# Ennis, Inc.: Form 10-Q for the period ended Aug 31, 2020

- Company: [Ennis, Inc.](/companies/ebf.md) (CIK 33002)
- Form: 10-Q
- Filed: 2020-10-07
- Accepted by EDGAR: Oct 7, 2020, 21:21 ET
- Period: 2020-08-31
- Accession: 0001564590-20-046031
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/33002/000156459020046031/ebf-10q_20200831.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/33002/000156459020046031/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-08-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-06-01 to 2020-08-31 | $86.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2020-03-01 to 2020-08-31 | $175.6m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2020-06-01 to 2020-08-31 | $61.5m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 6 months, 2020-03-01 to 2020-08-31 | $126.5m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2020-06-01 to 2020-08-31 | $25.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2020-03-01 to 2020-08-31 | $49.1m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2020-06-01 to 2020-08-31 | $16.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 6 months, 2020-03-01 to 2020-08-31 | $34.7m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2020-06-01 to 2020-08-31 | $8.9m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2020-03-01 to 2020-08-31 | $14.8m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2020-06-01 to 2020-08-31 | $3.0k | us-gaap:InterestExpense |
| Interest expense | 6 months, 2020-03-01 to 2020-08-31 | $6.0k | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-06-01 to 2020-08-31 | $2.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2020-03-01 to 2020-08-31 | $3.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-06-01 to 2020-08-31 | $6.4m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2020-03-01 to 2020-08-31 | $10.6m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-06-01 to 2020-08-31 | $0.25 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2020-03-01 to 2020-08-31 | $0.41 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-06-01 to 2020-08-31 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2020-03-01 to 2020-08-31 | $0.41 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-06-01 to 2020-08-31 | 25,974,412 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2020-03-01 to 2020-08-31 | 25,965,370 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2020-03-01 to 2020-08-31 | $28.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2020-03-01 to 2020-08-31 | $1.3m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2020-03-01 to 2020-08-31 | $11.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2020-03-01 to 2020-08-31 | $423.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-08-31 | $83.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2020-08-31 | $155.2m | us-gaap:AssetsCurrent |
| Total assets | at 2020-08-31 | $360.2m | us-gaap:Assets |
| Current liabilities | at 2020-08-31 | $34.6m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2020-08-31 | $65.9m | us-gaap:Liabilities |
| Shareholders' equity | at 2020-08-31 | $294.3m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 45,478 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 29, 2020.*

*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; 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; 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; our ability to protect our information systems from cybercrime or other disruptions; 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, 2020 and our Quarterly Report on Form 10-Q for the quarter ended May 31, 2020 before making an investment in our common stock.*

### Overview

Ennis, Inc. (formerly Ennis Business Forms, Inc.) 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 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 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 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, and Ace FormsSM. 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 independent distributors, as well as occasional sales of our products to 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 completed two acquisitions in fiscal year 2020. On July 15, 2019, we acquired all the outstanding stock of The Flesh Company (“Flesh”) for approximately $9.9 million (which includes potential earn-out consideration of up to $500,000) plus the assumption of trade payables, subject to final working capital and certain other adjustments. The earn-out consideration is capped at $500,000 and is payable over the four years following the closing if certain minimum operating income levels are achieved. We recorded intangible assets with definite lives of approximately $1.2 million in connection with the transaction. Flesh, together with its wholly owned subsidiary, Impressions Direct, Inc. (“Impressions Direct”), is a printing company with two locations, with the St. Louis, Missouri location containing Flesh’s corporate office and the direct mail operations of Impressions Direct, and the Parsons, Kansas location containing Flesh’s main manufacturing facility and warehouse. The acquisition of Flesh, which prior to the acquisition generated approximately $31.0 million in sales for its fiscal year ended September 30, 2018, expanded our operations with respect to business forms, checks, direct mail services, integrated products and labels.

On March 16, 2019, we acquired the assets of Integrated Print & Graphics (“Integrated”), which is based in South Elgin, Illinois, 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. We also recorded intangible assets with definite lives of approximately $1.8 million in connection with the transaction. The acquisition of Integrated, which prior to the acquisition generated approximately $20.0 million in sales for its fiscal year ended December 31, 2018, created additional capabilities within our high color commercial print product line.

