ENNIS, INC. (EBF) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management’s Discussion and Analysis provides material historical and prospective disclosures intended to enable investors and other users to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risk and uncertainties, including those discussed under the caption “Risk Factors” in Item 1A of this Annual Report on Form 10-K and elsewhere in this Report. You should read this discussion and analysis in conjunction with our Consolidated Financial Statements and the related notes appearing elsewhere in this Report. The words “anticipate,” “preliminary,” “expect,” “believe,” “intend” and similar expressions identify forward-looking statements. 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.

In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements may prove to be inaccurate and speak only as of the date when made. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

This Management’s Discussion and Analysis covers the continuing operations of the Company, which are comprised of the production and sale of business forms and other business products. This Management’s Discussion and Analysis includes the following sections:

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Overview – An overall discussion regarding our Company, the business challenges and opportunities we believe are key to our success, and our plans for facing these challenges relating to our continuing operations.

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Critical Accounting Estimates – A discussion of the accounting policies that require our most critical judgments and estimates relating to our continuing operations. This discussion provides insight into the level of subjectivity, quality, and variability involved in these judgments and estimates. This section also provides a summary of recently adopted and recently issued accounting pronouncements that have or may materially affect our business.

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Results of Operations – An analysis of our consolidated results of operations and segment results for the three years presented in our Consolidated Financial Statements. This analysis discusses material trends within our continuing business and provides important information necessary for an understanding of our continuing operating results.

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Liquidity and Capital Resources – An analysis of our cash flows and a discussion of our financial condition and contractual obligations. This section provides information necessary to evaluate our ability to generate cash and to meet existing and known future cash requirements over both the short and long term.

References to 2024, 2023 and 2022 refer to the fiscal years ended February 29, 2024, February 28, 2023 and February 28, 2022, respectively.

Overview

The Company – 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.

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

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addition to the risk factors discussed under the caption “Risk Factors” in Item 1A of this Annual Report, some of the key 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. 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.

Production capacity and price competition within our industry – Industry supply of paper products is subject to fluctuation as changing industry conditions influence producers to idle or permanently close individual machines or mills, and or convert them to different product lines, such as packaging to offset a decline in demand. In 2022 there was a build-up of paper mill’s customer inventory, and 2023 data showed an inventory correction in reduced spending. Paper mill shipments were down across the board through the first half of 2023 as buyers worked through elevated inventories of their products. Producers responded to the sluggish demand conditions with heavy downtime rather than permanent closures keeping prices mostly stable. While margins remain under pressure due to the resulting weak volumes, 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 and focus on maintaining our margins.

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 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 credit losses, 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 the following accounting policies are the most critical due to their effect on our more significant estimates and judgments used in preparation of our Consolidated Financial Statements.

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Pension Plan – We maintain the Pension Plan for certain eligible employees. Included in our financial results are Pension Plan costs that are measured using actuarial valuations and require the use of a number of significant assumptions. Changes in these assumptions can result in different expense and liability amounts and future actual pension cost experience and funding requirements may differ materially from current estimates.

As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our Pension Plan funding status and associated liability recorded. The expected rate of return on assets was 6.00% and 6.50% at February 29, 2024 and February 28, 2023, respectively.

Similar to fluctuations in market values, a drop in the discount rate could potentially negatively impact our Pension Plan's funded status, recorded pension liability and future contribution levels with the opposite impact occurring for an increase in the discount rate. During fiscal year 2024, the discount rate used to determine the net pension obligations for purposes of our Consolidated Financial Statements increased to 5.15% from 5.00% in fiscal year 2023. The discount rate is reviewed by management annually and is adjusted to reflect movements in the average Mercer and FTSE (formerly Citigroup) pension yield curves for mature pension plans with duration of about 12-15 years. The Company estimated the duration of its pension benefit obligation (PBO) to be approximately 12-15 years. Each 10 basis point change in the discount rate impacts our computed pension liability by about $0.5 million.

