Ennis, Inc.: Form 10-Q for the period ended Nov 30, 2016

Overview

Ennis, Inc. (formerly Ennis Business Forms, Inc.) was organized under the laws of Texas in 1909. Ennis, Inc. and its 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 dealers. 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 many of our competitors to satisfy their customer’s needs.

On April 1, 2016, we entered into a Unit Purchase Agreement (the “Initial Purchase Agreement”) with Alstyle Operations, LLC (the “Initial Buyer”) and, for the limited purpose set forth in the Initial Purchase Agreement, Steve S. Hong. Under the Initial Purchase Agreement, the Initial Buyer agreed to acquire Alstyle Apparel, LLC and its subsidiaries (the “Apparel Segment”) from us for an aggregate purchase price of $88.0 million, consisting of $76.0 million in cash to be paid at closing, subject to a working capital adjustment, and an additional $12.0 million to be paid pursuant to a capital lease covering certain equipment utilized by the Apparel Segment that would have been retained by us. The Initial Purchase Agreement contemplated post-closing transition services for up to 18 months.

Under the Initial Purchase Agreement, we retained the right to terminate the agreement in the event that the Company received an unsolicited purchase offer for the Apparel Segment that was not matched by the Initial Buyer, which, in the judgment of our Board of Directors (the “Board”) in the exercise of its fiduciary duties on behalf of the our shareholders, deemed such offer to be a superior offer to the transactions contemplated by the Initial Purchase Agreement.

On May 4, 2016, the Company received what the Board determined to be a superior offer from Gildan Activewear Inc. (“Gildan”). In connection therewith, we terminated the Initial Purchase Agreement and paid the required $3.0 million termination fee to the Initial Buyer. In connection with the superior offer, the Company and Gildan entered into a Unit Purchase Agreement, dated May 4, 2016 (the “Gildan Purchase Agreement”). Gildan acquired the Apparel Segment for an all-cash purchase price of $110.0 million, subject to a working capital adjustment, customary indemnification arrangements, and the other terms of the Gildan Purchase Agreement. Since the consummation of the sale, we have been providing transition assistance to Gildan for administrative, financial, human resource, and information technology matters, which we expect to cease during the next quarter of this fiscal year, and we have been subleasing from Gildan a portion of a real property located in Anaheim, California. As part of the purchase price, Gildan funded our payment of the $3.0 million termination fee payable to the Initial Buyer in connection with the termination of the Initial Purchase. We filed with the Securities and Exchange Commission Current Reports on Form 8-K on May 4, 2016 and June 1, 2016 regarding the Gildan Purchase Agreement and the consummation of the sale of the Apparel Segment, respectively, and reference is made herein to those current reports for further explanation.

Based on certain tax elections, we anticipate that we will be able to treat the loss arising from the sale of the Apparel Segment as an operating loss for tax purposes.

On August 12, 2016, we acquired the assets of Atlas Tag Company of Canada, Inc., located in Ontario, Canada, for $0.3 million in cash. Management considers this acquisition immaterial.

On March 19, 2016, we acquired the assets of Major Business Systems, Inc., located in Hillsborough, North Carolina, for $0.6 million in cash. Management considers this acquisition immaterial.

On July 31, 2015, we acquired the assets of CMC Group, Inc. for $0.3 million in cash plus the assumption of certain accrued current liabilities. Management considers this acquisition immaterial.

During the fourth quarter of our previous fiscal year, we moved our folder operations from Omaha, Nebraska to Columbus, Kansas, due to the landlord’s desire to sell the facility. The move and inefficiencies associated with starting-up and training new employees had a negative impact on revenues and operational margins over the past several quarters, but we have seen a turnaround and the operation was marginally profitable for this quarter. In addition, our medical claims have exceeded historical levels during the fiscal year. This resulted in an additional $2.0 million in increased medical expenses, which negatively impacted our operating profit margin during the quarter ended November 30, 2016. This expense was in addition to the $2.3 million in medical expenses that we incurred during the quarter ended August 31, 2016. To mitigate against further medical charges, we are implementing a new cost reimbursement program, as well as other changes to our health plan, as of the start of the new calendar year. However, while we believe that this program should reduce our medical claims expense to historical levels, actual cost savings may vary from anticipated levels.

