# Ennis, Inc.: Form 10-Q for the period ended Aug 31, 2021

- Company: [Ennis, Inc.](/companies/ebf.md) (CIK 33002)
- Form: 10-Q
- Filed: 2021-10-01
- Accepted by EDGAR: Oct 1, 2021, 15:40 ET
- Period: 2021-08-31
- Accession: 0000950170-21-001964
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/33002/000095017021001964/ebf-20210831.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/33002/000095017021001964/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2021-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2021-06-01 to 2021-08-31 | $100.5m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2021-03-01 to 2021-08-31 | $197.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2021-06-01 to 2021-08-31 | $71.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2021-03-01 to 2021-08-31 | $139.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2021-06-01 to 2021-08-31 | $28.9m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2021-03-01 to 2021-08-31 | $58.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2021-06-01 to 2021-08-31 | $18.1m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2021-03-01 to 2021-08-31 | $37.0m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2021-06-01 to 2021-08-31 | $10.8m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2021-03-01 to 2021-08-31 | $21.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2021-06-01 to 2021-08-31 | $2.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2021-03-01 to 2021-08-31 | $4.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2021-06-01 to 2021-08-31 | $3.2m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2021-03-01 to 2021-08-31 | $6.3m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2021-06-01 to 2021-08-31 | $7.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2021-03-01 to 2021-08-31 | $14.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2021-06-01 to 2021-08-31 | $0.29 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2021-03-01 to 2021-08-31 | $0.57 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2021-06-01 to 2021-08-31 | $0.29 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2021-03-01 to 2021-08-31 | $0.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2021-06-01 to 2021-08-31 | 26,170,396 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2021-03-01 to 2021-08-31 | 26,146,421 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2021-03-01 to 2021-08-31 | $24.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2021-03-01 to 2021-08-31 | $2.1m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2021-03-01 to 2021-08-31 | $12.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2021-03-01 to 2021-08-31 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2021-08-31 | $82.1m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2021-08-31 | $161.9m | us-gaap:AssetsCurrent |
| Total assets | at 2021-08-31 | $373.2m | us-gaap:Assets |
| Current liabilities | at 2021-08-31 | $40.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2021-08-31 | $67.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2021-08-31 | $305.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 42,089 characters.

### Cautionary Note Regarding Forward-Looking Statements

*The following “Management’s Discussion and Analysis of Financial Condition and Results of Operations” should be read together with the unaudited consolidated financial statements and related notes of Ennis, Inc. (collectively with its subsidiaries, the “Company,” “Registrant,” “Ennis,” or “we,” “us,” or “our”), included in Part 1, Item 1 of this report, and with the audited consolidated financial statements and the related notes of the Company included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021.*

*All of the statements in this report, other than historical facts, are forward-looking statements, including, without limitation, the statements made in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As a general matter, forward-looking statements are those focused upon anticipated events or trends, expectations, and beliefs relating to matters that are not historical in nature. The words “could,” “should,” “feel,” “anticipate,” “aim,” “preliminary,” “expect,” “believe,” “estimate,” “intend,” “intent,” “plan,” “will,” “foresee,” “project,” “forecast,” or the negative thereof or variations thereon, and similar expressions identify forward-looking statements.*

*The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for these forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that forward-looking statements are subject to known and unknown risks, uncertainties and other factors relating to its operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements.*

*These statements reflect the current views and assumptions of management with respect to future events. The Company does not undertake, and hereby disclaims, any duty to update these forward-looking statements, even though its situation and circumstances may change in the future. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date of this report. The inclusion of any statement in this report does not constitute an admission by the Company or any other person that the events or circumstances described in such statement are material.*

*We believe these forward-looking statements are based upon reasonable assumptions. All such statements involve risks and uncertainties, and as a result, actual results could differ materially from those projected, anticipated or implied by these statements. Such forward-looking statements involve known and unknown risks, including but not limited to: general economic, business and labor conditions and the potential impact on our operations; our ability to implement our strategic initiatives and control our operational costs; dependence on a limited number of key suppliers; our ability to recover the rising cost of raw materials and other costs (i.e., energy, freight, labor, benefit costs, etc.) in markets that are highly price competitive and volatile; uninsured losses, including those from natural disasters, catastrophes, pandemics, theft or sabotage; the impact of the novel coronavirus (COVID-19) pandemic or future pandemics on the U.S. and local economies, our business operations, our workforce, our supply chain and our customer base; our ability to timely or adequately respond to technological changes in the industry; the impact of the Internet and other electronic media on the demand for forms and printed materials; the impact of foreign competition, tariffs, trade regulations and import restrictions; customer credit risk; competitors’ pricing strategies; a decline in business volume and profitability could result in an impairment in our reported goodwill negatively impacting our operational results; our ability to retain key management personnel; our ability to identify, manage or integrate acquisitions; and changes in government regulations including measures intended to minimize the impact of COVID-19. In addition to the factors indicated above, you should carefully consider the risks described in and incorporated by reference herein and in the risk factors in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021 before making an investment in our common stock.*

