10-Q 1 ebf-10q_20190531.htm 10-Q ebf-10q_20190531.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 May 31, 2019

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 28, 2019, there were 26,113,699 shares of the Registrant’s common stock outstanding.

 

 

 

 


ENNIS, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE PERIOD ENDED MAY 31, 2019

TABLE OF CONTENTS

 

PART I: FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1. Financial Statements

 

3

 

 

 

 

 

Unaudited Consolidated Balance Sheets at May 31, 2019 and February 28, 2019

 

3

 

 

 

 

 

Unaudited Consolidated Statements of Operations for the three months ended May 31, 2019 and May 31, 2018

 

5

 

 

 

 

 

Unaudited Consolidated Statements of Comprehensive Income for the three months ended May 31, 2019 and May 31, 2018

 

6

 

 

 

 

 

Unaudited Consolidated Statements of Changes in Shareholders’ Equity for the three months ended May 31, 2019 and May 31, 2018

 

7

 

 

 

 

 

Unaudited Consolidated Statements of Cash Flows for the three months ended May 31, 2019 and May 31, 2018

 

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

 

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)

 

 

 

May 31,

 

 

February 28,

 

 

 

2019

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash

 

$

87,365

 

 

$

88,442

 

Accounts receivable, net of allowance for doubtful receivables of $1,041 at

   May 31, 2019 and $1,020 at February 28, 2019

 

 

41,876

 

 

 

40,357

 

Prepaid expenses

 

 

1,241

 

 

 

1,760

 

Prepaid income taxes

 

 

 

 

 

195

 

Inventories

 

 

36,826

 

 

 

35,411

 

Total current assets

 

 

167,308

 

 

 

166,165

 

Property, plant and equipment

 

 

 

 

 

 

 

 

Plant, machinery and equipment

 

 

149,678

 

 

 

146,001

 

Land and buildings

 

 

57,013

 

 

 

56,394

 

Other

 

 

23,993

 

 

 

23,838

 

Total property, plant and equipment

 

 

230,684

 

 

 

226,233

 

Less accumulated depreciation

 

 

175,397

 

 

 

173,099

 

Net property, plant and equipment

 

 

55,287

 

 

 

53,134

 

Operating lease right-of-use assets

 

 

18,653

 

 

 

 

Goodwill

 

 

82,527

 

 

 

81,634

 

Intangible assets, net

 

 

61,185

 

 

 

61,272

 

Net pension asset

 

 

580

 

 

 

580

 

Other assets

 

 

303

 

 

 

300

 

Total assets

 

$

385,843

 

 

$

363,085

 

 

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 28,

 

 

 

2019

 

 

2019

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

15,029

 

 

$

13,728

 

Accrued expenses

 

 

18,125

 

 

 

17,895

 

Current portion of operating lease liabilities

 

 

5,005

 

 

 

 

Total current liabilities

 

 

38,159

 

 

 

31,623

 

Long-term debt

 

 

30,000

 

 

 

30,000

 

Deferred income taxes

 

 

10,959

 

 

 

10,898

 

Operating lease liabilities, net of current portion

 

 

13,362

 

 

 

 

Other liabilities

 

 

1,099

 

 

 

1,437

 

Total liabilities

 

 

93,579

 

 

 

73,958

 

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, 2019 and February 28, 2019

 

 

75,134

 

 

 

75,134

 

Additional paid-in capital

 

 

122,111

 

 

 

123,065

 

Retained earnings

 

 

182,760

 

 

 

179,003

 

Accumulated other comprehensive loss:

 

 

 

 

 

 

 

 

Minimum pension liability, net of taxes

 

 

(16,470

)

 

 

(16,704

)

Total accumulated other comprehensive loss

 

 

(16,470

)

 

 

(16,704

)

Treasury stock

 

 

(71,271

)

 

 

(71,371

)

Total shareholders’ equity

 

 

292,264

 

 

 

289,127

 

Total liabilities and shareholders' equity

 