### 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 –** In December 2019, a novel strain of COVID-19 was reported in Wuhan, China, and by early 2020, the virus had spread to other countries, including the United States. This pandemic has significantly impacted health and economic conditions throughout the United States and the world, including the markets in which we operate. In response to COVID-19, federal, state and local authorities have recommended social distancing and have imposed various restrictions, including quarantine and isolation measures, mandatory closures of businesses deemed “non-essential” in certain jurisdictions. As of the date of this report, our plants continue to be deemed “essential,” largely due to our business’s support of many important sectors of the economy, including healthcare, government, food and beverage and banking. The COVID-19 pandemic continues to have an adverse impact on our business and our operations, especially demand for our products. We did however see improvement in our gross profit margin and our operational margin during the second quarter. Even so, we expect the pandemic to continue to have a negative impact on our financial condition and operational results, on a comparative basis, until at least the latter part of this fiscal year. While the impacts of the pandemic have been significant, they were within our forecasted parameters for the period ended August 31, 2020.

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, 2020 we had almost $83.9 million in cash, in addition to $99.3 million available under our credit facility, if needed. During the period, our cash position increased by almost $15.6 million ($8.1 million from May 31, 2020), and our working capital position increased by almost $8.7 million from February 29, 2020 ($6.4 million from May 31, 2020). In addition, our liquidity and debt ratios have all improved since the start of the pandemic, with our current ratio (calculated by dividing our current assets by our current liabilities) increasing from 3.95 to 4.48, our quick ratio (calculated by dividing our current assets less inventories by our current liabilities) increasing from 3.03 to 3.52, and our net debt to equity ratio (after application of cash) decreasing from .01 to -.06.

- *Receivable and Inventory Management:*

We continue to closely monitor and manage our outstanding trade receivables and inventories. During the second quarter, our days’ sales in our receivables remained fairly constant at about 35 days, while our days’ sales of inventory increased slightly from February 29, 2020 (30 days), it remained consistent with May 31, 2020 (35 days). The Company continues to monitor incoming orders and is adjusting its raw material purchases accordingly.

- *Supply Chain:*

To date, COVID-19 has not impacted, nor do we 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 in operation, and we have been able to switch from impacted suppliers to non-impacted suppliers in several instances since the outbreak. 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. To date, our traditional tag and folder operations, have been impacted more severely than our specialty products operations, including those that service the medical, banking and other related industries. We will continue to monitor incoming order volume so that we can proactively adjust our costs accordingly. While economic activity remains depressed due to the pandemic, we will continue to monitor projected sales and our cost structure. We believe the cost cutting measures we have implemented will not impact our ability to service increased customer demand when economic conditions improve. While our gross profit margin continues to run below comparable levels, we were able to increase our sequential gross profit margin during the current quarter by 210 basis points from 26.9% to 29.0% and our operating margin from 6.6% to 10.3% due to the costs control programs employed.

- *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 continues to be many uncertainties regarding the impact of the COVID-19 pandemic, including the scope of scientific and health issues, the anticipated duration of the pandemic and the status of viable vaccines, and the extent of local, regional and worldwide economic, social, and political disruption. 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 29, 2020 and Quarterly Report on Form 10-Q for the quarter ended May 31, 2020.

**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 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 do acquisitions.

**Production capacity and price competition within our industry –** Changes in the value of the U.S. dollar can have a significant 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. For the latter part of fiscal year 2020, with the strengthening of the U.S. dollar, imports began to flow back into the domestic marketplace. This development, along with continued slowing of domestic demand, resulted in renewed marketing of certain paper grades that previously had been placed on allocation. Consequently, spot pricing has become very competitive. The uncoated paper market was relatively balanced, but overall demand was weak, and mills dropped back to more normal operating levels. Coated paper demand dropped considerably and, even with several major closures, operating rates dropped and are expected to remain low for the foreseeable future. As such, pricing during the second half of fiscal 2020 was relatively stable.

Before the onset of the COVID-19 pandemic, with more capacity shuts/conversions planned across the market, we anticipated operating rates for uncoated paper to sustain in the lower 90% range. In light of this, in addition to expected decreases in domestic demand, expected increases in exports and expected decreases in domestic exports, prices were expected to remain relatively stable until at least the second half of fiscal year 2021. During the second quarter, demand for coated paper continued to drop, and operating rates are expected to remain low during the foreseeable future. Continued closures/conversions, while anticipated, are not expected to occur at levels sufficient to completely balance the coated paper market. Imports are expected to drop with demand, but the strong U.S. dollar could push imports even higher, which could lead to pressure on coated paper pricing.