### Overview

Ennis, Inc. (formerly Ennis Business Forms, Inc.) (collectively with its subsidiaries, “the “Company,” “Registrant,” Ennis,” or “we,” “us,” or “our”) was organized under the laws of Texas in 1909. We and our subsidiaries print and manufacture a broad line of business forms and other business products. We distribute business products and forms throughout the United States primarily through independent distributors. This distributor channel encompasses independent print distributors, commercial printers, direct mail, fulfillment companies, payroll and accounts payable software companies, and advertising agencies, among others. We also sell products to our competitors, from time to time, to satisfy their customers’ needs.

For a discussion regarding the impact of the ongoing novel coronavirus (COVID-19) pandemic on our business, please see *Business Challenges—COVID-19 Pandemi*c and *Results of Operations,* below.

### Business Overview

Our management believes we are the largest provider of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders to independent distributors in the United States.

We are in the business of manufacturing, designing, and selling business forms and other printed business products primarily to distributors located in the United States. We operate 57 manufacturing plants throughout the United States in 20 strategically located states as one reportable segment. Approximately 92% of the business products we manufacture are custom and semi-custom products, constructed in a wide variety of sizes, colors, number of parts, and quantities on an individual job basis, depending upon the customers’ specifications.

The products we sell include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, Specialized Printed Forms®, 360º Custom LabelsSM, ColorWorx®, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Ad ConceptsSM, FormSource LimitedSM, Star Award Ribbon Company®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphics®, Calibrated Forms®, PrintXcel®, Printegra®, Falcon Business FormsSM, Forms ManufacturersSM, Mutual Graphics®, TRI-C Business FormsSM, Major Business SystemsSM, Independent PrintingSM, Hoosier Data Forms®, Hayes Graphics®, Wright Business GraphicsSM, Wright 360SM, Integrated Print & GraphicsSM, the Flesh CompanySM, Impressions DirectSM, Ace FormsSM, and AmeriPrintSM. We also sell the Adams McClure® brand (which provides Point of Purchase advertising for large franchise and fast food chains as well as kitting and fulfillment); the Admore®, Folder Express®, and Independent Folders® brands (which provide presentation folders and document folders); Ennis Tag & LabelSM (which provides custom printed, high performance labels and custom and stock tags); Allen-Bailey Tag & LabelSM, Atlas Tag & Label®, Kay Toledo Tag®, and Special Service Partners® (SSP) (which provides custom and stock tags and labels); Trade Envelopes®, Block Graphics®, Wisco®, and National Imprint Corporation® (which provide custom and imprinted envelopes) and Northstar® and General Financial Supply® (which provide financial and security documents); InfosealSM and PrintXcel® (which provide custom and stock pressure seal documents). We sell predominantly through independent distributors, as well as to many of our competitors. Northstar Computer Forms, Inc., one of our wholly-owned subsidiaries, also sells direct to a small number of customers, generally large banking organizations (where a distributor is not acceptable or available to the end-user). Adams McClure, LP, a wholly-owned subsidiary, also sells direct to a small number of customers, where sales are generally through advertising agencies.

The printing industry generally sells its products either predominantly to end users, a market dominated by a few large manufacturers, such as R.R. Donnelley and Sons, Staples, Inc., Standard Register Co. (a subsidiary of Taylor Corporation), and Cenveo, Inc., or, like the Company, through a variety of independent distributors and distributor groups. While it is not possible, because of the lack of adequate public statistical information, to determine the Company’s share of the total business products market, management believes the Company is the largest producer of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders in the United States distributing primarily through independent distributors.

There are a number of competitors that operate in this segment, ranging in size from single employee-owned operations to multi-plant organizations. We believe our strategic locations and buying power permit us to compete on a favorable basis within the distributor market on competitive factors, such as service, quality, and price.

Distribution of business forms and other business products throughout the United States is primarily done through independent distributors, including business forms distributors, resellers, direct mail, commercial printers, payroll and accounts payable software companies, and advertising agencies.

Raw materials principally consist of a wide variety of weights, widths, colors, sizes, and qualities of paper for business products purchased primarily from one major supplier at favorable prices based on the volume of business.