Also, continued changes in the mortality assumptions could potentially impact our Pension Plan's funded status. For the February 29, 2024 measurement, no change was made to the mortality assumption. While U.S. mortality has been higher in the last couple of years due to the COVID-19 pandemic and other related factors, the mortality assumption is used to estimate the future lifetime of plan participants. Any actual impact on the Pension Plan from the higher than expected mortality has already been recognized in the underlying participant data used to measure the pension liability. The impact on future longevity is still being studied, and there is a general expectation that the current population is a healthier cohort such that mortality rates may return to pre-pandemic levels. This assumption will continue to be monitored.

Impairment Assessments on Goodwill and Other Intangible Assets – Amounts allocated to intangibles and goodwill are determined based on valuation analyses for our acquisitions. Amortizable intangibles are amortized over their expected useful lives. We evaluate these amounts periodically (at least once a year) to determine whether a triggering event has occurred during the year that would indicate potential impairment.

We assess goodwill for impairment annually as of December 1, or more frequently if impairment indicators are present. The Company uses qualitative factors to determine whether it is more likely than not (likelihood of more than 50%) that the fair value of a reporting unit exceeds its carrying amount, including goodwill. Some of the qualitative factors considered in applying this test include consideration of macroeconomic conditions, industry and market conditions, cost factors affecting the reporting unit’s business, overall financial performance of the business, and performance of the common share price of the Company. If qualitative factors are not deemed sufficient to conclude that it is more likely than not that the fair value of the reporting unit exceeds its carrying value, then a one-step quantitative approach is applied in making an evaluation. The quantitative evaluation utilizes multiple valuation methodologies, including a market approach (market price multiples of comparable companies) and an income approach (discounted cash flow analysis). The computations require management to make significant estimates and assumptions, including, among other things, selection of comparable publicly traded companies, an appropriate discount rate applied to future earnings reflecting a weighted average cost of capital, and earnings growth assumptions. A discounted cash flow analysis requires management to make various assumptions about future sales, operating margins, capital expenditures, working capital and growth rates. If the quantitative evaluation results in the fair value of the reporting unit being lower than the carrying value, an impairment charge is recorded. A goodwill impairment charge was not required for the fiscal years ended February 29, 2024 or February 28, 2023.

Allowance for Credit Losses and Accounts Receivable – Net sales consist of gross sales invoiced to customers, less certain related charges, including discounts, returns and other allowances. Our allowance for credit losses is based on an analysis that estimates the amount of our total customers receivable balance that is not collectible. This analysis includes assessing a default probability to customers’ receivable balances, which is influenced by several factors including (i) current market conditions, (ii) periodic review of customer credit worthiness, and (iii) review of customer receivable aging and payment trends. While we believe we have exercised prudent judgment and applied reasonable assumptions, there can be no assurance that in the future, changes in economic conditions or other factors would not cause changes in the financial health of our customers. If the financial health of our customers deteriorates, the timing

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and level of payments received could be impacted and therefore, could result in a change to our estimated losses. Returns, discounts and other allowances have historically been insignificant.

Allowance for Excess and Obsolete Inventories – With the exception of approximately 7.0% and 6.1% of inventories valued using the lower of last-in, first-out ("LIFO") cost flow assumption for fiscal years 2024 and 2023, respectively, our inventories are valued at the lower of cost or net realizable value. We regularly review inventory values on hand, using specific aging categories, and write down inventory deemed obsolete and/or slow-moving based on historical usage and estimated future usage to its estimated net realizable value. As actual future demand or market conditions may vary from those projected by management, adjustments to inventory valuations may be required. The allowance for excess and obsolete inventory at fiscal years ended 2024 and 2023 were $1.3 million and $1.6 million, respectively.

Results of Operations

The following discussion provides information which we believe is relevant to understanding 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. Unless otherwise indicated, this financial overview is for the continuing operations of the Company, which are comprised of the production and sales of business forms and other business products. The operating results of the Company for fiscal year 2024 and the comparative fiscal years 2023 and 2022 are included in the tables below.

