Ennis(EBF) - 2023 Q4 - Annual Report

Part I Business Ennis, Inc. is a leading US manufacturer and distributor of custom and semi-custom printed products, serving independent distributors, with growth supported by acquisitions and a focus on environmental and social responsibility - Ennis, Inc. operates as a leading provider of business forms and products, distributing primarily through independent channels across the United States[16][17] - The company operates 54 manufacturing plants in 20 states, with approximately 95% of its products being custom or semi-custom[18] - On November 30, 2022, the company acquired School Photo Marketing ("SPM"), which generated approximately $5.9 million in sales in its prior fiscal year, expanding services to school photographers[25] - The company's backlog of firm orders increased to approximately $46.7 million at February 28, 2023, from $38.4 million at February 28, 2022[32] - As of February 28, 2023, the company had 1,919 employees, with 167 represented by labor unions[42] - Ennis demonstrates environmental responsibility by recycling significant amounts of materials, including 23.1 million pounds of paper and 2.2 million pounds of cardboard and cores in 2023[35] Risk Factors The company faces risks from declining demand for printed documents, supply chain dependencies, pension funding volatility, acquisition integration challenges, cybersecurity threats, and economic downturns - The demand for traditional printed business documents is eroding due to the increasing sophistication and adoption of software, internet technologies, and digital equipment[52][53] - The company relies on a limited number of suppliers for raw materials, particularly paper, making it vulnerable to price increases, supply disruptions, and quality fluctuations, with the majority of paper products purchased from one major supplier[55][56] - The company's defined benefit pension plan is subject to market risks, with the plan 99% funded on a PBO basis as of February 28, 2023, and fluctuations in market values, interest rates, and mortality assumptions could negatively impact its funded status[57][58] - Acquisitions are a key part of the company's strategy to offset print attrition, but there are risks related to identifying suitable targets and successfully integrating acquired businesses[59] - The company was targeted with an encryption ransomware attack on November 30, 2022, which, while immediately addressed and not significantly financially impactful, highlights ongoing cybersecurity risks[75][76] Properties Ennis, Inc. operates approximately 2.6 million square feet of owned and 1.0 million square feet of leased properties across the US, all in good condition with no major expansions planned Owned vs. Leased Property Square Footage | Property Type | Approximate Square Footage | | :--- | :--- | | Owned | 2,589,702 | | Leased | 1,031,734 | - The company operates manufacturing facilities across the U.S., with specialized production for various products like business forms, presentation products, envelopes, and financial forms[81] - All facilities are believed to be in good condition, and management does not anticipate the need for substantial expansion or re-equipping in the near future[83] Legal Proceedings The company is involved in routine litigation, with no material adverse effects expected, though a subsidiary was awarded $5.0 million in damages in April 2023 not yet reflected in FY2023 financials - In April 2023, a subsidiary was awarded $5.0 million in actual and punitive damages in a case against Wright Printing Company, with the financial impact not included in the FY2023 statements[87] Part II Market for Common Equity and Related Matters Ennis, Inc. common stock trades on NYSE (EBF), paid $0.250 quarterly dividends in FY2023, and repurchased 64,082 shares under a $40.0 million program with $23.9 million remaining Fiscal Year 2023 Quarterly Stock and Dividend Data | Quarter | High Price | Low Price | Dividends per Share | | :--- | :--- | :--- | :--- | | First | $19.24 | $16.94 | $0.250 | | Second | $22.67 | $16.55 | $0.250 | | Third | $23.44 | $19.81 | $0.250 | | Fourth | $23.48 | $20.55 | $0.250 | - During fiscal year 2023, the company repurchased 64,082 shares of common stock at an average price of $17.46 per share[94] - As of February 28, 2023, $23.9 million remained available under the company's stock repurchase program[94] - The company's 5-year cumulative total shareholder return was 135.05%, outperforming the Russell 2000 (130.92%) but underperforming the S&P 500 (157.71%) for the period ending February 28, 