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 58 manufacturing plants throughout the United States in 21 strategically located states. Approximately 95% of the business products manufactured 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 sold 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®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphicsSM, Calibrated Forms®, PrintXcelSM, Printegra®, Curtis Business FormsSM, Falcon Business FormsSM, Forms ManufacturersSM, Mutual GraphicsSM, TRI-C Business FormsSM, Major Business SystemsSM, and Hoosier Data Forms®. 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® and Folder Express® brands (which provide presentation folders and document folders); Ennis Tag & LabelSM (which provides custom printed, high performance labels and custom and stock tags); Atlas Tag & Label®, Kay Toledo TagSM, and Special Service PartnersSM (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).

We sell predominantly through private printers and independent distributors, as well as to many of our competitors. Northstar 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). Northstar acquired several of the top 25 banks in the United States as customers and is actively pursuing other large banks within the top 25 tier of banks in the United States. Adams McClure also sells direct to a small number of customers, where sales are generally through advertising agencies.

The printing industry generally sells its products either through sales made 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 dealers.

There are a number of competitors that operate in this segment, ranging in size from single employee-owner 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 dealers, including business form 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 from generally 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 factor in quarterly volume fluctuations.

Business Challenges

We are engaged in an industry undergoing significant changes, including consolidation of some of our traditional channels, product obsolescence, expansion of commodity materials to our competition, as well as cheaper material imports due to the strong dollar. 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 the supply chain in an already over-supplied, price-competitive print industry. The challenges of our business include the following:

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. 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, 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.

Excess production capacity and price competition within our industry – Paper mills continue to adjust production capacity through downtime and closures to attempt to keep supply in line with demand, although a number of countries have disrupted the supply/demand curve by dumping paper into the U.S. market. Due to the number of paper mills worldwide, some paper pricing has been and is expected to remain fairly weak, although the strong dollar has attracted cheaper material into the United States notwithstanding the trade tariffs imposed, which has impaired the price advantage larger suppliers have held over smaller competitors. We will continue to focus our efforts on effectively managing and controlling our product costs to minimize these effects on our operational results, primarily through the use of forecasting, production and costing models, as well as working closely with our domestic suppliers to reduce our procurement costs. We will continue to look for ways to reduce as well as leverage our fixed costs. As always, some of these negative factors are cyclical and we will continue to focus on maintaining our margins when the inevitable currency swings go the other way.

Continued consolidation of our customers – Our customers, who are distributors, are consolidating or are being acquired by competitors. As such, they demand better pricing and services, or they are required to relocate their business to their new parent company’s manufacturing facilities. While we continue to maintain a majority of this business, it is possible that these consolidations and acquisitions will impact our margins and our sales.

Cautionary Statements Regarding Forward Looking Statements

You should read this discussion and analysis in conjunction with our Consolidated Financial Statements and the related notes appearing elsewhere in this Report. All of the statements in this Report, other than historical facts, are forward-looking statements, including, without limitation, the statements made in the “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” particularly under the caption “Overview.” 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. Ennis 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; 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; changes in economic conditions; 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. 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 29, 2016 before making an investment in our common stock.

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 29, 2016.

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. Unless otherwise indicated, this financial overview is for the continuing operations of the Company, which are comprised of the production and sales of business forms and other business products, and excludes the discontinued operations of the former Alstyle apparel segment. The operating results of the Company for the three and nine months ended November 30, 2016 and the comparative periods for 2015 are set forth in the unaudited consolidated financial information included in the tables below. Reconciliations and discussions of the use of the non-GAAP financial measures reported by the Company are also set forth below.

Consolidated Summary

To provide additional transparency and important supplemental information to both management and investors regarding financial and business trends used in assessing its results of operations, the Company has reported for continuing operations adjusted gross profit margin, adjusted income from operations, adjusted net earnings and adjusted diluted earnings per share, each of which is a non-GAAP financial measure and each of which excludes the impact of the additional medical charges and the Folder Express relocation expense. Management believes that these non-GAAP financial measures provide useful information to investors as a supplement to reported GAAP financial information for continuing operations. Management reviews these non-GAAP financial measures on a regular basis and uses them to evaluate and manage the performance of the Company’s continuing operations. These non-GAAP financial measures provide useful information in evaluating the Company’s period-to-period performance because they eliminate certain items that the Company does not consider to be indicative of earnings from ongoing operating activities. Management believes that excluding such items provides a better understanding of the underlying trends in the Company’s operating performance and allows more accurate comparisons of the Company’s operating results for its continuing operations to historical performance.

