ENNIS, INC. - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

For the fiscal year ended February 28, 2018

OR

For the transition period from __________ to __________

Commission File Number 1-5807

ENNIS, INC.

(Exact Name of Registrant as Specified in Its Charter)

(Registrant’s Telephone Number, Including Area Code) (972) 775-9801

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐  No ☒

Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes ☐   No ☒

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one).

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No ☒

The aggregate market value of voting stock held by non-affiliates of the Registrant as of August 31, 2017 was approximately $467 million. Shares of voting stock held by executive officers, directors and holders of more than 10% of the outstanding voting stock have been excluded from this calculation because such persons may be deemed to be affiliates. Exclusion of such shares should not be construed to indicate that any of such persons possesses the power, direct or indirect, to control the Registrant, or that any such person is controlled by or under common control with the Registrant.

The number of shares of the Registrant’s Common Stock, par value $2.50, outstanding at April 30, 2018 was 25,489,502.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the 2018 Annual Meeting of Shareholders are incorporated by reference into Part III of this Report.

ENNIS, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE PERIOD ENDED FEBRUARY 28, 2018

TABLE OF CONTENTS

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Cautionary Statements Regarding Forward-Looking Statements

All of the statements in this Annual Report on Form 10-K, 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, Ennis, Inc. 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 Ennis, Inc.  These known and unknown risks, uncertainties and other factors could cause actual results to differ materially from those matters expressed in, anticipated by or implied by such forward-looking statements.

These statements reflect the current views and assumptions of management with respect to future events.  Ennis, Inc. 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 Ennis, Inc. 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, tariffs, trade regulations and import restrictions; customer credit risk; competitors’ pricing strategies; a decline in business volume and profitability could result in an impairment in our reported goodwill negatively impacting our operational results; our ability to retain key management personnel; our ability to identify, manage or integrate acquisitions; and changes in government regulations.  

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PART I

ITEM 1.  BUSINESS

Overview

Ennis, Inc. (“we” or the “Company”) 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 April 30, 2018, we acquired the assets of a tag and label operation located in New York for $4.75 million in cash plus the assumption of trade payables.  On July 7, 2017, we acquired the assets of a tag operation located in Ohio, for $1.4 million in cash plus the assumption of certain accrued liabilities.  Management considers both of these acquisitions immaterial.

On January 27, 2017, we completed the acquisition of Independent Printing Company, Inc. and its related entities (collectively “Independent”) for $17.7 million in cash consideration, in a stock purchase transaction.  Independent’s main facility located in DePere, Wisconsin. The business produces presentation folders, checks, wide format and commercial print. Independent operates under its brand name and generated approximately $37.0 million in sales during the 2016 calendar year.  Independent sells mainly through distributors and resellers. We now have four folder facilities located in Michigan, Kansas, California and Wisconsin, as well as wide format capabilities in Colorado and Wisconsin.

On May 25, 2016 the Company sold its apparel business, consisting of Alstyle Apparel, LLC and its subsidiaries (the “Apparel Segment”) to Gildan Activewear Inc. (“Gildan”) for an all-cash purchase price of $110.0 million, subject to a working capital adjustment, customary indemnification arrangements, and the other terms of the Unit Purchase Agreement dated May 4, 2016.  In connection with the sale of the Apparel Segment to Gildan, the Company was required to place $2.0 million of the purchase price in escrow as a source of funds to pay any liabilities that arose post-closing from an employment contract with a former officer of the Company.  The Company believed in good faith, based on consultation with its advisors, that no liability existed with respect to the employment contract, and as such, recorded a receivable for the full amount of the funds held in escrow.  In January 2017, the purchaser, without notice to the Company, voluntarily paid $2.0 million to the former officer of the Company and requested that all of the escrowed funds be released to it as reimbursement.  The Company denied the request, due in part because of the purchaser’s failure to provide the Company prior notice and a right to defend as the Company believes was contractually required.  In February 2018 an arbitrator ruled in favor of Gildan but did not authorize the release of the escrow funds, as his opinion was appealable.  Although the Company has filed a complaint to vacate the arbitrator’s opinion, in the fourth quarter of fiscal year 2018 the Company wrote off the full amount of the receivable.