Business products usage in the printing industry is generally not seasonal. General economic conditions and contraction of the traditional business forms industry are the predominant factors in quarterly volume fluctuations.

### Recent Acquisitions

We have completed a number of acquisitions in recent years. In the prior year on December 31, 2020, we acquired the assets of Infoseal LLC (“Infoseal”) in Roanoke, Virginia. The acquisition of Infoseal, which prior to the acquisition generated approximately $19.2 million in sales for its fiscal year ended December 31, 2020, creates additional capabilities and expertise to our product offering including our existing VersaSeal pressure seal product line.

On June 1, 2021, we acquired the assets and business of AmeriPrint in Harvard, Illinois. The acquisition of Ameriprint, which prior to the acquisition generated approximately $6.5 million in sales for its fiscal year ended December 31, 2020, brings added capabilities and expertise to our expanding product offering including barcoding and variable imaging.

### Our Business Challenges

Our industry is currently experiencing consolidation of traditional supply channels, product obsolescence, paper supplier capacity adjustments, and increased pricing and potential supply allocations due to demand/supply curve imbalance. Technology advances have made electronic distribution of documents, internet hosting, digital printing and print-on-demand valid, cost-effective alternatives to traditional custom-printed documents and customer communications. Improved equipment has become more accessible to our competitors due to the continued low interest rate environment. We face highly competitive conditions throughout our supply chain in an already over-supplied, price-competitive print industry. The challenges of our business include the following:

**COVID-19 Pandemic –** The global spread of the novel strain of COVID-19 has significantly impacted health and economic conditions throughout the United States and the world, including the markets in which we operate. The U.S. economy continues to be significantly impacted by the COVID-19 pandemic and parts of the economy have started to re-open as vaccinations become more prevalent, but remain subject to ongoing surges and local shutdowns, creating a very fluid economic environment. Current governmental statistics have indicated an increase in economic activity that had previously been curtailed due to the COVID-19 pandemic and efforts to contain it. These statistics provide evidence that various sectors continue to improve, while others have not, which we believe was reflected in our sequential sales increase and improvements in our gross profit margin and operational margin during the first quarter. While the impacts of the pandemic have been significant, our results of operations were within our forecasted parameters for the period ended August 31, 2021.

The following is a summary of our recent and anticipated actions in response to COVID-19 and its impact on our business.

*Cash/Liquidity:*

We believe our strong liquidity position will help us mitigate the ongoing adverse impacts of COVID-19. On August 31, 2021, we had $82.1 million in cash, in addition to $99.4 million available under our credit facility, if needed. During the period, our cash position increased by $6.9 million and our working capital position increased by $8.4 million from February 28, 2021. In addition, our liquidity and debt ratios have remained stable throughout the pandemic with our current ratio (calculated by dividing our current assets by our current liabilities) of 4.0 at August 31, 2021 and 4.20 at February 28, 2021, and our quick ratio (calculated by dividing our current assets less inventories by our current liabilities) of 3.01 at August 31, 2021 and 3.29 at February 28, 2021. Our net debt to equity ratio (after application of cash) -.05 at August 31, 2021 and -.04 at February 28, 2021.

*Receivable and Inventory Management:*

We continue to closely monitor and manage our outstanding trade receivables and inventories. During the current quarter, our days’ sales in our receivables decreased from 39 days to 35 days, while our days’ sales of inventory increased from 34 to 37 days. The Company continues to monitor incoming orders and is adjusting its raw material purchases accordingly.

*Supply Chain:*

To date, COVID-19 has not materially impacted, nor do we currently expect it to materially impact, the supply chain for the products we sell. Most of our products are sourced domestically from suppliers deemed “essential” by the government, and therefore currently remain in operation. However, if one or more of our major suppliers are negatively impacted by the COVID-19 pandemic, through plant closures, deteriorating financial condition, or otherwise, it could adversely affect our operational results and financial condition.

*Cost Savings:*

COVID-19 has severely impacted global economic activity, including the printing industry in the United States. In response to the sales impact of the COVID-19 pandemic, we made modifications to our cost structure by reducing employee cost, ceasing operations at an under-utilized facility, as well as exiting two facilities with expiring leases and moving production to our other facilities. We are in the process of consolidating three underperforming manufacturing facilities into existing locations with excess capacity to reduce future costs and improve our operational efficiency. We will continue to monitor incoming order volume so that we can proactively adjust our costs accordingly. We believe the modifications to our cost structure in response to the sales impact of the COVID-19 pandemic will not materially impact our ability to service increased customer demand as economic conditions improve. During the six months ended August 31, 2021, our gross profit margin improved to 29.4% from the prior year’s period of 27.9% and our operating margin improved to 10.8% from the prior year’s period of 8.4%.