Reconciliations of these non-GAAP financial measures to the most directly comparable measures calculated and presented in accordance with GAAP are set out in the following tables. Other companies may calculate non-GAAP adjusted financial measures differently than the Company, limiting the usefulness of the non-GAAP measures for comparison with other companies. While management believes these non-GAAP financial measures are useful in evaluating Ennis, this information should be considered as supplemental in nature and not as a substitute or an alternative for, or superior to, the related financial information prepared in accordance with GAAP. These measures should be evaluated only in conjunction with the Company’s comparable GAAP financial measures.

The following table reconciles, on a non-GAAP basis, the reported numbers to the adjusted numbers for the three and nine months ended November 30, 2016 and 2015, after eliminating the negative impact associated with the higher than normal medical expenses and the negative impact of the Folder Express relocation.

(in thousands, except per share amounts)

Three months ended November 30, 2016 compared to three months ended November 30, 2015

Net Sales. Our net sales were $88.7 million for the quarter ended November 30, 2016, compared to $97.5 million for same quarter last year, or a decrease of 9.0%. The market continues to be fairly soft and competitive pricing pressures have intensified with the influx of cheaper off-shore paper coming into the United States due to the strength of the dollar. In previous years acquisitions have been an integral part of our strategy to offset industry revenue declines that result from normal print attrition and general economic conditions, however this year we were focused on completing the sale of our Apparel Segment. Thus, we have not completed any material print acquisitions.

Cost of Goods Sold. Our cost of goods sold decreased by $4.4 million from $67.8 million for the three months ended November 30, 2015 to $63.4 million for the three months ended November 30, 2016, or 6.5%. Our gross profit margin (“margin”) was $25.3 million for the quarter, or 28.5%, compared to 30.5% for the same quarter last year. Our margin was negatively impacted by medical claims which exceeded our historical levels. As a result, we incurred $2.0 million of increased medical expenses impacting our gross profit margin during the quarter by approximately $1.4 million. To mitigate against further medical charges, we are implementing a new cost reimbursement program for our health plan as of the start of the new calendar year. However, while all indications are that this program should reduce our medical claims expense consistent with historical levels next fiscal year, actual cost savings may vary from anticipated levels. Without these negative effects, our gross profit margin, on a non-GAAP basis, would have been approximately $26.6 million for the quarter, or 30.1%.

Selling, general, and administrative expense. For the three months ended November 30, 2016, our selling, general, and administrative expenses were $15.8 million compared to $16.4 million for the three months ended November 30, 2015, or a decrease of 3.7%. As a percentage of sales, the selling, general, and administrative expenses were 17.8% and 16.8% for the three months ended November 30, 2016 and November 30, 2015, respectively, which increased during the quarter due to lower sales volume. With the completion of the sale of our Apparel Segment on May 25, 2016, we expect to pursue acquisitions as part of our plan to better leverage these expenses in the future. In addition, in connection with the sale of the Apparel Segment, we entered into a transition services agreement with Gildan, pursuant to which we agreed to provide specified administrative services to Gildan for a stipulated period of time. We expect these services to be concluding in the fourth quarter, which should allow us to reduce any remaining redundant costs. Also, due to the additional medical expenses discussed above, our selling, general, and administrative expenses were further increased during the quarter by approximately $0.6 million. Excluding the additional charge to our medical reserve, our selling, general, and administrative expense line this quarter, on a non-GAAP basis, would have been $15.2 million, or 17.1% of sales.

(Gain) loss from disposal of assets. The $0.3 million loss from disposal of assets during the quarter related primarily to the $0.5 million loss on the sale of an unused manufacturing facility and its associated property offset by the $0.2 million gain on the sale of a second unused manufacturing facility and other idle manufacturing equipment. The gain of $0.4 million during the same quarter last year related primarily to the sale of an unused manufacturing facility as well as idle manufacturing equipment.