Consolidated Summary

Net Sales. Our net sales were $420.1 million for fiscal year 2024, compared to $431.8 million for fiscal year 2023, a decrease of $11.7 million, or 2.7%, primarily due to a $32.9 million decrease in volume demand, partially offset by an approximately $21.2 million increase in revenues generated from our recent acquisitions. The print market overall continues to be fairly soft with competitive pricing as well as some of our print partners have experienced slowness in their sales and reduced their outsourced work to us during the current fiscal year.

Our net sales increased from $400.0 million for fiscal year 2022 to $431.8 million for fiscal year 2023, an increase of 8%. The increase was attributable to $3.3 million in revenues from our 2023 acquisitions of School Photo Marketing as well as price and volume increases that were partially offset by reduced volumes in the fourth quarter.

Cost of Goods Sold. As a result of decreased sales volume, our manufacturing costs decreased $6.0 million, or 2.0% from $300.8 million for fiscal year 2023 to $294.8 million for fiscal year 2024. Our gross profit was $125.3 million or 29.8% of sales for fiscal year 2024, compared to $131.1 million or 30.3% of sales for fiscal year 2023. The print market overall was fairly soft during fiscal year 2024 with competitive pricing from similar situated vendors as us, resulting in downward pressure on operating margin.

Our manufacturing costs increased $15.5 million, or 5.4%, from $285.3 million for fiscal year 2022 to $300.8 million for fiscal year 2023. Our gross profit was $131.1 million or 30.3% of sales for fiscal year 2023, compared to $114.7 million or 28.7% for fiscal year 2022. Improved operational efficiencies and pricing adjustments to cover inflationary costs, primarily of paper, supplies and labor, contributed to improve our gross profit margin as a percentage of sales.

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Selling, general, and administrative expenses. For fiscal year 2024, our selling, general and administrative (“SG&A”) expenses were $68.8 million compared to $70.8 million for fiscal year 2023, a decrease of $2.0 million, or 2.8% primarily as a result of reduction in executive incentive compensation expense. As a percentage of sales, SG&A expenses remained flat at 16.4% in fiscal year 2024 and 2023.

Our SG&A expenses decreased approximately 0.9%, from $71.4 million for fiscal year 2022 to $70.8 million for fiscal year 2023. As a percentage of sales, SG&A expenses declined from 17.9% in fiscal year 2022 to 16.4% for fiscal year 2023. Our SG&A expense decreased as a result of operational efficiencies and intangible assets fully amortized in fiscal year 2022 partially offset by increased executive incentive compensation expense.

(Gain) loss from disposal of assets. The $0.1 million loss from disposal of assets for fiscal 2024 is primarily from the sale of unused manufacturing equipment. The $5.9 million gain from disposal of assets for fiscal 2023 is primarily from the sale of an unused manufacturing facility, $5.8 million, and $0.1 million of manufacturing equipment. The $0.3 million gain from disposal of assets for fiscal year 2022 is primarily related to the sale of an unused manufacturing facility and manufacturing equipment.

Income from operations. Primarily due to factors described above, our income from operations for fiscal year 2024 decreased $9.7 million to $56.5 million or 13.4% of net sales from $66.2 million or 15.3% of net sales for fiscal year 2023. Income from operations for fiscal year 2023 increased 51.8% to $66.2 million, or 15.3% of net sales, from $43.6 million, or 10.9% of net sales in 2022.

Other income (expense). Interest income for fiscal year 2024 was $4.0 million compared to $0.8 million in 2023 and $0.1 million in 2022. Our increase in interest income in 2024 was from higher interest rates in 2024 compared to 2023 and higher interest rates compared to 2002.

Other expense for fiscal year 2024 was $1.3 million compared to $2.0 million for fiscal year 2023. Our decrease in expense was from lower non-service cost components of net periodic benefit costs relating to pension expense in fiscal year 2024.