*Capital Expenditures:*

We continue to make capital expenditures for operational maintenance purposes, as may be required. Additionally, we will carefully review and make new capital expenditures for equipment to the extent such expenditures make economic sense by improving our operations and not jeopardizing our strong liquidity position.

There continue to be many uncertainties regarding the impact of the COVID-19 pandemic, including the scope of scientific and health issues. We continue to closely monitor the impact of the COVID-19 pandemic, including emerging variants, on all aspects of our business, including how it is affecting our employees, customers, supply chain and distribution network. The overall magnitude of the impact of the pandemic on our operating and financial results remains uncertain and will largely depend on the duration of the pandemic and the measures implemented in response, as well as the effect on our customers and suppliers. Given these factors, we are unable to reliably forecast the ultimate impact of COVID-19 on our business, including due to factors discussed under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2021. For further information, please see “Cautionary Note Regarding Forward Looking Statements,” above and “Risk Factors” contained within our Annual Report on Form 10-K for the fiscal year ended February 28, 2021.

**Transformation of our portfolio of products –** While traditional business documents are essential in order to conduct business, many are being replaced through the use of cheaper paper grades or imported paper, or devalued with advances in digital technologies, causing steady declines in demand for a portion of our current product line. In addition, the impact of COVID-19 on the speed of this transformation is unknown, but it is expected to accelerate the decline for some of our products. Transforming our product offerings in order to continue to provide innovative, valuable solutions through lower labor and fixed charges to our customers on a proactive basis will require us to make investments in new and existing technology and to develop key strategic business relationships, such as print-on-demand services and product offerings that assist customers in their transition to digital business environments. In addition, we will continue to look for new market opportunities and niches through acquisitions, such as the addition of our envelope offerings, tag offerings, folder offerings, healthcare wristbands, specialty packaging, direct mail, pressure seal products, secure document solutions, innovative in-mold label offerings and long-run integrated products with high color web printing, which provide us with an opportunity for growth and differentiate us from our competition. The ability to make investments in new and existing technology and/or to acquire new market opportunities through acquisitions is dependent on the Company’s liquidity and operational results. While currently the pandemic has not materially impacted our liquidity and it is not currently expected to, a protracted delay in the economy recovering could have a negative impact on our continued ability to make the aforementioned investments or to consummate acquisitions.

**Production capacity and price competition within our industry –** Changes in the value of the U.S. dollar can have an impact on the pricing and supply of paper. The weakening of the U.S. dollar will usually result in the dissipation of any pricing advantage that foreign imports have over domestic suppliers, which typically results in lower levels of imported papers and an increase in domestic exports. With increased pricing power, domestic paper producers can better control the supply of paper by eliminating capacity or changing the products produced on their large paper machines. The strengthening of the U.S. dollar usually has the opposite effect: more cheap imported paper; less domestic exports; and lower pricing power in the hands of domestic paper producers. Domestic paper suppliers typically seek to balance supply and demand, including by (if possible) taking capacity out of the market, whether by taking production off-line or switching production to alternative paper products. Generally, if mills are running at high capacity, suppliers are able to raise prices.

Paper production declined last year due to the pandemic and, as the economy improved, increased demand initially was satisfied with existing inventory at the paper mills. While paper mills now are operating at a very high capacity, they are basically producing to fill orders rather than stock inventory, which is contributing to the tight market in some grades of paper. Paper prices have also increased due to global logistics issues that have delayed and reduced imports that have typically filled gaps in domestic supply. While the availability of paper in the North American market is very low, our strong vendor relationship with our paper supplier allows us to meet customer demand for their business product needs. We have been adjusting our pricing to cover paper inflation during the year, but the impact of inflation with most of our other vendors, as well as the labor market, has had a slight impact on gross profit margin. We anticipate additional pricing adjustments to cover all aspects of our supply chain and our labor force to maintain our gross profit margins at their historical levels. As such, pricing during the second half of fiscal 2022 is currently expected to increase.

As the economy has improved, demand has increased in 2021 for coated and uncoated freesheet papers which has reduced the excess inventory in the market along with the reduction in supply from the closing of several paper mills. Regardless of these factors, many of which are cyclical, we continue to believe paper pricing will remain in a range which will not unfavorably impact our margins over the long term. Additionally, the possibility of paper shortages in the market is not a major concern due to our primary material supplier’s commitment to the Company. Consistent with our historical practice, we intend to continue to focus on effectively managing and controlling our product costs through the use of forecasting, production and costing models, as well as working closely with our domestic suppliers to manage our procurement and logistics costs, in order to minimize effects on our operational results. In addition, we will continue to look for ways to reduce and leverage our fixed costs as we consolidate plants where leases expire and sell unused real estate where we have the opportunity to relocate the business to another facility.