The COVID-19 pandemic has reduced the demand for both coated and uncoated papers faster than previously expected in the first quarter of fiscal 2021 and paper companies have idled some of their mills to adjust supply and reduce inventory levels. As the economy has begun to improve, demand has increased in the second quarter for coated and uncoated freesheet papers which will reduce the excess inventory in the market. Even so, paper pricing to date has been flat to slightly lower in the spot market and imports have recently declined. It is unclear whether this is a temporary situation or not. 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. Additionally the possibility of paper shortages in the market is not a 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 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. 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 29, 2020.

### 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, 2020 and the comparative period for 2019 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, 2020 |  | 2019 |  | Six Months Ended August 31, 2020 |  | 2019 |  |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net sales | $86,612 | 100.0% | $108,816 | 100.0% | $175,608 | 100.0% | $216,849 | 100.0% |
| Cost of goods sold | 61,457 | 71.0 | 76,358 | 70.2 | 126,546 | 72.1 | 151,695 | 70.0 |
| Gross profit margin | 25,155 | 29.0 | 32,458 | 29.8 | 49,062 | 27.9 | 65,154 | 30.0 |
| Selling, general and administrative | 16,535 | 19.1 | 19,644 | 18.1 | 34,658 | 19.7 | 39,347 | 18.1 |
| Gain from disposal of assets | (300) | (0.4) | - | — | (412) | (0.2) | - | — |
| Income from operations | 8,920 | 10.3 | 12,814 | 11.7 | 14,816 | 8.4 | 25,807 | 11.9 |
| Other income (expense) | (243) | (0.3) | 68 | 0.1 | (484) | (0.3) | 91 | — |
| Earnings before income taxes | 8,677 | 10.0 | 12,882 | 11.8 | 14,332 | 8.1 | 25,898 | 11.9 |
| Provision for income taxes | 2,256 | 2.6 | 3,349 | 3.0 | 3,726 | 2.1 | 6,733 | 3.1 |
| Net earnings | $6,421 | 7.4% | $9,533 | 8.8% | $10,606 | 6.0% | $19,165 | 8.8% |

### Three months ended August 31, 2020 compared to three months ended August 31, 2019

*Net Sales.* Our net sales were $86.6 million for the quarter ended August 31, 2020, compared to $108.8 million for the same quarter in the prior year, a decrease of $22.2 million, or 20.4%. Our sales for the quarter were significantly impacted by economic conditions driven by the COVID-19 pandemic. Our transactional form sales for the quarter decreased significantly given country wide governmental restrictions that virtually stopped the country’s economic engine, including the closure of businesses deemed “non-essential,” and associated reductions in consumer demand. However, certain sectors of the economy did not experience a downturn or as much of a downturn, and “flat” sales of a number of our specialty products helped offset the reduction in sales for the quarter. We continue to hunt for new sales in new markets and new channels. Our acquisition program, which is an integral part of our sales growth strategy, had minimal impact on our sales during the quarter.

*Cost of Goods Sold and Gross Profit Margin.* Our cost of goods sold decreased $14.9 million, or 19.5%, from $76.4 million for the three months ended August 31, 2019 to $61.5 million for the three months ended August 31, 2020. Our gross profit margin (“margin”) was $25.2 million for the quarter, or 29.0% of net sales, compared to $32.5 million, or 29.8% of net sales, for the same quarter in the prior year. While our plants were deemed “essential” and as such have remained open, our sales for the quarter continued to be significantly impacted by reduced economic activity due to COVID-19. As such, our reduced production levels adversely impacted our factory utilization and efficiency factors. We continue to monitor incoming order volume so that we can proactively adjust our costs. All of these actions to reduce variable and fixed costs are on-going as we continue to evaluate our projected sales and cost structure. While our current year margin continues to be run below comparable metrics, on a sequential quarter basis, our margin increased from 26.9% to 29.0% due to cost cutting measures employed.