Other expense was $2.0 million for fiscal year 2023 compared to $1.6 million for fiscal year 2022. The increase in expense was primarily from higher non-service cost components of net periodic benefit costs relating to pension expense in fiscal year 2023.

Provision for income taxes. Our effective tax rates for fiscal years 2024, 2023 and 2022 were 28.0%, 27.2%, and 30.9%, respectively. The higher effective tax rate for fiscal year 2022 was primarily the result of distributions during the year from our deferred compensation plan which was terminated in fiscal year 2021.

Net earnings. Net earnings were $42.6 million, or $1.64 per diluted share for fiscal year 2024 as compared to $47.3 million of $1.82 per diluted share for fiscal year 2023. Net earnings were impacted by decreased revenues in fiscal year 2024. Net earnings in fiscal year 2023 were impacted by a $5.8 million gain from disposal of assets that added $0.17 per share. Net earnings were $47.3 million, or $1.82 per diluted share for fiscal year 2023, as compared to $29.0 million, or $1.11 per diluted share for fiscal year 2022. Net earnings were impacted by increased revenues in fiscal year 2023.

Liquidity and Capital Resources

We rely on our cash flows generated from operations 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, compensation and benefits for employees and the payment of dividends to our shareholders. We believe that our current cash balance of $81.6 million at February 29, 2024, short-term investments of $29.3 million and cash flows from operations are expected to be similar to prior years which should be adequate to cover the next twelve months

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and beyond of our operating and capital requirements. Our annual capital requirements are expected to be within our historical levels of between $3.0 million and $6.0 million.

Working Capital. Our working capital increased by approximately $12.2 million, or 7.9%, from $155.4 million at February 28, 2023 to $167.6 million at February 29, 2024. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.8 to 1.0 for fiscal year 2023 to 6.0 to 1.0 for fiscal year 2024. Our increase in working capital primarily reflects the increase in cash and short-term investments, $17.0 million, offset by the decrease in accounts receivable, $6.3 million, and inventory, $6.8 million, and the decrease in our accounts payable and accrued expense, $7.0 million. We strategically reduced inventory levels to improve cash flow and the decrease in receivables is primarily a result of accelerating the timing of collections relative to fiscal year end.

Our working capital increased by approximately $27.5 million, or 21.5%, from $127.8 million at February 28, 2022 to $155.4 million at February 2023. Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.4 to 1.0 for fiscal year 2022 to 4.8 to 1.0 for fiscal year 2023. Our increase in working capital primarily reflects the increase in cash, $8.4 million, accounts receivable, $14.5 million, and inventory, $8.3 million, offset by the increase in our accounts payable and accrued expense.

Cash Flow Components

Cash flows from operating activities. Cash provided by operating activities was $69.1 million for fiscal year 2024 (an increase of $22.3 million compared to fiscal year 2023), $46.8 million for fiscal year 2023 (a decrease of $3.9 million compared to fiscal year 2022) and $50.7 million for fiscal year 2022.

Our increased operational cash flows in fiscal year 2024 compared to fiscal year 2023 was primarily the result of a $16.9 million decrease from inventories, $18.1 million decrease from our accounts receivable, offset by a $4.7 decrease in earnings, $5.3 million decrease in payables and accrued expenses and a $5.9 million gain from disposal of assets during fiscal year 2023.

Our decreased operational cash flows in fiscal year 2023 compared to fiscal year 2022 was primarily the result of a $3.4 million decrease from inventories, $8.2 million decrease from our accounts receivable, $5.9 million gain from disposal of assets and a $5.0 million decrease from deferred tax liability offset by $18.3 million in increased earnings.