**Continued consolidation of our customers –** Our customers are distributors, many of which are consolidating or are being acquired by competitors. We continue to maintain a majority of the business we have had with our customers historically, but it is possible that these consolidations and acquisitions, which we expect to continue in the future, ultimately will impact our margins and sales.

### Critical Accounting Policies and Estimates

In preparing our consolidated financial statements, we are required to make estimates and assumptions that affect the disclosures and reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our estimates and judgments on an ongoing basis, including those related to allowance for doubtful receivables, inventory valuations, property, plant and equipment, intangible assets, pension plan obligations, accrued liabilities and income taxes. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We believe our accounting policies related to the aforementioned items are the most critical due to their effect on our more significant estimates and judgments used in preparation of our consolidated financial statements. For additional information, reference is made to the Critical Accounting Policies and Estimates section of our Annual Report on Form 10-K for the fiscal year ended February 28, 2021.

### Results of Operations

The discussion that follows provides information which we believe is relevant to an understanding of our results of operations and financial condition. The discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto, which are incorporated herein by reference. The operating results of the Company for the three and six months ended August 31, 2021 and the comparative period for 2020 are set forth in the unaudited consolidated financial information included in the tables below.

### Consolidated Summary

*Unaudited Consolidated Statements of*

| Operations - Data (in thousands) | Three Months Ended August 31, 2021 |  | 2020 |  | Six Months Ended August 31, 2021 |  | 2020 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $100,451 | 100.0% | $86,612 | 100.0% | $197,381 | 100.0% | $175,608 | 100.0% |
| Cost of goods sold | 71,550 | 71.2 | 61,457 | 71.0 | 139,294 | 70.6 | 126,546 | 72.1 |
| Gross profit margin | 28,901 | 28.8 | 25,155 | 29.0 | 58,087 | 29.4 | 49,062 | 27.9 |
| Selling, general and administrative | 18,095 | 18.0 | 16,535 | 19.1 | 37,010 | 18.8 | 34,658 | 19.7 |
| (Gain) loss from disposal of assets | 1 | — | (300) | (0.4) | (276) | (0.1) | (412) | (0.2) |
| Income from operations | 10,805 | 10.8 | 8,920 | 10.3 | 21,353 | 10.8 | 14,816 | 8.4 |
| Other income (expense) | (148) | (0.1) | (243) | (0.3) | (262) | (0.1) | (484) | (0.3) |
| Earnings before income taxes | 10,657 | 10.6 | 8,677 | 10.0 | 21,091 | 10.7 | 14,332 | 8.1 |
| Provision for income taxes | 3,197 | 3.2 | 2,256 | 2.6 | 6,327 | 3.2 | 3,726 | 2.1 |
| Net earnings | $7,460 | 7.4% | $6,421 | 7.4% | $14,764 | 7.5% | $10,606 | 6.0% |

24

### Three months ended August 31, 2021 compared to three months ended August 31, 2020

*Net Sales.* Our net sales were $100.5 million for the quarter ended August 31, 2021, compared to $86.6 million for the same quarter in the prior year, an increase of $13.9 million, or 16.0%. Our net sales increased on a sequential quarter basis as well, $3.5 million or 3.6% from $96.9 million for the quarter ended May 31, 2021 to $100.5 million for the current quarter. While our revenues continue to be impacted by the COVID-19 pandemic, some of our customers are seeing sales return to normalized levels. Infoseal, our acquisition in January of last fiscal year and AmeriPrint, our acquisition from June 1, 2021, added $6.7 million in sales for the current quarter.

*Cost of Goods Sold and Gross Profit Margin.* Our cost of goods sold increased $10.1 million, or 16.4%, from $61.5 million for the three months ended August 31, 2020 to $71.6 million for the three months ended August 31, 2021. Our gross profit margin was $28.9 million for the quarter ended August 31, 2021 compared to $25.2 million for the same quarter in the prior year. Our second quarter gross profit margin percentage slightly decreased from 29.0% in 2020 to 28.8% in 2021 due primarily to higher inflationary factors.

