubtful receivables of $940 at May 31, 2020 and $715 at February 29, 2020

 

 

33,167

 

 

 

43,086

 

Prepaid expenses

 

 

1,250

 

 

 

1,541

 

Prepaid income taxes

 

 

939

 

 

 

2,164

 

Inventories

 

 

34,235

 

 

 

34,835

 

Total current assets

 

 

145,423

 

 

 

149,884

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Plant, machinery and equipment

 

 

152,253

 

 

 

155,744

 

Land and buildings

 

 

57,859

 

 

 

57,887

 

Computer equipment and software

 

 

19,317

 

 

 

19,312

 

Other

 

 

4,873

 

 

 

4,873

 

Total property, plant and equipment

 

 

234,302

 

 

 

237,816

 

Less accumulated depreciation

 

 

179,243

 

 

 

181,414

 

Net property, plant and equipment

 

 

55,059

 

 

 

56,402

 

Operating lease right-of-use assets

 

 

18,647

 

 

 

20,068

 

Goodwill

 

 

82,527

 

 

 

82,527

 

Intangible assets, net

 

 

54,585

 

 

 

56,557

 

Other assets

 

 

260

 

 

 

261

 

Total assets

 

$

356,501

 

 

$

365,699

 

 

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)

 

 

 

May 31,

 

 

February 29,

 

 

 

2020

 

 

2020

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

12,027

 

 

$

17,235

 

Accrued expenses

 

 

13,763

 

 

 

15,069

 

Current portion of operating lease liabilities

 

 

5,443

 

 

 

5,665

 

Total current liabilities

 

 

31,233

 

 

 

37,969

 

Liability for pension benefits

 

 

8,936

 

 

 

8,936

 

Deferred income taxes

 

 

8,893

 

 

 

8,749

 

Operating lease liabilities, net of current portion

 

 

12,986

 

 

 

14,200

 

Other liabilities

 

 

1,455

 

 

 

1,516

 

Total liabilities

 

 

63,503

 

 

 

71,370

 

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, 2020 and February 29, 2020

 

 

75,134

 

 

 

75,134

 

Additional paid-in capital

 

 

122,266

 

 

 

123,052

 

Retained earnings

 

 

192,130

 

 

 

193,809

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Minimum pension liability, net of taxes

 

 

(24,773

)

 

 

(25,206

)

Treasury stock

 

 

(71,759

)

 

 

(72,460

)

Total shareholders’ equity

 

 

292,998

 

 

 

294,329

 

Total liabilities and shareholders' equity

 

$

356,501

 

 

$

365,699

 

 

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,

 

 

 

2020

 

 

2019

 

Net sales

 

$

88,996

 

 

$

108,033

 

Cost of goods sold

 

 

65,089

 

 

 

75,337

 

Gross profit margin

 

 

23,907

 

 

 

32,696

 

Selling, general and administrative

 

 

18,123

 

 

 

19,703

 

Gain from disposal of assets

 

 

(112

)

 

 

 

Income from operations

 

 

5,896

 

 

 

12,993

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(3

)

 

 

(317

)

Other, net

 

 

(238

)

 

 

340

 

              Total other income (expense)

 

 

(241

)

 

 

23

 

Earnings before income taxes

 

 

5,655

 

 

 

13,016

 

Income tax expense

 

 

1,470

 

 

 

3,384

 

Net earnings

 

$

4,185

 

 

$

9,632

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

25,975,010

 

 

 

26,028,337

 

Diluted

 

 

25,975,010

 

 

 

26,028,337

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.16

 

 

$

0.37

 

Diluted

 

$

0.16

 

 

$

0.37

 

Cash dividends per share

 

$

0.225

 

 

$

0.225

 

 

 

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,

 

 

 

2020

 

 

2019

 

Net earnings

 

$

4,185

 

 

$

9,632

 

Adjustment to pension, net of taxes

 

 

433

 

 

 

234

 

Comprehensive income

 

$

4,618

 

 

$

9,866

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to consolidated financial statements.