Income from operations. Our income from continuing operations for the three months ended November 30, 2016 was $9.2 million, or 10.4% of net sales, as compared to $13.7 million, or 14.0% of net sales, for the three months ended November 30, 2015. Without the additional charge to our medical reserve during the quarter, our income from continuing operations, on a non-GAAP basis, would have been $11.2 million, or 12.6% of sales.

Other expense. Other expense for the three months ended November 30, 2016 increased by approximately $0.1 million, as compared to the three months ended November 30, 2015. This increase primarily relates to the reallocation of interest expense from the Print Segment to our former Apparel Segment as part of discontinued operations for last fiscal year.

Provision for income taxes. Our effective tax rate for continuing operations was 37.0% for the three months ended November 30, 2016 and November 30, 2015.

Net earnings. Our net earnings from continuing operations per diluted share for three months ended November 30, 2016 was $0.22, compared to $0.33 for the same quarter last year. There were no discontinued operations during the three months ended November 30, 2016, compared to net earnings from discontinued operations per diluted share during the three months ended November 30, 2015 of $0.08. During the three months ended November 30, 2016, our operational results continued to be negatively impacted by the $2.0 million in additional medical expenses for higher than normal medical expenses that we incurred. Without the negative impact of this item, on a non-GAAP basis, our adjusted net earnings from continuing operations for the three months ended November 30, 2016 would have been $7.0 million, and our adjusted net earnings from continuing operations per diluted share for the three months ended November 30, 2016 would have been $0.27.

Nine months ended November 30, 2016 compared to nine months ended November 30, 2015

Net Sales. Our net sales were $270.3 million for the nine-month period ended November 30, 2016, compared to $294.7 million for same period last year, or a decrease of 8.3%. The overall print market continues to be fairly soft and competitive from a pricing perspective, with the influx of low priced foreign paper into the United States due to the strong dollar. In previous years, acquisitions have been an integral part of our strategy to offset industry revenue declines that result from normal print attrition and general economic conditions. However, as we were focused on completing the sale of our Apparel Segment this year, we have not completed any material print acquisitions to offset these historical revenue declines. Also, management estimates that the move of our Company’s folder operations from Omaha, Nebraska to Columbus, Kansas negatively impacted our sales by approximately $5.5 million during the nine-month period ended November 30, 2016.

Cost of Goods Sold. Our cost of goods sold was $203.7 million for the nine months ended November 30, 2015 and $191.3 million for the nine months ended November 30, 2016, a difference of $12.4 million, or 6.1%. Our margin was $79.0 million for the nine-month period ended November 30, 2016, or 29.2%. This compares to 30.9% for the nine-month same period last year. For the nine-month period, our margin was negatively impacted by the costs associated with the move of our folder operations from Nebraska to Kansas. The start-up training process for the labor force decreased efficiencies, negatively impacting our sales and margins for the nine months ended November 30, 2016 by an estimated $3.0 million. While the overall relocation process took longer than initially expected, this operation no longer had a negative impact on our operational results during the third quarter. In addition, we incurred additional medical expenses due to our medical claims exceeding historical levels, impacting our gross profit margin for the nine months ended November 30, 2016 by approximately $2.9 million. Without these negative effects on our gross profit margin, our gross profit margin, on a non-GAAP basis, for the nine months ended November 30, 2016 would have been approximately $84.9 million, or 31.4%.

Selling, general, and administrative expense. For the nine months ended November 30, 2016, our selling, general, and administrative expenses were $48.0 million, down slightly from $48.6 million for the nine months ended November 30, 2015. As a percentage of sales, the selling, general, and administrative expenses were 17.7% and 16.5% for the nine months ended November 30, 2016 and November 30, 2015, respectively, which increased as compared to the prior year due to lower sales volume. With the completion of the sale of our Apparel Segment on May 25, 2016, we expect to pursue acquisitions to better leverage these expenses in the future. In addition, in connection with the sale of our Apparel Segment, we entered into a transition services agreement with Gildan, pursuant to which we agreed to provide specified administrative services to Gildan for a stipulated period of time. We expect these services to be concluding in the fourth quarter, which should allow us to reduce any remaining redundant costs. Our selling, general, and administrative expense line was further impacted during the period by approximately $1.3 million associated with the additional charge to our medical reserve. Excluding the additional charge to our medical reserve, our selling, general, and administrative expenses for the nine months ended November 30, 2016, on a non-GAAP basis, would have been $46.7 million, or 17.3% of sales.