*Selling, general, and administrative expense.* For the three months ended August 31, 2020, our selling, general, and administrative (“SG&A”) expenses were $16.5 million compared to $19.6 million for the three months ended August 31, 2019, a decrease of $3.1 million, or 15.8%. On a sequential basis, our SG&A expenses were down $1.6 million, or 8.8%. As a percentage of net sales, SG&A expenses for the current quarter were 19.1% and 18.1% for the three months ended August 31, 2020 and August 31, 2019, respectively. 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 current quarter is primarily attributed to the sale of underutilized land and buildings. Remaining product from these facilities has been transitioned to another Company facility.

*Income from operations.* Our income from operations during the quarter was significantly impacted by the decline in demand in our products due to COVID-19. For the three months ended August 31, 2020 our income from operations was $8.9 million, or 10.3% of net sales, as compared to $12.8 million, or 11.8% of net sales, for the three months ended August 31, 2019. While down on a comparable basis, our operating income is up significantly on a sequential basis from $5.9 million, or 6.6% for the three months ended May 31, 2020.

*Other income (expense).* Other expense was $243,000 for the three months ended August 31, 2020 compared to income of $68,000 for the three months ended August 31, 2019. This increase was primarily due to a decrease in our interest income of

$350,000 and an increase in our pension expense of $230,000 over the comparable quarter. Our interest expense for the current quarter was negligible due to the payoff of our credit facility during the 2020 fiscal year.

*Provision for income taxes.* Our effective tax rate was 26.0% for the three months ended August 31, 2020 and the three months ended August 31, 2019.

*Net earnings.* Net earnings, due to the factors above, were $6.4 million for the three months ended August 31, 2020 as compared to $9.5 million for the comparable quarter in the prior year, a decrease of $3.1 million. Net earnings per diluted share for the three months ended August 31, 2020 was $0.25, compared to $0.37 for the same quarter in the prior year. While our comparable earnings continue to be impacted by the COVID-19 pandemic, we did increase our earnings in the current quarter by $0.09 per diluted share, or 56% over our sequential quarter’s result of $0.16 per diluted share.

### Six months ended August 31, 2020 compared to six months ended August 31, 2019

*Net Sales.* Our net sales were $175.6 million for the six-month period ended August 31, 2020, compared to $216.8 million for same period last year, or a decrease of 19.0%. Our sales for the period were significantly impacted by economic conditions driven by the COVID-19 pandemic. Our transactional form sales for the period decreased significantly given country wide governmental restrictions that virtually stopped the country’s economic engine, including the closure of businesses deemed “non-essential,” and associated reductions in consumer demand. However, certain sectors of the economy did not experience a downturn or as much of a downturn, and “flat” sales of a number of our specialty products helped offset the reduction in sales for the period. Our previous year acquisitions impacted our comparable net sales by approximately $10.5 million during the six months ended August 31, 2020.

*Cost of Goods Sold.* Our cost of goods sold was $126.5 million for the six months ended August 31, 2020, compared to $151.7 million for the same period last year, a decrease of $25.2 million, or 16.6%. Our margin was $49.1 million for the six-month period ended August 31, 2020, or 27.9%. This compares to 30.0% for the same six-month period last year. While our plants have been deemed “essential” and as such have remained open, our sales for the period were significantly impacted by reduced economic activity due to COVID-19. As such, our reduced production levels adversely impacted our factory utilization and efficiency factors. We continue to monitor incoming order volume so that we can proactively adjust our costs accordingly. All of these actions to reduce variable and fixed costs are on-going as we continue to evaluate our projected sales and cost structure. In addition, our margin was also impacted by product mix changes during the period.

Selling, general, and administrative expense. Our SG&A expenses were $34.7 million for the six months ended August 31, 2020, compared to $39.3 million for the same period last year, or a decrease of 11.7%. As a percentage of sales, the SG&A expenses were 19.7% and 18.1% for the six months ended August 31, 2020 and August 31, 2019, respectively. 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 $0.4 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, 2020 was $14.8 million, or 8.4% of sales, as compared to $25.8 million, or 11.9% of sales, for the six months ended August 31, 2019.

*Other income (expense).* Other income for the six months ended August 31, 2020 was $0.5 million as compared to $0.1 million expense for the six months ended August 31, 2019. This increase was primarily due to the increase in pension expense for the current fiscal year. Interest expense for the current quarter was negligible due to the payoff of our credit facility during the 2020 fiscal year.