 

6


ENNIS, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS 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 February 29, 2020

 

30,053,443

 

 

$

75,134

 

 

$

123,052

 

 

$

193,809

 

 

$

(25,206

)

 

 

(4,136,286

)

 

$

(72,460

)

 

$

294,329

 

Net earnings

 

 

 

 

 

 

 

 

 

 

4,185

 

 

 

 

 

 

 

 

 

 

 

 

4,185

 

Adjustment to pension, net of deferred tax of $144

 

 

 

 

 

 

 

 

 

 

 

 

 

433

 

 

 

 

 

 

 

 

 

433

 

Dividends paid ($0.225 per share)

 

 

 

 

 

 

 

 

 

 

(5,864

)

 

 

 

 

 

 

 

 

 

 

 

(5,864

)

Stock based compensation

 

 

 

 

 

 

 

338

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

338

 

Exercise of stock options and restricted stock

 

 

 

 

 

 

 

(1,124

)

 

 

 

 

 

 

 

 

64,151

 

 

 

1,124

 

 

 

 

Common stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(26,472

)

 

 

(423

)

 

 

(423

)

Balance May 31, 2020

 

30,053,443

 

 

$

75,134

 

 

$

122,266

 

 

$

192,130

 

 

$

(24,773

)

 

 

(4,098,607

)

 

$

(71,759

)

 

$

292,998

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance February 28, 2019

 

30,053,443

 

 

$

75,134

 

 

$

123,065

 

 

$

179,003

 

 

$

(16,704

)

 

 

(4,097,099

)

 

$

(71,371

)

 

$

289,127

 

Net earnings

 

 

 

 

 

 

 

 

 

 

9,632

 

 

 

 

 

 

 

 

 

 

 

 

9,632

 

Adjustment to pension, net of deferred tax of $78

 

 

 

 

 

 

 

 

 

 

 

 

 

234

 

 

 

 

 

 

 

 

 

234

 

Dividends paid ($0.225 per share)

 

 

 

 

 

 

 

 

 

 

(5,875

)

 

 

 

 

 

 

 

 

 

 

 

(5,875

)

Stock based compensation

 

 

 

 

 

 

 

358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

358

 

Exercise of stock options and restricted stock

 

 

 

 

 

 

 

(1,312

)

 

 

 

 

 

 

 

 

83,095

 

 

 

1,312

 

 

 

 

Common stock repurchases

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(62,038

)

 

 

(1,212

)

 

 

(1,212

)

Balance May 31, 2019

 

30,053,443

 

 

$

75,134

 

 

$

122,111

 

 

$

182,760

 

 

$

(16,470

)

 

 

(4,076,042

)

 

$

(71,271

)

 

$

292,264

 

 

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,

 

 

 

 

2020

 

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

4,185

 

 

$

9,632

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

2,444

 

 

 

2,477

 

Amortization of deferred finance charges

 

 

 

 

 

28

 

Amortization of intangible assets

 

 

1,972

 

 

 

1,904

 

Gain from disposal of assets

 

 

(112

)

 

 

 

Bad debt expense, net of recoveries

 

 

648

 

 

 

40

 

Stock based compensation

 

 

338

 

 

 

358

 

Net pension expense

 

 

577

 

 

 

295

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

9,271

 

 

 

412

 

Prepaid expenses and income taxes

 

 

1,517

 

 

 

755

 

Inventories

 

 

600

 

 

 

(93

)

Accounts payable and accrued expenses

 

 

(6,514

)

 

 

487

 

Other liabilities

 

 

(76

)

 

 

(624

)

Net cash provided by operating activities

 

 

14,850

 

 

 

15,671

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(1,125

)

 

 

(802

)

Purchase of businesses, net of cash acquired

 

 

 

 

 

(8,859

)

Proceeds from disposal of plant and property

 

 

136

 

 

 

 

Net cash used in investing activities

 

 

(989

)

 

 

(9,661

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(5,864

)

 

 

(5,875

)

Common stock repurchases

 

 

(423

)

 

 

(1,212

)

Net cash used in financing activities

 

 

(6,287

)

 

 

(7,087

)

Net change in cash

 

 

7,574

 

 

 

(1,077

)

Cash at beginning of period

 

 

68,258

 

 

 

88,442

 

Cash at end of period

 

$

75,832

 

 

$

87,365

 

 

 

See accompanying notes to consolidated financial statements.