(Gain) loss from disposal of assets. The $0.3 million loss from disposal of assets during the quarter related primarily to the $0.5 million loss on the sale of an unused manufacturing facility and its associated property offset by the $0.2 million gain on the sale of a second unused manufacturing facility and other idle manufacturing equipment. The gain of $0.4 million during the same quarter last year related primarily to the sale of an unused manufacturing facility as well as idle manufacturing equipment.

Income from operations. Our income from continuing operations for the nine months ended November 30, 2016 was $30.8 million, or 11.4% of net sales, as compared to $42.8 million, or 14.5% of net sales, for the nine months ended November 30, 2015. Without the negative impact associated with our folder operations move and the additional charge to our medical reserve during the nine months ended November 30, 2016, our income from continuing operations, on a non-GAAP basis, would have been $37.7 million, or 14.0% of sales.

Other expense. Other expense increased by approximately $0.3 million for the nine months ended November 30, 2016 to $0.3 million compared to the nine months ended November 30, 2015. This related primarily to the reallocation of interest expense from the Print Segment to our former Apparel Segment as part of discontinued operations for last fiscal year.

Provision for income taxes. Our effective tax rate for continuing operations was 37.0% for both the nine months ended November 30, 2016 and the nine months ended November 30, 2015. The effective tax rate for discontinued operations was 35.9% and 37.0% for the nine months ended November 30, 2016 and November 30, 2015, respectively.

Net earnings (loss). Our net earnings from continuing operations per diluted share for the nine months ended November 30, 2016 were $0.74, compared to $1.05 for the nine months ended November 30, 2015. Before the loss on the sale of the Apparel Segment, net earnings from discontinued operations per diluted share during the nine months ended November 30, 2016 were $0.10, compared to $0.15 for the nine months ended November 30, 2015. Overall, before the loss on the sale of the Apparel Segment, net earnings per diluted share (continued and discontinued) for the period were $0.84 for the nine months ended November 30, 2016 and $1.20 for the nine months ended November 30, 2015. The net loss from the sale of the Company’s discontinued operations during the period, net of tax, was $26.0 million, or ($1.01) per share, which included the write-off of the balance of foreign currency translation adjustments of $16.1 million, or $10.3 million, net of taxes. As a result, the Company realized a net loss of ($4.4) million, or ($0.17) per diluted share, for the nine months ended November 30, 2016, compared to net earnings of $30.9 million, or $1.20 per diluted share for the nine months ended November 30, 2015. Excluding the negative impact of the Folder Express relocation and the additional medical expenses incurred, our adjusted earnings from continuing operations, on a non-GAAP basis, would have been $23.6 million, or $0.91 per diluted share, for the nine months ended November 30, 2016.

Liquidity and Capital Resources

We rely on our cash flows generated from operations and the borrowing capacity under our 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 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 required to cover our operating and capital requirements for the foreseeable future.

(Dollars in thousands)

Working Capital. Our working capital decreased $5.7 million or 4.1%, from $138.6 million at February 29, 2016 to $132.9 million at November 30, 2016. Our working capital decreased primarily due to the special one-time dividend of $1.50 per share paid in connection with the sale of the Apparel Segment. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.4 to 1.0 at February 29, 2016 to 6.4 to 1.0 at November 30, 2016. Our current ratio increased primarily as a result of the impact associated with the cash sale of the Apparel Segment.

(Dollars in thousands)

Cash flows from operating activities. Cash provided by operating activities decreased by $36.0 million from $78.6 million for the nine months ended November 30, 2015 to $42.6 million for the nine months ended November 30, 2016. Our decreased operational cash flows in comparison to the comparable period last year was primarily the result of four factors: (i) a decrease in operating cash flows from the Apparel Segment that was sold on May 25, 2016, (ii) decreased operational earnings, (iii) a decrease of $3.2 million associated with the collection of accounts receivable, and (iv) an increase in our prepaid expenses of $2.8 million, principally prepaid income taxes.