2023[96] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) FY2023 saw 8% net sales growth to $431.8 million, gross profit margin improved to 30.3%, net earnings rose to $47.3 million (aided by a $5.9 million asset disposal gain), and liquidity remained strong with $155.4 million working capital Overview Management addresses challenges like supply channel consolidation, digital obsolescence, and price competition by transforming the product portfolio through technology and acquisitions while managing costs - The company's sales have recovered in fiscal years 2022 and 2023 after being impacted by the COVID-19 pandemic in fiscal year 2021[105] - Key business challenges include the transformation of the product portfolio away from traditional documents, managing production capacity amid industry price competition, and the ongoing consolidation of customers[106][107][108] Critical Accounting Estimates Critical accounting estimates include the Pension Plan (discount rates, asset returns), Goodwill (annual impairment testing), Revenue Recognition (credit losses), and Inventories (obsolescence based on demand) - The discount rate for the Pension Plan obligation increased to 5.00% in FY2023 from 3.10% in FY2022, with each 10 basis point change impacting the pension liability by about $0.53 million[113] - Goodwill is assessed for impairment annually as of December 1, with no impairment charge required for fiscal years 2023 or 2022[116] - Revenue from 'print and store' arrangements, where products are manufactured for future delivery, amounted to $17.1 million in FY2023, up from $14.6 million in FY2022[118] Results of Operations FY2023 net sales grew 8% to $431.8 million, gross profit margin improved to 30.3%, income from operations surged 51.8% to $66.2 million, and net earnings increased to $47.3 million ($1.82 diluted EPS) Consolidated Results of Operations (in thousands) | | 2023 | % of Sales | 2022 | % of Sales | 2021 | % of Sales | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $431,837 | 100.0% | $400,014 | 100.0% | $357,973 | 100.0% | | Cost of goods sold | 300,787 | 69.7% | 285,291 | 71.3% | 254,207 | 71.0% | | Gross profit margin | 131,050 | 30.3% | 114,723 | 28.7% | 103,766 | 29.0% | | SG&A | 70,793 | 16.4% | 71,410 | 17.9% | 68,270 | 19.1% | | Income from operations | 66,153 | 15.3% | 43,584 | 10.9% | 35,901 | 10.0% | | Net earnings | $47,300 | 11.0% | $28,982 | 7.2% | $24,094 | 6.7% | - Net sales for FY2023 increased by 8% year-over-year, driven by $3.3 million from recent acquisitions as well as price and volume increases[121] - Gross profit margin improved from 28.7% in FY2022 to 30.3% in FY2023 due to improved operational efficiencies and pricing adjustments to cover inflationary costs[123] - A $5.9 million gain from the disposal of assets was recognized in FY2023, primarily from the sale of an unused manufacturing facility for $5.8 million[127] - Net earnings for FY2023 were $47.3 million ($1.82 per diluted share), compared to $29.0 million ($1.11 per diluted share) for FY2022, with the increase impacted by higher revenues and a $5.8 million gain from asset disposal, which added $0.17 per share[131] Liquidity and Capital Resources The company maintains strong liquidity with working capital up 21.5% to $155.4 million and $46.8 million cash from operations, no long-term debt, and anticipates funding $3.0-5.0 million in FY2024 capital expenditures from existing cash Working Capital and Cash (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Working Capital | $155,379 | $127,839 | $113,022 | | Cash | $93,968 | $85,606 | $75,190 | Cash Flow Components (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $46,776 | $50,678 | $52,817 | | Net cash used in investing activities | $(11,457) | $(10,052) | $(21,183) | | Net cash used in financing activities | $(26,957) | $(30,210) | $(24,702) | - The company did not renew its Credit Agreement which expired in November 2021 and has had no outstanding long-term debt since August 2019[143] - A contribution of $2.0 million was made to the Pension Plan in fiscal year 2023, with future contributions anticipated to be between $1.0 million and $3.0 million per year[144] - Capital expenditure requirements for fiscal year 2024 are expected to be between $3.0 million and $5.0 million, funded by existing cash flows[146] Quantitative and Qualitative Disclosures about Market Risk The company faces interest rate risk on variable-rate financial instruments, though it had no outstanding debt as of February 28, 2023, and does not use derivatives for trading - The company had no outstanding debt as of February 28, 2023, but would be exposed to