During the fourth quarter of fiscal year 2016, we moved our folder operations from Omaha, Nebraska to Columbus, Kansas, due to the landlord’s desire to sell the facility.  The move and inefficiencies associated with starting-up and training new employees had a negative impact on revenues and operational margins over the first half of fiscal year 2017.  However, during the second half of fiscal year 2017 we saw a turnaround and the operations were marginally profitable.  This momentum largely carried over into the 2018 fiscal year.  In addition, our medical claims during fiscal year 2017 exceeded historical levels, which resulted in us incurring an additional $4.3 million in increased medical charges that had a negative impact on our earnings.  To mitigate further medical charges, we implemented a new cost reimbursement program, as well as other changes to our health plan, as of the start of the calendar year 2017.  At the completion of the first year of this program, we are encouraged with the results.

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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 56 manufacturing plants throughout the United States in 20 strategically located states. Approximately 95% of the business products manufactured are custom and semi-custom products, constructed in a wide variety of sizes, colors, number of parts and quantities on an individual job basis, depending upon the customers’ specifications.

The products sold include snap sets, continuous forms, laser cut sheets, tags, labels, envelopes, integrated products, jumbo rolls and pressure sensitive products in short, medium and long runs under the following labels: Ennis®, Royal Business Forms®, Block Graphics®, Specialized Printed Forms®, 360º Custom Labels^SM, ColorWorx®, Enfusion®, Uncompromised Check Solutions®, VersaSeal®, Ad Concepts^SM, FormSource Limited^SM, Star Award Ribbon Company®, Witt Printing®, B&D Litho®, Genforms®, PrintGraphics^SM, Calibrated Forms®, PrintXcel^SM, Printegra®, Curtis Business Forms^SM, Falcon Business Forms^SM, Forms Manufacturers^SM, Mutual Graphics^SM, TRI-C Business Forms^SM, Major Business Systems^SM, Independent Printing^SM, Hoosier Data Forms®, and Hayes Graphics®.  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 & Label^SM (which provides custom printed, high performance labels and custom and stock tags); 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., our 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 predominantly to end users, a market dominated by a few large manufacturers, such as R.R. Donnelley and Sons, Staples, Inc., Standard Register Co. (a subsidiary of Taylor Corporation), and Cenveo, Inc., or, like the Company, through a variety of independent distributors and distributor groups. While it is not possible, because of the lack of adequate public statistical information, to determine the Company’s share of the total business products market, management believes the Company is the largest producer of business forms, pressure-seal forms, labels, tags, envelopes, and presentation folders in the United States distributing primarily through independent dealers.

There are a number of competitors that operate in this segment, ranging in size from single employee-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 from generally one major supplier at favorable prices based on the volume of business.

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

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Patents, Licenses, Franchises and Concessions

Outside of the patent for our VersaSeal® product, we do not have any significant patents, licenses, franchises, or concessions.

Intellectual Property

We market our products under a number of trademarks and trade names. The protection of our trademarks is important to our business.  We believe that our registered and common law trademarks have significant value and these trademarks are important to our ability to create and sustain demand for our products. We have registered trademarks in the United States for Ennis®, EnnisOnline^SM, B&D Litho of AZ®, B&D Litho®, ACR®, Block Graphics®, Enfusion®, 360º Custom Labels^SM, Admore®, CashManagementSupply.com^SM, Securestar®, Northstar®, MICRLink®, MICR Connection^TM, Ennisstores.com^TM, General Financial Supply®, Calibrated Forms®, PrintXcel^SM, Printegra®, Trade Envelopes®, Witt Printing®, Genforms®, Royal Business Forms®, Crabar/GBF^SM, BF&S^SM, Adams McClure®, Advertising Concepts^TM, ColorWorx®, Atlas Tag & Label®, Printgraphics^SM, Uncompromised Check Solutions®, VersaSeal®, VersaSeal SecureX®, Folder Express®, Wisco®, National Imprint Corporation®, Star Award Ribbon®, Kay Toledo Tag®, Curtis Business Forms^SM, Falcon Business Forms^SM, Forms Manufacturers^SM, Mutual Graphics^SM, TRI-C Business Forms^SM, SSP®, EOSTouchpoint®, Printersmall®, Check Guard®, Envirofolder®, Independent®, Independent Checks®, Independent Folders®, Independent Large Format Solutions®, and variations of these brands as well as other trademarks. We have similar trademark registrations internationally.

Customers

No single customer accounts for as much as five percent of our consolidated net sales or accounts receivable.

Backlog

At February 28, 2018, our backlog of orders was approximately $17.4 million, as compared to approximately $14.9 million at February 28, 2017.

Research and Development

While we seek new products to sell through our distribution channel, there have been no material amounts spent on research and development in fiscal years 2018, 2017 or 2016.