$

385,843

 

 

$

363,085

 

 

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,

 

 

 

2019

 

 

2018

 

Net sales

 

$

108,033

 

 

$

93,419

 

Cost of goods sold

 

 

75,337

 

 

 

63,228

 

Gross profit margin

 

 

32,696

 

 

 

30,191

 

Selling, general and administrative

 

 

19,703

 

 

 

17,735

 

Gain from disposal of assets

 

 

 

 

 

(4

)

Income from operations

 

 

12,993

 

 

 

12,460

 

Other income (expense)

 

 

 

 

 

 

 

 

Interest expense

 

 

(317

)

 

 

(261

)

Other, net

 

 

340

 

 

 

130

 

Total other income (expense)

 

 

23

 

 

 

(131

)

Earnings before income taxes

 

 

13,016

 

 

 

12,329

 

Income tax expense

 

 

3,384

 

 

 

3,082

 

Net earnings

 

$

9,632

 

 

$

9,247

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

26,028,337

 

 

 

25,333,673

 

Diluted

 

 

26,028,337

 

 

 

25,363,772

 

Earnings per share

 

 

 

 

 

 

 

 

Basic

 

$

0.37

 

 

$

0.37

 

Diluted

 

$

0.37

 

 

$

0.36

 

Cash dividends per share

 

$

0.225

 

 

$

0.200

 

 

 

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,

 

 

 

2019

 

 

2018

 

Net earnings

 

$

9,632

 

 

$

9,247

 

Adjustment to pension, net of taxes

 

 

234

 

 

 

261

 

Comprehensive income

 

$

9,866

 

 

$

9,508

 

 

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 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance February 28, 2018

 

30,053,043

 

 

$

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

 

30,053,043

 

 

$

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,

 

 

 

 

2019

 

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net earnings

 

$

9,632

 

 

$

9,247

 

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

 

 

 

 

 

 

 

 

Depreciation

 

 

2,477

 

 

 

2,035

 

Amortization of deferred finance charges

 

 

28

 

 

 

28

 

Amortization of intangible assets

 

 

1,904

 

 

 

1,415

 

Gain from disposal of assets

 

 

 

 

 

(4

)

Bad debt expense, net of recoveries

 

 

40

 

 

 

135

 

Stock based compensation

 

 

358

 

 

 

327

 

Net pension expense

 

 

295

 

 

 

329

 

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

 

 

 

 

 

 

 

 

Accounts receivable

 

 

412

 

 

 

453

 

Prepaid expenses and income taxes

 

 

755

 

 

 

3,391

 

Inventories

 

 

(93

)

 

 

(3,505

)

Accounts payable and accrued expenses

 

 

487

 

 

 

(1,964

)

Other liabilities

 

 

(624

)

 

 

3

 

Net cash provided by operating activities

 

 

15,671

 

 

 

11,890

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(802

)

 

 

(1,205

)

Purchase of businesses, net of cash acquired

 

 

(8,859

)

 

 

(4,736

)

Proceeds from disposal of plant and property

 

 

 

 

 

4

 

Net cash used in investing activities

 

 

(9,661

)

 

 

(5,937

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Dividends paid

 

 

(5,875

)

 

 

(5,083

)

Common stock repurchases

 

 

(1,212

)

 

 

(680

)

Net cash used in financing activities

 

 

(7,087

)

 

 

(5,763

)

Net change in cash

 

 

(1,077

)

 

 

190

 

Cash at beginning of period

 

 

88,442

 

 

 

96,230

 

Cash at end of period

 

$

87,365

 

 

$

96,420

 

 

 

See accompanying notes to consolidated financial statements.

 

8


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

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, 2019 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, 2019, from which the accompanying consolidated balance sheet at February 28, 2019 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 August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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.  We are currently evaluating the impact of ASU 2018-14 on the consolidated financial statements.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which modifies the lease recognition requirements and requires entities to recognize the assets and liabilities arising from leases on the balance sheet and to disclose key qualitative and quantitative information about the entity’s leasing arrangements.