 

8


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

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, 2020 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 29, 2020, from which the accompanying consolidated balance sheet at February 29, 2020 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, especially in light of the uncertainties surrounding the impact of the novel coronavirus (COVID-19) pandemic.

Recent Accounting Pronouncements

Recently Adopted Accounting Updates

 

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-13, Fair Value Measurement (Topic 820) (“ASU 2018-13”).  The standard is effective for public business entities in fiscal years beginning after December 15, 2019, and for interim periods within those fiscal years.  Early adoption is permitted, including during an interim period.  This new standard requires changes to disclosure requirements for fair value measurements for certain Level 3 items, and specifies that some of the changes must be applied prospectively, while others should be applied retrospectively.  The Company adopted ASU 2018-13 as of March 1, 2020 and the adoption of this standard had no impact on the Company’s financial statement disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which changes the impairment model for most financial assets and certain other instruments.  Unlike the new guidance, entities will be required to measure expected credit losses for financial instruments, including trade receivables, based on historical experience, current conditions and reasonable forecasts.  The Company adopted ASU 2016-13 as of March 1, 2020 and the adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

Recently Issued Accounting Updates

In December 2019, the FASB issued Accounting Standards Update ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements.  Amendments include removal of certain exceptions to the general principles of Topic 740, Income Taxes, and simplification n several other areas.  ASU 2019-12 is effective for annual reporting periods beginning after December 15, 2020, and interim periods therein.  The Company is currently evaluating the impact of ASU 2019-12 on the consolidated financial statements.

 

In August 2018, the FASB issued ASU No. 2018-14, Compensation-Retirement Benefits-Defined Benefit Plans-General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans (“ASU 2018-14”), which removes certain disclosures that are no longer cost beneficial and also includes additional disclosures to improve the overall usefulness of the disclosure requirements to financial statement users.  ASU 2018-14 is effective for fiscal years ending after December 15, 2020, and earlier adoption is permitted.  The Company is currently evaluating the impact of ASU 2018-14 on the consolidated financial statements.

9


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

2. Revenue

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 a small number of 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.  Storage revenue for certain customers may be recognized over time rather than at a point in time.  As of the date of this report, the amount of storage revenue is immaterial to the Company’s financial statements.  The output method for measure of progress is determined to be appropriate, the Company recognizes storage 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, 2020.

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 60 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 are generally short-term in nature.  Accordingly, the Company does not disclose the value of unsatisfied performance obligations nor the timing of revenue recognition.

10


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

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 the pooling of receivables based on risk assessment and then assessing a default probability to these pooled balances, which can be influenced by several factors including (i) current market conditions, (ii) historical experience, (iii) reasonable forecast, and (iv) 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,

 

 

 

2020

 

 

2019

 

Balance at beginning of period

 

$

715

 

 

$

1,020

 

Bad debt expense, net of recoveries

 

 

648

 

 

 

40

 

Accounts written off

 

 

(423

)

 

 

(19

)

Balance at end of period

 

$

940

 

 

$

1,041

 

 

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 net realizable value 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 29,

 

 

 

2020

 

 

2020

 

Raw material

 

$

21,340

 

 

$

20,267

 

Work-in-process

 

 

2,830

 

 

 

4,557

 

Finished goods

 

 

10,065

 

 

 

10,011

 

 

 

$

34,235

 

 

$

34,835

 

 

11


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

5. Acquisitions

 

The Company applies the acquisition method of accounting for business combinations.  Under the acquisition method, the acquiring entity in a business combination recognizes 100% of the assets acquired and liabilities assumed at their acquisition date fair values.  Management utilizes valuation techniques appropriate for the asset or liability being measured in determining these fair values.  Any excess of the purchase price over amounts allocated to assets acquired, including identifiable intangible assets and liabilities assumed, is recorded as goodwill.  Where amounts allocated to assets acquired and liabilities assumed is greater than the purchase price, a bargain purchase gain is recognized.  Acquisition-related costs are expensed as incurred.