Environment

We are subject to various federal, state, and local environmental laws and regulations concerning, among other things, wastewater discharges, air emissions and solid waste disposal. Our manufacturing processes do not emit substantial foreign substances into the environment. We do not believe that our compliance with federal, state, or local statutes or regulations relating to the protection of the environment has any material effect upon capital expenditures, earnings or our competitive position. There can be no assurance, however, that future changes in federal, state, or local regulations, interpretations of existing regulations or the discovery of currently unknown problems or conditions will not require substantial additional expenditures. Similarly, the extent of our liability, if any, for past failures to comply with laws, regulations, and permits applicable to our operations cannot be determined.

Employees

At February 28, 2018, we had 2,183 employees.  210 employees are represented by labor unions under collective bargaining agreements, which are subject to periodic negotiations.

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Available Information

We make our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 available free of charge under the Investors Relations page on our website, www.ennis.com, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”).  Information on our website is not included as a part of, or incorporated by reference into, this report. Our SEC filings are also available through the SEC’s website, www.sec.gov. In addition, the public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street NE, Washington, DC 20549. Information regarding the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

ITEM 1A.  RISK FACTORS

You should carefully consider the risks described below, as well as the other information included or incorporated by reference in this Annual Report on Form 10-K, before making an investment in our common stock. The risks described below are not the only ones we face in our business. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. If any of the following risks occur, our business, financial condition or operating results could be materially harmed. In such an event, our common stock could decline in price and you may lose all or part of your investment.

Our results and financial condition are affected by global and local market conditions, and competitors’ pricing strategies, which can adversely affect our sales, margins, and net income.

Our results of operations can be affected by local, national and worldwide market conditions.  The consequences of domestic and international economic uncertainty or instability, volatility in commodity markets, and domestic or international policy uncertainty, all of which we have seen in the past, can all impact economic activity.   Unfavorable conditions can depress the demand for our products and thus sales in a given market and may prompt competitor’s pricing strategies that adversely affect our margins or constrain our operating flexibility.  Certain macroeconomic events, such as the past crisis in the financial markets, could have a more wide-ranging and prolonged impact on the general business environment, which could also adversely affect us.  Whether we can manage these risks effectively depends mainly on the following:

The terms and conditions of our credit facility impose certain restrictions on our operations.  We may not be able to raise additional capital, if needed, for proposed expansion projects.

The terms and conditions of our 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.  Our ability to comply with the covenants may be affected by events beyond our control, such as distressed and volatile financial and/or consumer markets, etc.  A breach of any of these covenants could result in a default under our credit facility.  In the event of a default, the bank could elect to declare the outstanding principal amount of our credit facility, all interest thereon, and all other amounts payable under our credit facility to be immediately due and payable.  As of February 28, 2018, we were in compliance with all terms and conditions of our credit facility, which matures on August 11, 2020, and have cash on hand in excess of 3.2 times our current outstanding debt level.

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Declining financial market conditions and continued decline in long-term interest rates could adversely impact the funded status of our pension plan.

We maintain a noncontributory defined benefit retirement plan (the “Pension Plan”) covering approximately 20% of our employees.  Included in our financial results are Pension Plan costs that are measured using actuarial valuations.  The actuarial assumptions used may differ from actual results.  In addition, as our Pension Plan assets are invested in marketable securities, severe fluctuations in market values could potentially negatively impact our funded status, recorded pension liability, and future required minimum contribution levels.  A decline in long-term debt interest rates puts downward pressure on the discount rate used by plan sponsors to determine their pension liabilities.  Each 10 basis point change in the discount rate impacts our computed liability by about $900,000.  Similar to fluctuations in market values, a drop in the discount rate could potentially negatively impact our funded status, recorded pension liability and future contribution levels.  Also, continued changes in the mortality tables could potentially impact our funded status.  As of February 28, 2018, our pension plan was 98.7% funded on a projected benefit obligation (PBO) basis and 106.8% on an accumulated benefit obligation (ABO) basis.

We may be unable to identify or to complete acquisitions or to successfully integrate the businesses we acquire.

We have evaluated, and may continue to evaluate, potential acquisition transactions.  We attempt to address the potential risks inherent in assessing the attractiveness of acquisition candidates, as well as other challenges such as retaining the employees and integrating the operations of the businesses we acquire.  Integrating acquired operations, such as our acquisition of Independent, involves significant risks and uncertainties, including maintenance of uniform standards, controls, policies and procedures; diversion of management’s attention from normal business operations during the integration process; unplanned expenses associated with integration efforts; and unidentified issues not discovered in due diligence, including legal contingencies.  Due to these risks and others, there can be no guarantee that the businesses we acquire will lead to the cost savings or increases in net sales that we expect or desire.  Additionally, there can be no assurance that suitable acquisition opportunities will be available in the future, which could harm our business plan.