Cash flows from investing activities. Cash provided by investing activities increased $108.9 million from $4.0 million used to $104.9 million provided by for the nine months ended November 30, 2015 and November 30, 2016, respectively. This was primarily due to the net proceeds of $107.4 million from the sale of the Apparel Segment which took place on May 25, 2016 as well as a decrease of $2.2 million in capital expenditures.

Cash flows from financing activities. We used $7.5 million less in cash from financing activities this period than during the same period last year. We used $10.0 million in cash this year to pay down our debt, compared to $54.0 million used last year. We used $52.7 million to pay dividends which included a special one-time dividend of $1.50 per share that was paid as result of the sale of the Apparel Segment, whereas we used $13.5 million to pay dividends last year. This year we have used $7.8 million to repurchase our common stock under our stock repurchase program, whereas we did not repurchase shares of our common stock last year. In addition, we received $2.9 million from the exercise of stock options, whereas for the same period last year no stock options were exercised.

Credit Facility. The Company has entered into a Second Amended and Restated Credit Agreement, which has been amended from time to time, pursuant to which a credit facility has been extended to the Company (the “Credit Facility”) until August 11, 2020 and 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 or its subsidiaries also can request up to three increases in the aggregate commitments in an aggregate amount not to exceed $50.0 million. Under the Credit Facility: (i) the Company’s net leverage ratio may not exceed 3.00:1.00, (ii) the Company’s fixed charge coverage ratio may not be less than 1.25:1.00, and (iii) the Company may make dividends or distributions to shareholders so long as (a) no event of default has occurred and is continuing and (b) 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.

The Credit Facility bears interest at the LIBOR rate plus a spread ranging from 1.0% to 2.0%, which rate was 1.9% (3 month LIBOR + 1.0%) at November 30, 2016 and 1.76% (30 day LIBOR + 1.25%) at February 29, 2016. The rate is determined by our fixed charge coverage ratio of total funded debt to EBITDA. As of November 30, 2016, we had $30.0 million of borrowings under the revolving credit line and $1.9 million outstanding under standby letters of credit arrangements, leaving approximately $68.1 million available in borrowing capacity. 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 the available line of credit is sufficient to cover the Company’s working capital requirements for the foreseeable future, should it be required.

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 29, 2016. However, we expect to make a cash contribution to the Pension Plan of between $2.0 million and $3.0 million during fiscal year 2017. We made contributions of $3.0 million to our Pension Plan during fiscal 2016. 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 November 30, 2016, we had an unfunded pension liability recorded on our balance sheet of $10.6 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.

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 $2.0 million and $4.0 million. To date we have spent approximately $1.9 million on capital expenditures. We expect to fund these expenditures through existing cash flows.

Contractual Obligations & Off-Balance Sheet Arrangements – There have been no significant changes in our contractual obligations since February 29, 2016 that have, or are reasonably likely to have, a material impact on our results of operations or financial condition. We had no off-balance sheet arrangements in place as of November 30, 2016.

Market Risk

Interest Rates

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. Our variable rate financial instruments, consisting of the outstanding loans under the Credit Facility, totaled $30.0 million at November 30, 2016. The annual impact on our results of operations of a one-point interest rate change on the outstanding balance of the variable rate financial instruments as of November 30, 2016 would be approximately $0.3 million.

Foreign Exchange

Although our previous transactions in foreign currencies were associated primarily with our former Apparel Segment operations, we expect to continue to make investments and enter into transactions in various foreign currencies from time to time. Any income and expenses (translated using average rates prevailing during the period), are affected by the translation into our reporting currency (the U.S. Dollar). Such translation adjustments are reported as a separate component of consolidated statements of comprehensive income. In future periods, foreign exchange rate fluctuations could have an impact on our reported results of operations.

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.

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 Rule 13a-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 November 30, 2016 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 were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Exchange Act Rule 13a-15 that occurred during our fiscal quarter ended November 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 29, 2016.