# Ennis, Inc.: Form 10-Q for the period ended May 31, 2019

- Company: [Ennis, Inc.](/companies/ebf.md) (CIK 33002)
- Form: 10-Q
- Filed: 2019-07-03
- Accepted by EDGAR: Jul 3, 2019, 16:25 ET
- Period: 2019-05-31
- Accession: 0001564590-19-024496
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/33002/000156459019024496/ebf-10q_20190531.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/33002/000156459019024496/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2019-05-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2019-03-01 to 2019-05-31 | $108.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2019-03-01 to 2019-05-31 | $75.3m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2019-03-01 to 2019-05-31 | $32.7m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2019-03-01 to 2019-05-31 | $19.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2019-03-01 to 2019-05-31 | $13.0m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2019-03-01 to 2019-05-31 | $317.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2019-03-01 to 2019-05-31 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2019-03-01 to 2019-05-31 | $9.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2019-03-01 to 2019-05-31 | $0.37 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2019-03-01 to 2019-05-31 | $0.37 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2019-03-01 to 2019-05-31 | 26,028,337 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2019-03-01 to 2019-05-31 | $15.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2019-03-01 to 2019-05-31 | $802.0k | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 3 months, 2019-03-01 to 2019-05-31 | $5.9m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2019-03-01 to 2019-05-31 | $1.2m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2019-05-31 | $87.4m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2019-05-31 | $167.3m | us-gaap:AssetsCurrent |
| Total assets | at 2019-05-31 | $385.8m | us-gaap:Assets |
| Current liabilities | at 2019-05-31 | $38.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2019-05-31 | $93.6m | us-gaap:Liabilities |
| Long-term debt | at 2019-05-31 | $30.0m | us-gaap:LongTermDebtNoncurrent |
| Shareholders' equity | at 2019-05-31 | $292.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 33,343 characters.

### 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. The Company 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 customers’ needs.

On March 16, 2019, the Company, through one of its subsidiaries, acquired the assets of Integrated Print & Graphics (“Integrated”) for $8.9 million in cash plus the assumption of trade payables, subject to certain adjustments. Goodwill of $893,000 recognized as a part of the acquisition is deductible for tax purposes. The Company also recorded intangible assets with definite lives of approximately $1.8 million in connection with the transaction. Integrated is located in South Elgin, Illinois and generated approximately $20.0 million in sales for its fiscal year ended December 31, 2018. The acquisition will create additional capabilities within the Company’s high color commercial print product line, which is consistent with the Company’s business model. Management considers this acquisition to be immaterial.

On July 31, 2018, the Company issued an aggregate of 829,126 shares of common stock of the Company, par value $2.50 per share, to the former stockholders of Wright Business Forms, Inc., d/b/a Wright Business Graphics (“Wright”), as partial consideration for the acquisition by the Company of all of the outstanding equity interests of Wright pursuant to the Agreement and Plan of Merger, dated July 16, 2018 (the “Merger Agreement”). The Company shares issued to the former stockholders of Wright represent aggregate consideration under the Merger Agreement equal to approximately $16.2 million. An additional $19.7 million was paid in cash to the stockholders of Wright, subject to a final working capital adjustment, and $2.6 million was paid to pay-off outstanding debt. The goodwill recognized as a part of this merger is not deductible for tax purposes. Wright is a printing company that produces forms, pressure seal, packaging, direct mail, checks, statement processing and commercial printing and sells mainly through distributors and resellers. Wright is headquartered in Portland, Oregon and has additional locations in Washington and California. Wright, which generated approximately $58.0 million in sales for its fiscal year ended March 31, 2018, continues to operate under its brand names.

On April 30, 2018, we acquired the assets of Allen-Bailey Tag & Label (“ABTL”), a tag and label operation located in New York, for $4.7 million in cash plus the assumption of trade payables, subject to a working capital adjustment. In addition, contingent consideration of up to $500,000 is payable to the sellers if certain sales levels are maintained over the next three years. ABTL generated approximately $12.0 million in sales for the twelve months ended December 31, 2017. Management considers this acquisition to be immaterial.

