Ennis(EBF) - 2019 Q3 - Quarterly Report

PART I: FINANCIAL INFORMATION Item 1. Financial Statements The unaudited consolidated financial statements for November 30, 2018, reflect increased total assets and net earnings, driven by acquisitions and strong operating cash flow Unaudited Consolidated Balance Sheets Consolidated Balance Sheet Highlights (in thousands) | Account | November 30, 2018 | February 28, 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $80,818 | $96,230 | | Total current assets | $162,972 | $163,344 | | Goodwill | $81,376 | $70,603 | | Intangible assets, net | $63,139 | $49,254 | | Total assets | $362,334 | $329,439 | | Total current liabilities | $30,632 | $29,571 | | Long-term debt | $30,000 | $30,000 | | Total liabilities | $74,612 | $67,735 | | Total shareholders' equity | $287,722 | $261,704 | - Total assets increased by $32.9 million, primarily due to a $10.8 million increase in goodwill and a $13.9 million increase in net intangible assets, largely resulting from acquisitions[11][67][68] Unaudited Consolidated Statements of Operations Consolidated Statement of Operations Highlights (in thousands, except per share data) | Metric | Three Months Ended Nov 30, 2018 | Three Months Ended Nov 30, 2017 | Nine Months Ended Nov 30, 2018 | Nine Months Ended Nov 30, 2017 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $108,070 | $93,606 | $300,080 | $283,083 | | Gross profit margin | $33,755 | $29,956 | $94,269 | $90,807 | | Income from operations | $14,006 | $13,318 | $39,224 | $39,752 | | Net earnings | $10,419 | $8,274 | $29,233 | $24,598 | | Diluted EPS | $0.40 | $0.33 | $1.14 | $0.97 | - For the three months ended November 30, 2018, net sales increased 15.5% YoY, and net earnings increased 25.9% YoY. For the nine-month period, net sales grew 6.0% YoY, and net earnings grew 18.8% YoY[17] Unaudited Consolidated Statements of Cash Flows Consolidated Statement of Cash Flows Highlights (in thousands) | Cash Flow Category | Nine Months Ended Nov 30, 2018 | Nine Months Ended Nov 30, 2017 | | :--- | :--- | :--- | | Net cash provided by operating activities | $36,667 | $33,818 | | Net cash used in investing activities | ($30,855) | ($3,406) | | Net cash used in financing activities | ($21,224) | ($17,948) | | Net change in cash | ($15,412) | $12,464 | | Cash at end of period | $80,818 | $92,930 | - Cash used in investing activities increased significantly to $30.9 million from $3.4 million YoY, primarily due to $27.4 million spent on business acquisitions[24] - Cash used in financing activities increased due to higher dividend payments ($16.7M vs $14.6M YoY) and more common stock repurchases ($4.6M vs $3.3M YoY)[24] Notes to Unaudited Consolidated Financial Statements - The company adopted new accounting standards for revenue recognition (ASU 2014-09) and pension cost presentation (ASU 2017-07) on March 1, 2018. The adoption of the revenue standard did not have a significant impact[28][35][36] - On July 31, 2018, the Company acquired Wright Business Graphics (WBG) for approximately $38.9 million, consisting of $22.7 million in cash and $16.2 million in Ennis common stock. This acquisition added $10.8 million to goodwill[54][68] - On April 30, 2018, the Company acquired the assets of Allen-Bailey Tag & Label for $4.7 million in cash, plus potential contingent consideration[58] - During the nine months ended November 30, 2018, the company repurchased 234,823 shares of common stock for $4.6 million. As of November 30, 2018, $13.8 million remained available under the repurchase program[21][76] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management attributes revenue growth to acquisitions, while gross margin declined due to rising costs and acquisition impact, with net earnings boosted by tax rate changes Overview and Business Challenges - The company identifies itself as the largest provider of business forms, labels, tags, envelopes, and presentation folders to independent distributors in the U.S., operating 60 manufacturing plants[105][106] - Key business challenges include: - Product obsolescence due to digital technology advances - Intense price competition and production overcapacity in the print industry - Rising raw material costs and supply chain pressures, with multiple price increases over the last eight months - Consolidation of customers (distributors), leading to increased pricing pressure[115][116][120] Results of Operations Q3 FY2019 vs Q3 FY2018 Performance (Three months ended Nov 30) | Metric | 2018 | 2017 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $108.1M | $93.6M | +$14.5M | +15.5% | | Gross Profit Margin | 31.2% | 32.0% | -0.8 p.p. | - | | Income from Operations | $14.0M | $13.3M | +$0.7M | +5.3% | | Net Earnings | $10.4M | $8.3M | +$2.1M | +25.3% | - The $14.5 million increase in quarterly net sales was driven by contributions from the acquisitions of Wright ($15.4 million) and ABTL ($3.0 million), offsetting organic declines[130] - Gross margin percentage declined primarily due to increased raw material costs and the dilutive impact of the Wright and ABTL acquisitions, whose margins are currently below the company average[133] - The effective tax rate for the quarter decreased to 25.0% from 37.0% in the prior year, a direct result of the Tax Cuts and Jobs Act of 2017[138] Liquidity and Capital Resources - The company relies on cash from operations and its $100 million revolving credit facility for liquidity. As of November 30, 2018, cash and equivalents were $80.8 million[150][151] - Working capital decreased slightly to $132.3 million from $133.8 million at fiscal year-end, impacted by the use of $22.6 million in cash for the Wright acquisition[153] - As of November 30, 2018, the company had $30.0 million of borrowings under its revolving credit line, with approximately $69.3 million in available borrowing capacity[158] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate fluctuations on its variable-rate debt, with a one-percentage-point change impacting annual results by approximately $0.3 million - The company is exposed to interest rate risk on its $30.0 million of variable-rate borrowings under its Credit Facility[166] - A hypothetical one-point interest rate change would have an annual impact of approximately $0.3 million on the company's results of operations[166] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of November 30, 2018, with no material changes to internal control over financial reporting - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of November 30, 2018[168] - There were no changes in internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[169] PART II: OTHER INFORMATION Item 1. Legal Proceedings The company reports no material pending legal proceedings outside of ordinary routine litigation incidental to its business - There are no material pending legal proceedings against the company[172] Item 1A. Risk Factors No material changes to the company's risk factors were reported since the last Annual Report on Form 10-K - No material changes in Risk Factors were reported since the last Annual Report on Form 10-K[173] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter, the company repurchased 196,880 shares of common stock, with $13.8 million remaining available under the program Share Repurchases (Three Months Ended November 30, 2018) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | September 2018 | — | — | | October 2018 | 29,360 | $19.49 | | November 2018 | 167,520 | $19.75 | | Total | 196,880 | $19.71 | - As of November 30, 2018, approximately $13.8 million was available for future share repurchases under the existing program[175] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate governance documents and CEO/CFO certifications - The report includes standard exhibits such as Articles of Incorporation, Bylaws, and CEO/CFO certifications pursuant to Sarbanes-Oxley rules[180]