We may be required to write down goodwill and other intangible assets, which could cause our financial condition and results of operations to be negatively affected in the future.

When we acquire a business, a portion of the purchase price of the acquisition may be allocated to goodwill and other identifiable intangible assets.  The amount of the purchase price which is allocated to goodwill and other intangible assets is the excess of the purchase price over the net identifiable tangible assets acquired.  The annual impairment test is based on several factors requiring judgment.  An impairment may be caused by any number of factors outside our control, such as a decline in market conditions caused by a recession, or protracted recovery there-from, or other factors like competitor’s pricing strategies, which may be tied to such economic events.  Though to date, we have not been required to take an impairment charge relating to our print business, continued sale-side pressures due to technology transference, competitor pricing pressures, and economic uncertainties could result in a determination that a portion of the recorded value of goodwill and intangible assets may be required to be written down. Although such a charge would be a non-cash expense, it would impact our reported operating results and financial position. At February 28, 2018, our consolidated goodwill and other intangible assets were approximately $70.6 million and $49.3 million, respectively.

Digital technologies will continue to erode the demand for our printed business documents.

The increasing sophistication of software, internet technologies, and digital equipment combined with our customers’ general preference, as well as governmental influences for paperless business environments will continue to reduce the number of traditional printed documents sold.  Moreover, the documents that will continue to coexist with software applications will likely contain less value-added print content.

Many of our custom-printed documents help companies control their internal business processes and facilitate the flow of information.  These applications will increasingly be conducted over the internet or through other

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electronic payment systems.  The predominant method of our customers’ communication to their customers is by printed information.  As their customers become more accepting of internet communications, our clients may increasingly opt for what is perceived to be less costly electronic option, which would reduce our revenue.  The pace of these trends is difficult to predict.  These factors will tend to reduce the industry-wide demand for printed documents and require us to gain market share to maintain or increase our current level of print-based revenue which could place pressure on our operating margins.  

In response to the gradual obsolescence of our standardized forms business, we continue to develop our capability to provide custom and full-color products. If new printing capabilities and new product introductions do not continue to offset the obsolescence of our standardized business forms products, and we aren’t able to increase our market share, our sales and profits will be affected.  Decreases in sales of our standardized business forms and products due to obsolescence could also reduce our gross margins or impact the value of our recorded goodwill and intangible assets. This reduction could in turn adversely impact our profits, unless we are able to offset the reduction through the introduction of new high margin products and services or realize cost savings in other areas.

Our distributor customers may be acquired by other manufacturers who redirect business within their plants.

Some of our customers are being absorbed by the distribution channels of some of our manufacturing competitors.  However, we do not believe this will significantly impact our business model.  We have continued to sell to some of these customers even after they were absorbed by our competition because of the breadth of our product line and our geographic diversity.  

Our distributors face increased competition from various sources, such as office supply superstores. Increased competition may require us to reduce prices or to offer other incentives in order to enable our distributors to attract new customers and retain existing customers.

Low price, high value office supply chain stores offer standardized business forms, checks and related products. Because of their size, these superstores have the buying power to offer many of these products at competitive prices. These superstores also offer the convenience of “one-stop” shopping for a broad array of office supplies that our distributors do not offer. In addition, superstores have the financial strength to reduce prices or increase promotional discounts to expand market share. This could result in us reducing our prices or offering incentives in order to enable our distributors to attract new customers and retain existing customers, which could reduce our profits.

Technological improvements may reduce our competitive advantage over some of our competitors, which could reduce our profits.

Improvements in the cost and quality of printing technology are enabling some of our competitors to gain access to products of complex design and functionality at competitive costs. Increased competition from these competitors could force us to reduce our prices in order to attract and retain customers, which could reduce our profits.

We could experience labor disputes that could disrupt our business in the future.

As of February 28, 2018, approximately 10% of our employees are represented by labor unions under collective bargaining agreements, which are subject to periodic negotiations.  While we feel we have a good working relationship with all of the unions, there can be no assurance that any future labor negotiations will prove successful, which may result in a significant increase in the cost of labor, or may break down and result in the disruption of our business or operations.

We obtain our raw materials from a limited number of suppliers, and any disruption in our relationships with these suppliers, or any substantial increase in the price of raw materials or material shortages could have a material adverse effect on us.