 

Based on the original guidance in ASU 2016-02, lessees and lessors would have been required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including a number of practical expedients.  In July 2018, the FASB issued ASU No. 2018-11, Leases (“ASC 842”): Targeted Improvements, which provides entities with an option to apply the guidance prospectively, instead of retrospectively, and allows for other classification provisions.

 

The Company adopted this guidance as of March 1, 2019, using the optional transition method and elected the option to not apply ASC 842 to comparative periods, which continue to be presented under the accounting standards in effect for those periods.

The Company elected the ‘package of practical expedients’ as lessee, which permits it not to reassess under the new standard its prior conclusions about lease identification, lease classification and initial direct costs.  Additionally, the Company elected to treat lease and non-lease components as a single lease component.

 

Adoption of the new standard resulted in the recording of operating lease right-of-use (“ROU”) assets of $18 million and operating lease liabilities of $18.2 million.  The difference between the leased assets and lease liabilities represents the existing deferred rent liabilities balance at adoption, resulting from historical straight line recognition of operating leases, which was reclassified upon adoption to reduce the measurement of the leased assets.  The adoption of the standard did not have an impact on the Company’s shareholders’ equity, statement of operations, or cash flows.

9


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

2. Revenue

On March 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“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 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 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, 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, 2019.

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.

10


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

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,

 

 

 

2019

 

 

2018

 

Balance at beginning of period

 

$

1,020

 

 

$

1,194

 

Bad debt expense, net of recoveries

 

 

40

 

 

 

135

 

Accounts written off

 

 

(19

)

 

 

(31

)

Balance at end of period

 

$

1,041

 

 

$

1,298

 

 

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,

 

 

 

2019

 

 

2019

 

Raw material

 

$

22,826

 

 

$

21,717

 

Work-in-process

 

 

4,414

 

 

 

4,172

 

Finished goods

 

 

9,586

 

 

 

9,522

 

 

 

$

36,826

 

 

$

35,411

 

 

11


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

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 March 16, 2019, the Company, through one of its subsidiaries, acquired the assets of Integrated Print & Graphics (“Integrated”) for $8.9 million in cash plus the assumption of trade payables, subject to certain adjustments.  Integrated is located in South Elgin, Illinois.  During the three months ended May 31, 2019, the Company 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, which generated approximately $20.0 million in sales for its fiscal year ended December 31, 2018, will create additional capabilities within the Company’s high color commercial print product line, which is consistent with the Company’s business model.  Management considers this acquisition to be immaterial.

 

On July 31, 2018, the Company issued an aggregate of 829,126 shares of common stock to the former stockholders of Wright Business Forms, Inc., d/b/a Wright Business Graphics (“Wright”), as partial consideration for the acquisition by the Company of all of the outstanding equity interests of Wright pursuant to the Agreement and Plan of Merger, dated July 16, 2018 (the “Merger Agreement”).  The Company shares issued to the former stockholders of Wright 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 Wright’s outstanding debt.  Since the acquisition, the Company has 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.  The goodwill recognized as a part of this merger is not deductible for tax purposes.  Wright is a printing company which produces forms, pressure seal, packaging, direct mail, checks, statement processing and commercial printing and sells mainly through distributors and resellers.  Wright is headquartered in Portland, Oregon and has additional locations in Washington and California.  Wright, which generated approximately $58.0 million in sales for its fiscal year ended March 31, 2018, continues to operate under its brand names.