### 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 61 manufacturing plants throughout the United States in 21 strategically located states. Approximately 95% 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 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®, 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 GraphicsSM, TRI-C Business FormsSM, Major Business SystemsSM, Independent PrintingSM, Hoosier Data Forms®, Hayes Graphics®, Wright Business GraphicsSM, Wright 360SM, and Integrated Print & GraphicsSM. 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).

We sell predominantly through private printers and independent distributors, as well as to many of our competitors. Northstar Computer Forms, Inc., a wholly-owned subsidiary, 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 directly 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-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 dealers, 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.

### Business Challenges

We are engaged in an industry experiencing consolidation of some of our traditional 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 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, 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.

**Production capacity and price competition within our industry –** The strong U.S. dollar during the first half of fiscal 2018 attracted cheaper material into the United States, notwithstanding the imposition of trade tariffs, which impaired the price advantage larger suppliers had over smaller competitors and helped to maintain pricing. However, with the subsequent weakening of the U.S. dollar during the latter portion of fiscal 2018 and first half of fiscal 2019, the price advantage of foreign imports largely dissipated during most of fiscal 2019, which has led to lower volumes of imported paper and an increase in domestic exports. Meanwhile, significant capacity left the market during this period, whether planned or unplanned (as in the case of the bankruptcy of several mills). In addition, some mills moved capacity formerly used for coated production to uncoated production due to their ability to obtain higher margins on these products. Even with shrinking demand, this led to a supply/demand imbalance with most mills running in excess of 90% of capacity across all grades during fiscal 2019. At this level, suppliers have historically raised prices in the marketplace, and fiscal year 2019 was no exception, with suppliers raising prices multiple times across all facets of the manufacturing process, from raw materials to supplies. In the past, price increases have been less frequent, which allowed manufacturers to make pricing adjustments in a timely manner. The size and number of increases during 2019 impacted the ability of manufacturers to timely pass along the required price adjustments to the end users. Additionally, some paper grades during 2019 were placed on allocations given the tight supply environment.

Given our long-term relationship with our major paper supplier, our financial strength and our size, we were able to avoid disruptions in our supply chain this past fiscal year. Some of these challenges have evolved recently. With the strengthening U.S. dollar and current pricing levels, imports have again begun to flow into the domestic marketplace. This development, along with continued slowing domestic demand, has resulted in renewed marketing of certain paper grades that previously had been placed on allocation. Historically, this would result in the normalization of pricing and costs in the marketplace. However, with the change in ownership of several of the larger domestic paper mills, this historical swing in pricing may not occur and manufacturer’s margins may continue to be negatively impacted. Regardless of these factors, many of which are cyclical, 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 reduce our procurement 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.

**Continued consolidation of our customers –** Our customers are distributors, many of which are consolidating or are being acquired by competitors. Some customers may demand better pricing and services, and other customers may be forced to relocate their business to their new parent company’s manufacturing facilities. We continue to maintain a majority of the historical business of these customers, but it is possible that these consolidations and acquisitions, which we expect to continue in the future, ultimately will impact our margins and 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. 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; 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 28, 2019 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 28, 2019.

### 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 months ended May 31, 2019 and the comparative period for 2018 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 May 31, 2019 |  | 2018 |  |
| --- | ---: | ---: | ---: | ---: |
| Net sales | $108,033 | 100.0% | $93,419 | 100.0% |
| Cost of goods sold | 75,337 | 69.7 | 63,228 | 67.7 |
| Gross profit margin | 32,696 | 30.3 | 30,191 | 32.3 |
| Selling, general and administrative | 19,703 | 18.3 | 17,735 | 19.0 |
| Gain from disposal of assets | — | — | (4) | — |
| Income from operations | 12,993 | 12.0 | 12,460 | 13.3 |
| Other income (expense) | 23 | — | (131) | (0.1) |
| Earnings before income taxes | 13,016 | 12.0 | 12,329 | 13.2 |
| Provision for income taxes | 3,384 | 3.1 | 3,082 | 3.3 |
| Net earnings | $9,632 | 8.9% | $9,247 | 9.9% |

### Three months ended May 31, 2019 compared to three months ended May 31, 2018

*Net Sales.* Our net sales were $108.0 million for the quarter ended May 31, 2019, compared to $93.4 million for the same quarter in the prior year, or an increase of $14.6 million, or 15.6%. On a sequential quarter basis, our revenues increased from $100.7 million to $108.0 million, a $7.3 million increase, or 7.2%. Recent increases in foreign imports due to the strengthening of the U.S. dollar and current domestic pricings levels continues to provide the elements for a challenging marketplace. The acquisitions of ABTL (completed in April 2018), Wright (completed in July 2018), and Integrated (completed in March 2019) are integral parts of our strategy to offset on going technological disruption and other changes. These three acquisitions contributed approximately $19.3 million in net sales during the three months ended May 31, 2019.