*Selling, general, and administrative expense.* For the three months ended August 31, 2021, our selling, general, and administrative (“SG&A”) expenses were $18.1 million compared to $16.5 million for the three months ended August 31, 2020, an increase of $1.6 million, or 9.4%. As a percentage of net sales, SG&A expenses for the current quarter were 18.0% and 19.1% for the three months ended August 31, 2021 and August 31, 2020, respectively. Our acquisition of Infoseal and AmeriPrint impacted our SG&A expenses by approximately $0.7 million. As part of our on-going corporate strategy, we continue to look for ways to reduce and more fully leverage our SG&A expenses.

*Gain from disposal of assets.* The $0.3 million net gain from disposal of assets during the prior year quarter is primarily attributed to the sale of underutilized land and buildings. Remaining product from these facilities was transitioned to another Company facility.

*Income from operations.* Primarily due to factors described above, our income from operations for the three months ended August 31, 2021 was $10.8 million, or 10.8% of net sales, as compared to $8.9 million, or 10.3% of net sales, for the three months ended August 31, 2020 and increased on a sequential quarter basis as well from $10.5 million for the quarter ended May 31, 2021.

*Other expense.* Other expense was $0.1 million for the three months ended August 31, 2021 compared to expense of $0.2 million for the three months ended August 31, 2020. This decrease was primarily due to a decrease in our pension expense of $0.1 million over the comparable quarter.

*Provision for income taxes.* Our effective tax rate was 30.0% for the three months ended August 31, 2021 as compared to 26.0% for the three months ended August 31, 2020. The primary reason for the increase in the effective tax rate is permanent non-deductible expense resulting from probable distributions this year from our deferred compensation plan which was terminated last fiscal year.

*Net earnings.* Net earnings, due to the factors above, were $7.5 million for the three months ended August 31, 2021 as compared to $6.4 million for the comparable quarter in the prior year, an increase of $1.0 million. Net earnings per diluted share for the three months ended August 31, 2021 was $0.29, compared to $0.25 for the same quarter in the prior year. Our acquisition of Infoseal and AmeriPrint added $0.02 to our diluted earnings per share.

### Six months ended August 31, 2021 compared to six months ended August 31, 2020

*Net Sales.* Our net sales were $197.4 million for the six-month period ended August 31, 2021, compared to $175.6 million for same period last year, or an increase of 12.4%. While our revenues continue to be impacted by the COVID-19 pandemic, some of our customers are seeing sales return to normalized levels. Infoseal, our acquisition in January of last fiscal year and AmeriPrint our acquisition in June 1, 2021, added $11.9 million in sales during the six months ended August 31, 2021.

*Cost of Goods Sold and Gross Profit Margin.* Our cost of goods sold was $139.3 million for the six months ended August 31, 2021, compared to $126.5 million for the same period last year, a increase of $12.8 million, or 10.1%. Our margin was $58.1 million for the six-month period ended August 31, 2021, or 29.4%. In response to the sales impact of the COVID-19 pandemic, we made modifications to our cost structure by reducing employee cost, ceasing operations at an under-utilized facility, as well as exiting two facilities with expiring leases and moving production to our other facilities. These modifications to our cost structure resulted in improvements to our gross profit margin from 27.9% for the same six-month period last year.

*Selling, general, and administrative expense.* Our SG&A expenses were $37.0 million for the six months ended August 31, 2021, compared to $34.7 million for the same period last year, or an increase of 6.8%. As a percentage of sales, the SG&A expenses were 18.8% and 19.7% for the six months ended August 31, 2021 and August 31, 2020, respectively. As part of our ongoing corporate strategy, we continue to look for ways to reduce and more fully leverage our SG&A expenses. During the period, the Board approved a change to our “Long-Term Incentive Equity Awards” program to a three-year performance period from a one-year performance period. A bridge award of restricted stock was granted during the transition and resulted in the recognition of an additional $0.8 million in restricted stock expense. Our acquisition of Infoseal and AmeriPrint impacted our SG&A expenses by approximately $1.3 million.

*Gain from disposal of assets.* The $0.3 million net gain from disposal of assets during the six months ended August 31, 2021 is primarily attributed to the sale of a previously held-for-sale facility that had transferred its operations to another facility. The $0.4 million net gain from disposal of assets during the six months ended August 31, 2020 is primarily attributed to the sale of manufacturing underutilized equipment, land and buildings.

*Income from operations.* Our income from continuing operations for the six months ended August 31, 2021 was $21.4 million, or 10.8% of sales, as compared to $14.8 million, or 8.4% of sales, for the six months ended August 31, 2020.

*Other expense.* Other expense for the six months ended August 31, 2021 was $0.3 million as compared to $0.5 million expense for the six months ended August 31, 2020. This decrease was primarily due to the decrease in pension expense for the current fiscal year.