 

The purchase price of Wright was as follows (in thousands):

 

Ennis shares of common stock

 

$

16,218

 

Cash

 

 

22,653

 

Purchase price of Wright Business Graphics

 

$

38,871

 

 

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

 

Accounts receivable

 

$

5,220

 

Prepaid expenses

 

 

427

 

Inventories

 

 

4,365

 

Other assets

 

 

88

 

Property, plant & equipment

 

 

10,331

 

Non-compete

 

 

447

 

Customer lists

 

 

12,900

 

Trade names

 

 

3,830

 

Goodwill

 

 

11,031

 

Accounts payable and accrued liabilities

 

 

(4,226

)

Deferred income taxes

 

 

(5,542

)

 

 

$

38,871

 

 

12


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

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, 2018, 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

 

 

 

May 31,

 

 

 

2019

 

 

2018

 

Pro forma net sales

 

$

108,033

 

 

$

107,321

 

Pro forma net earnings

 

 

9,632

 

 

 

9,810

 

Pro forma earnings per share - diluted

 

 

0.37

 

 

 

0.39

 

 

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

 

On April 30, 2018, the Company acquired the assets of Allen-Bailey Tag & Label, 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.  Management considers this acquisition to be immaterial.

 

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, 2019.

 

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, 2019 were as follows (in thousands):

 

Operating lease cost

 

$

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

 

$

1,569

 

 

 

 

 

 

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, 2019

 

 

Weighted Average Remaining Lease Terms

 

 

 

 

Operating leases

 

5 Years

 

 

 

 

 

 

Weighted Average Discount Rate

 

 

 

 

Operating leases

 

 

4.50

%

 

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

 

 

 

Operating

 

 

 

Lease

 

 

 

Commitments

 

2020 (remaining 9 months)

 

$

4,424

 

2021

 

 

4,689

 

2022

 

 

3,851

 

2023

 

 

3,196

 

2024

 

 

2,341

 

2025

 

 

1,646

 

Thereafter

 

 

1,196

 

Total lease payments

 

$

21,343

 

Less imputed interest

 

 

2,976

 

Total lease payments

 

$

18,367

 

 

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.  The annual impairment test of goodwill and intangible assets is performed as of November 30 of each fiscal year.

The Company considers 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.

14


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

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, 2019

 

(in years)

 

 

Amount

 

 

Amortization

 

 

Net

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

13.3

 

 

$

25,281

 

 

$

4,346

 

 

$

20,935

 

Customer lists

 

 

8.0

 

 

 

72,765

 

 

 

32,907

 

 

 

39,858

 

Non-compete

 

 

2.4

 

 

 

747

 

 

 

355

 

 

 

392

 

Patent

 

 

 

 

 

783

 

 

 

783

 

 

 

 

Total

 

 

9.8

 

 

$

99,576

 

 

$

38,391

 

 

$

61,185

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of February 28, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amortized intangible assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks and trade names

 

 

13.8

 

 

$

24,385

 

 

$

3,906

 

 

$

20,479

 

Customer lists

 

 

8.2

 

 

 

71,869

 

 

 

31,498

 

 

 

40,371

 

Non-compete

 

 

2.5

 

 

 

722

 

 

 

300

 

 

 

422

 

Patent

 

 

 

 

 

783

 

 

 

783

 

 

 

 

Total

 

 

10.0

 

 

$

97,759

 

 

$

36,487

 

 

$

61,272

 

 

Aggregate amortization expense for the three months ended May 31, 2019 and May 31, 2018 was $1.9 million and $1.4 million, respectively.

 

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

 

2020

 

$

7,589

 

2021

 

 

7,472

 

2022

 

 

7,305

 

2023

 

 

6,459

 

2024

 

 

6,421

 

 

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

 

Balance as of March 1, 2018

 

$

70,603

 

Goodwill acquired

 

 

11,031

 

Goodwill impairment

 

 

 

Balance as of February 28, 2019

 

 

81,634

 

Goodwill acquired

 

 

893

 

Goodwill impairment

 

 

 

Balance as of May 31, 2019

 

$

82,527

 

 

During the three months ended May 31, 2019, $0.9 million was added to goodwill related to the acquisition of Integrated.

15


ENNIS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE PERIOD ENDED MAY 31, 2019

 

8. Accrued Expenses

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

 

 

 

May 31,