*Cost of Goods Sold.* Our cost of goods sold increased $12.1 million from $63.2 million for the three months ended May 31, 2018 to $75.3 million for the three months ended May 31, 2019, or 19.1%. Our gross profit margin (“margin”) was $32.7 million for the quarter, or 30.3% of net sales, compared to $30.2 million, or 32.3% of net sales, for the same quarter in the prior year. For the sequential quarter our margin increased from $29.1 million, or 28.9% of net sales, to $32.7 million, or 30.3% of net sales, an increase of $3.6 million. While our margins as indicated improved 140 basis points over the sequential quarter, they continue to be impacted by the magnitude of raw material price increases and the dilutive impact of the acquisitions completed in the last year. During the last year, tight supply conditions allowed for multiple price increases on raw materials, as well as other items in the manufacturing process. Historical price increases were less frequent, which allowed manufacturers the ability to pass the required pricing adjustments through to the marketplace in a timely manner. However, the size and number of increases have impacted manufacturers’ abilities to timely pass these price adjustments to the end-users. These price increases will continue to have a negative impact on margins until they are able to be passed through to the marketplace, or costs decline. Recently, due to current pricing levels and the strengthening of the U.S. dollar, the environment has once again been attractive for imports and they have more than filled any vacuum in the supply chain. This historically has led to some normalization/stability in the marketplace. However, with the recent ownership change in several larger domestic mills, this historical pendulum swing in pricing may not occur. As mentioned earlier, the acquisitions completed during the past year have had a dilutive impact on our margins. We continue to believe once we have the opportunity to fully analyze the business cost structure and implement our costs systems, its margins will improve to more normalized levels.

*Selling, general, and administrative expense.* For the three months ended May 31, 2019, our selling, general, and administrative (“SG&A”) expenses were $19.7 million compared to $17.7 million for the three months ended May 31, 2018, an increase of $2.0 million, or 11.3%. As a percentage of net sales, the SG&A expenses were 18.3% and 19.0% for the three months ended May 31, 2019 and May 31, 2018, respectively. The increase on our SG&A expenses related to the acquisitions completed during the prior twelve months, which added approximately $3.2 million to our expenses.

*Gain from disposal of assets.* The $4,000 net gain from disposal of assets during the prior year’s quarter related primarily to the sale of manufacturing equipment.

*Income from operations.* As a result of the above factors, our income from operations for the three months ended May 31, 2019 was $13.0 million, or 12.0% of net sales, as compared to $12.5 million, or 13.3% of net sales, for the three months ended May 31, 2018. The acquisitions of ABTL, Wright and Integrated contributed approximately $0.3 million, $1.1 million and $0.1 million, respectively, of operating income during the quarter.

*Other income (expense).* Other income was $23,000 for the three months ended May 31, 2019 compared to $131,000 expense for the three months ended May 31, 2018. During the current quarter, due to our cash balance, our interest income was higher than our interest expense.

*Provision for income taxes.* Our effective tax rate was 26.0% for the three months ended May 31, 2019 as compared to 25.0% for the three months ended May 31, 2018. The slight increase in our overall tax rate this year as compared to last is due to an increase in our overall expected state tax rate due to changes in state apportionment.

*Net earnings.* Net earnings, due to the factors above, were $9.6 million for the three months ended May 31, 2019 as compared to $9.2 million for the comparable quarter in the prior year, an increase of 4.3%. Net earnings per diluted share for the three months ended May 31, 2019 was $0.37, compared to $0.36 for the same quarter in the prior year.

### 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 17% 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 required to cover our operating and capital requirements for the foreseeable future.