 

On July 15, 2019, the Company acquired all the outstanding stock of The Flesh Company (“Flesh”) for approximately $9.9 million (which includes a potential earn-out consideration of up to $500,000) plus the assumption of trade payables, subject to certain other adjustments.  The earn-out consideration is capped at $500,000 and is payable over the four years following the closing if certain minimum operating income levels are achieved.  Since the acquisition, the Company has incurred approximately $0.2 million of costs (including legal and accounting fees) related to the acquisition.  The Company recorded intangible assets with definite lives of approximately $1.2 million in connection with the transaction.  Flesh, together with its wholly owned subsidiary, Impressions Direct, Inc. (“Impressions Direct”), is a printing company with two locations, with the St. Louis, Missouri location containing Flesh’s corporate office and the direct mail operations of Impressions Direct, and their Parsons, Kansas location containing Flesh’s main manufacturing facility and warehouse.  The acquisition of Flesh expands the Company’s operations with respect to business forms, checks, direct mail services, integrated products and labels.

 

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

 

Accounts receivable

 

$

2,480

 

Inventories

 

 

1,343

 

Other assets

 

 

191

 

Right-of-use asset

 

 

715

 

Property, plant & equipment

 

 

7,065

 

Customer lists

 

 

337

 

Trademarks

 

 

880

 

Non-compete

 

 

20

 

Accounts payable and accrued liabilities

 

 

(2,251

)

Operating lease liability

 

 

(700

)

Deferred income taxes

 

 

(206

)

 

 

$

9,874

 

 

On March 16, 2019, the Company acquired the assets of Integrated Print & Graphics (“Integrated”), which is based in South Elgin, Illinois, for $8.9 million in cash plus the assumption of trade payables, subject to certain adjustments.  Since the acquisition, the Company has incurred approximately $29,000 of costs (including legal and accounting fees) related to the acquisition.  Goodwill of $893,000 recognized as a part of the acquisition is deductible for tax purposes.  The Company also recorded intangible assets with definite lives of approximately $1.8 million in connection with the transaction.  The acquisition of Integrated created additional capabilities within the Company’s high color commercial print product line.

 

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

 

Accounts receivable

 

$

1,971

 

Inventories

 

 

1,322

 

Other assets

 

 

72

 

Property, plant & equipment

 

 

3,828

 

Right-of-use asset

 

 

2,041

 

Customer lists

 

 

896

 

Trademarks

 

 

896

 

Non-compete

 

 

25

 

Goodwill

 

 

893

 

Accounts payable and accrued liabilities

 

 

(1,044

)

Operating lease liability

 

 

(2,041

)

 

 

$

8,859

 

 

12


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

The results of operations for Integrated and Flesh are included in the Company’s consolidated financial statements from the respective dates of acquisition.  The following table sets forth certain operating information on a pro forma basis as though all Integrated and Flesh operations had been acquired as of March 1, 2019, after the estimated impact of adjustments such as amortization of intangible assets, depreciation expense and interest expense and related tax effects (in thousands, except per share amounts).

 

 

 

 

Three months ended

 

 

 

May 31, 2019

 

Pro forma net sales

 

$

116,136

 

Pro forma net earnings

 

 

9,569

 

Pro forma earnings per share - diluted

 

 

0.37

 

 

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

6. Leases

 

The Company leases certain of its facilities and equipment under operating leases, which are recorded as right-of-use assets and lease liabilities.  The Company’s leases generally have terms of 1 – 5 years, with certain leases including renewal options to extend the leases for additional periods at the Company’s discretion.  At lease inception, all renewal options reasonably certain to be exercised are considered when determining the lease term.  The Company currently does not have leases that include options to purchase or provisions that would automatically transfer ownership of the leased property to the Company.