*Provision for income taxes.* Our effective tax rate was 30.0% for the six months ended August 31, 2021 as compared to 26.0% for the six months ended August 31, 2020. The primary reason for the increase in the effective tax rate is permanent non-deductible expense resulting from probable distributions this year from our deferred compensation plan which was terminated last fiscal year.

*Net earnings.* Net earnings were $14.8 million for the six months ended August 31, 2021 as compared to $10.6 million for the comparable period last year, an increase of $4.2 million. Net earnings per diluted share for the six months ended August 31, 2021 was $0.57, compared to $0.41 for the same six-month period last year. Our acquisition of Infoseal and AmeriPrint added $0.04 to our diluted earnings per share.

### Liquidity and Capital Resources

We rely on our cash flows generated from operations and the borrowing capacity under our credit facility extended pursuant to our Second Amended and Restated Credit Agreement, as amended from time to time (the “Credit Facility”), to meet cash requirements of our business. The primary cash requirements of our business are payments to vendors in the normal course of business, capital expenditures, debt repayments and related interest payments, contributions to our noncontributory defined benefit retirement plan, which covers approximately 12% of our aggregate employees (the “Pension Plan”), and the payment of dividends to our shareholders. We expect to generate sufficient cash flows from operations, supplemented by our Credit Facility as necessary, to cover our operating and capital requirements for the foreseeable future.

*(Dollars in thousands)*

|  | August 31, 2021 | February 28, 2021 |
| --- | ---: | ---: |
| Working capital | $121,426 | $113,022 |
| Cash | $82,101 | $75,190 |

26

***Working Capital.*** Our working capital increased $8.4 million or 7.4%, from $113.0 million at February 28, 2021 to $121.4 million at August 31, 2021. Our current ratio, calculated by dividing our current assets by our current liabilities, decreased from 4.2 to 1.0 at February 28, 2021 to 4.0 to 1.0 at August 31, 2021. The increase in working capital primarily reflects the increase in cash and inventory partially offset by the increase in our accounts payable.

*(Dollars in thousands)*

|  | Six months ended August 31, 2021 | 2020 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $24,507 | $28,154 |
| Net cash used in investing activities | $(5,205) | $(353) |
| Net cash used in financing activities | $(12,391) | $(12,153) |

***Cash flows from operating activities.*** Cash provided by operating activities decreased from $28.2 million for the six months ended August 31, 2020 to $24.5 million for the six months ended August 31, 2021. Our decreased operational cash flows in comparison to the comparable period in the prior year was primarily the result of a $8.5 million increase in our accounts receivable and a $7.5 million increase in our inventories. These increases were offset by a $4.2 million increase in our operational earnings, in addition to a $7.2 million increase in our accounts payable and accrued expenses.

***Cash flows from investing activities.*** Cash used in investing activities increased from $0.4 million cash used to $5.2 million used for the six months ended August 31, 2020 and August 31, 2021, respectively. This was primarily due to the $3.9 million cost to acquire businesses and additional capital expenditures during the six months ended August 31, 2021 as compared to the six months ended August 31, 2020.

***Cash flows from financing activities.*** We used $0.2 million less cash from financing activities during the six months ended August 31, 2021 compared to the same period in the prior year. The decrease in cash used during the six months ended August 31, 2021 compared to the six months ended August 31, 2020 resulted from no common stock being repurchased under our stock repurchase program in the current period compared to $0.4 million to repurchase our common stock during the six months ended August 31, 2020.

***Credit Facility.*** The Company’s Credit Facility, pursuant to which a credit facility has been extended to the Company until November 11, 2021, provides the Company and its subsidiaries with up to $100.0 million in revolving credit, as well as a $20.0 million sublimit for the issuance of letters of credit and a $15.0 million sublimit for swing-line loans. Under the Credit Facility, the Company or any of its subsidiaries can request up to three increases in the aggregate commitments in an aggregate amount not to exceed $50.0 million. The terms and conditions of the Credit Facility impose certain restrictions on our ability to incur additional debt, make capital expenditures, acquisitions and asset dispositions, as well as impose other customary covenants, such as requiring that our fixed charge coverage ratio not be less than 1.25:1.00 and our total leverage ratio not exceed 3.00:1.00. The Company may make dividends or distributions to shareholders so long as (i) no event of default has occurred and is continuing and (ii) the Company’s net leverage ratio both before and after giving effect to any such dividend or distribution is equal to or less than 2.50:1.00. All calculations are made based on U.S. Generally Accepted Accounting Principles existing at the time the Credit Facility was entered into. As of August 31, 2021, the Company was in compliance with all terms and conditions of the Credit Facility.