interest rate risk if it borrows under a credit facility in the future[149] Controls and Procedures Management concluded disclosure controls and internal control over financial reporting were effective as of February 28, 2023, with a previously identified IT material weakness remediated following a November 2022 ransomware attack - Management concluded that disclosure controls and procedures were effective as of February 28, 2023[153] - A material weakness related to IT controls, which permitted a ransomware attack on November 30, 2022, was identified, but the company has since taken corrective action and remediated the material weakness as of February 28, 2023[158] - Management's assessment of internal control over financial reporting excluded the recently acquired SPM, which constituted less than 1% of consolidated assets and revenues[157] Part III Directors, Executive Compensation, and Corporate Governance Information for Items 10-14, covering directors, executive compensation, and corporate governance, is incorporated by reference from the 2023 Annual Meeting of Shareholders Proxy Statement - Information for Items 10, 11, 12, 13, and 14 is incorporated by reference from the Registrant's Proxy Statement for the 2023 Annual Meeting of Shareholders[165][166][167][168][169] Part IV Exhibits and Financial Statement Schedules This section lists documents filed with the Form 10-K, including an index to Consolidated Financial Statements and various exhibits like corporate governance documents and certifications - This section provides an index to the Consolidated Financial Statements and lists all exhibits filed with the report, including corporate governance documents and executive certifications[171][172][173] Consolidated Financial Statements Reports of Independent Registered Public Accounting Firm CohnReznick LLP issued unqualified opinions on the consolidated financial statements and the effectiveness of internal control over financial reporting for the year ended February 28, 2023 - CohnReznick LLP issued an unqualified opinion, stating the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2023[182] - The firm also issued an unqualified opinion on the effectiveness of the Company's internal control over financial reporting as of February 28, 2023[189] Consolidated Financial Statements Tables Consolidated financial statements show total assets of $393.8 million and shareholders' equity of $331.4 million as of February 28, 2023, with FY2023 net sales of $431.8 million and net earnings of $47.3 million Consolidated Balance Sheet Highlights (in thousands) | | Feb 28, 2023 | Feb 28, 2022 | | :--- | :--- | :--- | | Total current assets | $196,626 | $165,029 | | Total assets | $393,835 | $368,844 | | Total current liabilities | $41,247 | $37,190 | | Total liabilities | $62,403 | $65,029 | | Total shareholders' equity | $331,432 | $303,815 | Consolidated Statement of Operations Highlights (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net sales | $431,837 | $400,014 | $357,973 | | Gross profit | $131,050 | $114,723 | $103,766 | | Income from operations | $66,153 | $43,584 | $35,901 | | Net earnings | $47,300 | $28,982 | $24,094 | | Diluted EPS | $1.82 | $1.11 | $0.93 | Consolidated Statement of Cash Flows Highlights (in thousands) | | 2023 | 2022 | 2021 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $46,776 | $50,678 | $52,817 | | Net cash used in investing activities | $(11,457) | $(10,052) | $(21,183) | | Net cash used in financing activities | $(26,957) | $(30,210) | $(24,702) | | Net change in cash | $8,362 | $10,416 | $6,932 | | Cash at end of period | $93,968 | $85,606 | $75,190 | Notes to Consolidated Financial Statements Notes detail accounting policies, acquisitions (SPM in FY2023), benefit plans (pension 99% funded), and an effective tax rate of 27.2% for FY2023, highlighting key financial details - The company operates as a single reportable segment, with all assets located in the United States[222] - On November 30, 2022, the company acquired School Photo Marketing (SPM) for $8.8 million, adding $3.1 million to goodwill[259] - The company's noncontributory defined benefit pension plan covered approximately 13% of employees, and as of year-end, the plan had a funded status deficit of $0.6 million, a significant improvement from a $5.7 million deficit in the prior year[303][313] - The effective income tax rate was 27.2% for FY2023, compared to 30.9% for FY2022 and 27.6% for FY2021[317] - The company has a significant concentration of risk with one third-party vendor, from which it purchased 50% of its materials in fiscal year 2023[331]