Operating lease expense is recognized on a straight-line basis over the lease term, and variable lease payments are expensed as incurred.  The Company had no variable lease costs for the three months ended May 31, 2020.

The Company determines whether a contract is or contains a lease at the inception of the contract. A contract will be deemed to be or contain a lease if the contract conveys the right to control and direct the use of identified property, plant, or equipment for a period of time in exchange for consideration. The Company generally must also have the right to obtain substantially all of the economic benefits from the use of the property, plant, and equipment.

Operating lease assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term.  To determine the present value of lease payments not yet paid, the Company estimates incremental borrowing rates based on the information available at lease commencement date as rates are not implicitly stated in most leases.  

Components of lease expense for the three months ended May 31, 2020 and May 31, 2019 were as follows (in thousands):

 

 

 

Three months ended

 

 

 

May 31, 2020

 

 

May 31, 2019

 

Operating lease cost

 

$

1,627

 

 

$

1,577

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information related to leases was as follows:

 

 

 

 

 

 

 

 

Cash paid for amounts included in the measurement of lease liabilities

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

1,612

 

 

$

1,569

 

 

 

 

 

 

 

 

 

 

Right-of-use assets obtained in exchange for lease obligations

 

 

 

 

 

 

 

 

Operating leases

 

$

 

 

$

 

 

13


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

Weighted Average Remaining Lease Terms

 

 

 

 

Operating leases

 

4 Years

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

Operating leases

 

 

4.34

%

 

Future minimum lease commitments under non-cancelable operating leases for each of the fiscal years ending are as follows (in thousands):

 

 

 

Operating

 

 

 

Lease

 

 

 

Commitments

 

2021 (remaining 9 months)

 

$

4,143

 

2022

 

 

5,194

 

2023

 

 

4,245

 

2024

 

 

2,946

 

2025

 

 

2,154

 

2026

 

 

877

 

Thereafter

 

 

621

 

Total future minimum lease payments

 

$

20,180

 

Less imputed interest

 

 

1,751

 

Present value of lease liabilities

 

$

18,429

 

 

7. 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.  Historically, the Company has performed its annual impairment test as of November 30, the last day of the third quarter, but beginning in fiscal year 2020, the Company performed its annual impairment test as of December 1, the first day of the fourth quarter.  Accordingly, the annual impairment test was performed as of November 30 and updated as of December 1 of fiscal year 2020, in each case with no impact on the financial statements.  The change to the Company’s impairment testing date did not accelerate, delay, avoid or cause an impairment charge, nor did the change result in adjustments to the Company’s previously issued financial statements.  The Company’s impairment tests indicated significant cushion between its carrying value and fair market value.

Subsequent to the December 1, 2019 assessment, the novel coronavirus (COVID-19) pandemic began to cause major economic disruption and significant volatility in the stock market.  As a result, the Company updated the assessment performed for fiscal year 2020 through February 29, 2020.  No impairment charge to the Company’s recorded goodwill was deemed required as a result of this updated assessment.  For the quarter ended May 31, 2020, given the significant decline in revenues, the Company reviewed the assumptions used in the previous assessment and found them to still be materially accurate.

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 used 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.

14


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2020

 

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, 2020

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

12.3

 

 

$

26,161

 

 

$

6,318

 

 

$

19,843

 

Customer lists

 

 

7.2

 

 

 

73,102

 

 

 

38,576

 

 

 

34,526

 

Non-compete

 

 

1.6

 

 

 

767

 

 

 

551

 

 

 

216

 

Patent

 

 

 

 

 

783

 

 

 

783

 

 

 

 

Total

 

 

9.0

 

 

$

100,813

 

 

$

46,228

 

 

$

54,585

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of February 29, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

12.6

 

 

$

26,161

 

 

$

5,811

 

 

$