The Credit Facility bears interest at the LIBOR rate plus a spread ranging from 1.85% to 2.5%. The rate is determined by our fixed charge coverage ratio of total funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). As of August 31, 2021, the Company had no outstanding debt, and the Company had $0.6 million outstanding under standby letters of credit arrangements, leaving approximately $99.4 million available in borrowing capacity under the Credit Facility. The Credit Facility is secured by substantially all of our assets (other than real property), as well as all capital securities of each of our subsidiaries.

It is anticipated that our cash and funds from operating cash flows will be sufficient to fund anticipated future expenditures. We are considering the nonrenewal of the facility or renewing with a smaller line of credit limit during the third quarter.

***Pension Plan –*** We are required to make contributions to our Pension Plan. These contributions are required under the minimum funding requirements of the Employee Retirement Income Security Act of 1974 (“ERISA”). Due to the enactment of the Highway and Transportation Funding Act (HATFA) in August 2014, which effectively raises the discount rates mandated for determining the value of a plan’s benefit liability and annual cost of accruals, our minimum required contribution to the Pension Plan is zero for the Pension Plan year ending February 28, 2022. Assuming a stable funding status, we would expect that our future contributions to be between $1.0 million and $3.0 million per year. However, changes in actual investment returns or in discount rates could change this amount significantly. There was no contribution required or made to our Pension Plan in fiscal year 2021. As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status, associated liabilities recorded and future required minimum contributions. At August 31, 2021, we had an unfunded pension liability recorded on our balance sheet of $6.3 million.

***Inventories –*** We believe our inventory levels are sufficient to satisfy our customer demands and we anticipate having adequate sources of raw materials to meet future business requirements. We have long-term contracts in effect with paper suppliers that govern prices, but do not require minimum purchase commitments. Certain of our rebate programs do, however, require minimum purchase volumes. Management anticipates meeting the required volumes or to be able to get the required volumes temporarily waived given the COVID-19 pandemic.

***Capital Expenditures –*** We expect our capital requirements for our current fiscal year, exclusive of capital required for possible acquisitions, will be within our historical levels of between $3.0 million and $5.0 million. For the quarter, we have spent approximately $2.1 million on capital expenditures. We expect to fund these expenditures through existing cash flows.

***Contractual Obligations –*** There have been no significant changes in our contractual obligations since February 28, 2021 that have, or are reasonably likely to have, a material impact on our results of operations or financial condition.

## Market risk

As filed, 827 characters.

### Market Risk

### Interest Rates

From time to time, we are exposed to interest rate risk on short-term and long-term financial instruments carrying variable interest rates. We may from time to time utilize interest rate swaps to manage overall borrowing costs and reduce exposure to adverse fluctuations in interest rates. We do not use derivative instruments for trading purposes. While we had no variable rate financial instruments outstanding at August 31, 2021 given no outstanding debt under the Credit Facility, we will be exposed to interest rate risk if we borrow under the Credit Facility in the future.

This market risk discussion contains forward-looking statements. Actual results may differ materially from this discussion based upon general market conditions and changes in domestic and global financial markets.

## Controls and procedures

As filed, 2,155 characters.

**Evaluation of Disclosure Controls and Procedures.** A review and evaluation were carried out under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of the design and operation of our “disclosure controls and procedures” (as such term is defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this Quarterly Report on Form 10-Q, pursuant to Exchange Act Rules 13a-15 and 15d-15. Based upon that review and evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures as of August 31, 2021 are effective to ensure that information required to be disclosed by us in the reports filed or submitted by us under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and include controls and procedures designed to ensure that information required to be disclosed by us in such reports is accumulated and communicated to our management, including our principal executive and financial officers as appropriate to allow timely decisions regarding required disclosure. Due to the inherent limitations of control systems, not all misstatements may be detected. Those inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple errors or mistakes.

Additionally, controls could be circumvented by the individual acts of some persons or by collusion of two or more people. Our controls and procedures can only provide reasonable, not absolute, assurance that the above objectives have been met.

There have been no changes in our internal control over financial reporting (as defined in Rule 13a–15(f) or Rule 15d–15(f) of the Exchange Act) that occurred during the six months ended August 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 151 characters.

There have been no material changes in our Risk Factors as previously discussed in our Annual Report on Form 10-K for the year ended February 28, 2021.

Filed Oct 1, 2021.
Source: SEC EDGAR, the filing index for accession 0000950170-21-001964. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.