*Provision for income taxes.* Our effective tax rate was 26.0% for the six months ended August 31, 2020 and the six months ended August 31, 2019.

*Net earnings.* Net earnings which continue to be significantly impacted by COVID-19 pandemic were $10.6 million for the six months ended August 31, 2020 as compared to $19.2 million for the comparable period last year, a decrease of $8.6 million. Net earnings per diluted share for the six months ended August 31, 2020 was $0.41, compared to $0.74 for the same six-month period last 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 18% 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, 2020 | February 29, 2020 |
| --- | ---: | ---: |
| Working capital | $120,578 | $111,915 |
| Cash | $83,906 | $68,258 |

We are unable to estimate the full impact of COVID-19 on our financial condition and results of operations given numerous uncertainties associated with the pandemic, including the prolonged shutdown of business activity. Although, the Company believes it is unlikely, if our cash flows from operations and our funds available under the Credit Facility are insufficient to meet our capital requirements, we may deem it necessary to pursue debt or equity financings. There can be no assurance that any such financings, if deemed necessary, will be available on terms not unduly dilutive to our shareholders and otherwise satisfactory to us.

***Working Capital.*** Our working capital increased $8.7 million or 7.7%, from $111.9 million at February 29, 2020 to $120.6 million at August 31, 2020. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.0 to 1.0 at February 29, 2020 to 4.5 to 1.0 at August 31, 2020. Our working capital and current ratio were positively impacted by a $15.6 million increase in cash and $4.3 million in reduction of accounts payable and employee compensation and benefits. These positive increases were offset by a $9.6 million reduction in receivables and $1.5 million reduction in inventories.

*(Dollars in thousands)*

|  | Six months ended August 31, 2020 | 2019 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $28,154 | $27,718 |
| Net cash used in investing activities | $(353) | $(20,264) |
| Net cash used in financing activities | $(12,153) | $(43,396) |

***Cash flows from operating activities.*** Cash provided by operating activities increased by $0.5 million from $27.7 million for the six months ended August 31, 2019 to $28.2 million for the six months ended August 31, 2020. Our increased operational cash flows in comparison to the comparable period in the prior year was primarily the result of a $7.7 million decrease in our accounts receivable and a $2.6 million decrease in our inventories. These increases were offset by a $8.6 million decrease in our operational earnings, in addition to a $0.9 million reduction in our accounts payable and accrued expenses.

***Cash flows from investing activities.*** Cash used in investing activities decreased $19.9 million from $20.3 million to $0.4 million used for the six months ended August 31, 2019 and August 31, 2020, respectively. This was primarily due to 18.7 million less used for purchase of businesses, in addition to costs associated with the purchase of Integrated and Flesh in the first two quarters of fiscal year 2020.

***Cash flows from financing activities.*** We used $31.2 million less in cash from financing activities during the six months ended August 31, 2020 compared to the same period in the prior year. The decrease in our cash used during the six months ended August 31, 2020 compared to the six months ended August 31, 2019 resulted from two factors: (i) the pay-off of $30.0 million in long-term debt during the six months ended August 31, 2019; and (ii) $1.6 million to repurchase our common stock under our stock repurchase program during the six months ended August 31, 2019, compared to $0.4 million to repurchase shares of 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, 2020, 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, 2020, the Company had no outstanding debt, and the Company had $0.7 million outstanding under standby letters of credit arrangements, leaving approximately $99.3 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 availability under the Credit Facility 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 28, 2021. Assuming a stable funding status, we would expect that our future contributions to be between $1.5 million and $3.0 million per year. However, changes in actual investment returns or in discount rates could change this amount significantly. We made contributions totaling $3.0 million to our Pension Plan during fiscal year 2020. 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, 2020, we had an unfunded pension liability recorded on our balance sheet of $8.9 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 period, we have spent approximately $1.3 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, 2020 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 August 31, 2020.

## 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, 2020 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, 2,154 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, 2020 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, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 224 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 29, 2020 and our Quarterly Report on Form 10-Q for the quarter ended May 31, 2020.

Filed Oct 7, 2020.
Source: SEC EDGAR, the filing index for accession 0001564590-20-046031. Last ingested by Listed: Oct 24, 2026, 14:52 ET. No prices; not investment advice.