Cash flows from investing activities. Cash used in investing activities was $55.0 million in fiscal year 2024 compared to $11.5 million in fiscal year 2023, and $10.1 million in fiscal year 2022. The increase in cash used in fiscal year 2024 compared to 2023 was primarily due to net purchase and maturity of short-term investments of $28.9 million and a $10.8 million increase in costs to acquire businesses. During fiscal year 2024, we purchased approximately $31.4 million of U.S. government treasury bills with staggered maturities of between three months and twelve months. The $1.4 million decrease in cash used in fiscal year 2023 compared to fiscal year 2022 was primarily due to a $2.2 million decrease in capital expenditures and $0.8 million increase in proceeds from disposal of plant and property, offset by a $4.4 million increase in costs to acquire businesses.

Cash flows from financing activities. Cash used in financing activities was $26.4 million in fiscal year 2024 compared to $27.0 million in fiscal year 2023 and $30.2 million used in fiscal year 2022.

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The decrease in our cash used in financing activities in fiscal year 2024 was primarily due to a $0.5 million decrease of common stock repurchases. The decrease in our cash used in financing activities in fiscal year 2023 was primarily due to a $3.7 million decrease of common stock repurchases.

Stock Repurchase – The Board has authorized the repurchase of the Company’s outstanding common stock through a stock repurchase program, which authorized amount is currently up to $60.0 million in the aggregate. Under the repurchase program, purchases may be made from time to time in the open market or through privately-negotiated transactions, depending on market conditions, share price, trading volume and other factors. Repurchases may be commenced or suspended at any time or from time to time without prior notice, provided that any purchases must be made in accordance with applicable insider trading rules and securities laws and regulations. Since the program’s inception in October 2008, we have repurchased 2,242,461 common shares under the program at an average price of $16.34 per share. During our fiscal year 2024, we repurchased 29,350 shares of common stock at an average price of $19.96 per share. As of February 29, 2024, $23.4 million remained available to repurchase shares of the Company’s common stock under the program. The Company expects to continue to repurchase its shares under the repurchase program during fiscal year 2025 provided that the Board determines such repurchases to be in the best interests of the Company and its shareholders.

Credit Facility – As of February 29, 2024, we had $0.3 million outstanding under a standby letter of credit arrangement secured by a cash collateral bank account. It is anticipated that our cash, short-term investments and funds from operating cash flows will be sufficient to fund anticipated future expenditures.

Pension Plan – The funded status of our Pension Plan is dependent on many factors, including returns on invested assets, the level of market interest rates and the level of funding. The assumptions used to calculate the pension funding deficit are different from the assumption used to determine the net pension obligations for purposes of our Consolidated Financial Statements. The funding of our Pension Plan is governed by the Employee Retirement Income Security Act of 1974 (“ERISA”), as amended, and the Internal Revenue Code and is also subject to the Moving Ahead for Progress in the 21st Century Act, the Highway and Transportation Funding Act of 2014, the Bipartisan Budget Act of 2015, and the American Rescue Plan Act of 2021. Under these regulations, the liabilities are discounted using 25-year average corporate bond rates within a specified corridor. For the period ended February 29, 2024, the specified corridor around the 25-year average was 5%. We made a contribution of $1.2 million to our Pension Plan in fiscal year 2024, $2.0 million in fiscal year 2023 and $1.0 million in fiscal year 2022. Given our funding status as of February 29, 2024, and absent any significant negative event, we anticipate that our future contributions will be between $1.0 million and $3.0 million per year, depending on our Pension Plan’s funding.

Inventories – We believe our current 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 expenditure requirements for fiscal year 2024, exclusive of capital required for possible acquisitions, will be in line with our historical levels of between $3.0 million and $5.0 million. We expect to fund these expenditures through existing cash flows. We expect to generate sufficient cash flows from our operating activities to cover our operating and other normal capital requirements for the foreseeable future.

Contractual Obligations – There have been no significant changes in our contractual obligations since February 29, 2024 that have, or that are reasonably likely to have, a material impact on our results of operations or financial condition. The following table represents our contractual commitments as of February 29, 2024 (in thousands).

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