*(Dollars in thousands)*

|  | May 31, 2019 | February 28, 2019 |
| --- | ---: | ---: |
| Working capital | $129,149 | $134,542 |
| Cash | $87,365 | $88,442 |

***Working Capital.*** Our working capital decreased $5.4 million or 4.0%, from $134.5 million at February 28, 2019 to $129.1 million at May 31, 2019. Our current ratio, calculated by dividing our current assets by our current liabilities, decreased from 5.3 to 1.0 at February 28, 2019 to 4.4 to 1.0 at May 31, 2019. Our working capital and current ratio were negatively impacted by an increase in our income taxes payable of $3.4 million and the adoption of accounting pronouncement ASC 842 which increased our current liabilities by $5.0 million.

*(Dollars in thousands)*

|  | Three months ended May 31, 2019 | 2018 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $15,671 | $11,890 |
| Net cash used in investing activities | $(9,661) | $(5,937) |
| Net cash used in financing activities | $(7,087) | $(5,763) |

***Cash flows from operating activities.*** Cash provided by operating activities increased by $3.8 million from $11.9 million for the three months ended May 31, 2018 to $15.7 million for the three months ended May 31, 2019. Our increased operational cash flows in comparison to the comparable period in the prior year was primarily the result of two factors: i) a $3.4 million decrease in our inventories, and ii) a $2.5 million increase in our accounts payable and accrued expenses. This increase in our cash was offset by a $2.6 million increase in our prepaid expenses and income taxes.

***Cash flows from investing activities.*** Cash used in investing activities increased $3.7 million from $5.9 million to $9.7 million used for the three months ended May 31, 2018 and May 31, 2019, respectively. This was primarily due to our acquisition of Integrated in the current quarter of $8.9 million as compared to $4.7 million used for the acquisition of ABTL in the same quarter last fiscal year offset by $0.4 million less in cash used for capital expenditures.

***Cash flows from financing activities.*** We used $1.3 million more in cash from financing activities during the three months ended May 31, 2019 compared to the same period in the prior year. We used $1.2 million to repurchase our common stock under our stock repurchase program during the three months ended May 31, 2019, whereas we used $0.7 million to repurchase shares of our common stock during the three months ended May 31, 2018. In addition, $0.8 million more was used to pay dividends during the three months ended May 31, 2019 as compared to the three months ended May 31, 2018.

***Credit Facility.*** The Company’s Credit Facility, extended to the Company until August 11, 2020, 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 (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. All calculations are made based on GAAP existing at the time the Credit Facility was entered into. As of May 31, 2019, 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 1.0% to 2.0%, which rate was 3.5% (3 month LIBOR + 1.0%) at May 31, 2019 and 3.6% (3 month LIBOR + 1.0%) at February 28, 2019. The rate is determined by our fixed charge coverage ratio of total funded debt to EBITDA. As of May 31, 2019, we had $30.0 million of borrowings under the revolving credit line and $0.7 million outstanding under standby letters of credit arrangements, leaving approximately $69.3 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, 2020. Given our current funding status as of February 28, 2019 and absent any significant negative event, we anticipate that our future contributions will be in line with our service costs, which are expected to be between $1.0 million and $1.5 million per year. We made contributions totaling $3.0 million to our Pension Plan during fiscal 2019. 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 May 31, 2019, we had a net pension asset recorded on our balance sheet of $0.6 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 $3.0 million and $5.0 million. To date we have spent approximately $0.8 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 28, 2019 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 May 31, 2019.

## Market risk

As filed, 929 characters.

### 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 May 31, 2019. 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 May 31, 2019 would be approximately $0.3 million.

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, 2,614 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 May 31, 2019 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.

In connection with the Company’s adoption of ASC 842 effective March 1, 2019, we have made appropriate design and implementation updates to our business processes, systems and internal controls to support recognition and disclosure under the new standard. The Company’s adoption and implementation of ASC 842 is discussed in Note 1 and Note 6 to the consolidated financial statements included in “Item 1. Financial Statements.”

There have been no changes, other than those discussed above, 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 three months ended May 31, 2019 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, 2019.

Filed Jul 3, 2019.
Source: SEC EDGAR, the filing index for accession 0001564590-19-024496. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.