We purchase our paper products from a limited number of sources, which meet stringent quality and on-time delivery standards under long-term contracts.  However, fluctuations in the quality of our paper, unexpected price changes or other factors that relate to our paper products could have a material adverse effect on our operating results.

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Paper is a commodity that is subject to periodic increases or decreases in price, which are sometimes quite significant. There is no effective market of derivative instruments to cost-effectively insulate us against unexpected changes in price of paper, and corporate negotiated purchase contracts provide only limited protection against price increases.  Generally, when paper prices are increased, we attempt to recover the higher costs by raising the prices of our products to our customers.  In the price-competitive marketplaces in which we operate, we may not always be able to pass through any or all of the higher costs.  As such, any significant increase in the price of paper or shortages in its availability, could have a material adverse effect on our results of operations.  Lately, paper pricing has been increasing due to higher pulp prices and reduced domestic capacity, which has been caused by capacity being taken off-line (planned or unplanned) or transferred to different paper types coupled with the impact of a cheaper dollar on foreign imports.  Fewer imports and less domestic capacity may cause higher prices and in some cases imposed allocations, which tends to put pressure on our selling prices and operating margins.

We face intense competition to gain market share, which may lead some competitors to sell substantial amounts of goods at prices against which we cannot profitably compete.

Our marketing strategy is to differentiate ourselves by providing quality service and quality products to our customers.  Even if this strategy is successful, the results may be offset by reductions in demand or price declines due to competitors’ pricing strategies or other micro or macro-economic factors.  We face the risk of our competition following a strategy of selling its products at or below cost in order to cover some amount of fixed costs, especially in stressed economic times.

Environmental regulations may impact our future operating results.

We are subject to extensive and changing federal, state and foreign laws and regulations establishing health and environmental quality standards, concerning, among other things, wastewater discharges, air emissions and solid waste disposal, and may be subject to liability or penalties for violations of those standards. We are also subject to laws and regulations governing remediation of contamination at facilities currently or formerly owned or operated by us or to which we have sent hazardous substances or wastes for treatment, recycling or disposal. We may be subject to future liabilities or obligations as a result of new or more stringent interpretations of existing laws and regulations. In addition, we may have liabilities or obligations in the future if we discover any environmental contamination or liability at any of our facilities, or at facilities we may acquire.

We are subject to taxation related risks.

Tax laws are dynamic and subject to change as new laws are passed and new interpretations of the law are applied.  On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system.  In the future, we may be subject to increased taxes under the Tax Act, including possible significant limitations on deductions for certain items, such as interest on debt, executive compensation, etc.  Also, we may be required to make material adjustments to provisional items recorded.  In addition, there can be no assurance that U.S. tax laws, including the corporate income tax rate, which the Tax Act lowered to 21%, would not undergo additional changes in the future.  The final impact of the Tax Act on the Company may differ from the estimates reported, possibly materially, due to such factors as changes in interpretations and assumptions made, additional guidance that may be issued, and actions taken by the Company as a result of the Tax Act, among others.  All of these factors and uncertainties may adversely affect our results of operations, financial position and cash flows.

We are exposed to the risk of non-payment by our customers on a significant amount of our sales.

Our extension of credit involves considerable judgment and is based on an evaluation of each customer’s financial condition and payment history.  We monitor our credit risk exposure by periodically obtaining credit reports and updated financials on our customers.  We generally see a heightened amount of bankruptcies by our customers during economic downturns.  While we maintain an allowance for doubtful receivables for potential credit losses based upon our historical trends and other available information, in times of economic turmoil, there is heightened risk that our historical indicators may prove to be inaccurate.  The inability to collect on sales to significant customers or a group of customers could have a material adverse effect on our results of operations.

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Our business incurs significant freight and transportation costs.

We incur transportation expenses to ship our products to our customers.  Significant increases in the costs of freight and transportation could have a material adverse effect on our results of operations, as there can be no assurance that we could pass on these increased costs to our customers.  Recently, due to imposed government regulations, the availability of drivers has become a significant challenge in the industry.  Costs to employ drivers have increased and transportation shortages have become more prevalent.

We depend upon the talents and contributions of a limited number of individuals, many of whom would be difficult to replace.

The loss or interruption of the services of our Chief Executive Officer, Executive Vice President or Chief Financial Officer could have a material adverse effect on our business, financial condition or results of operations. Although we maintain employment agreements with these individuals, it cannot be assured that the services of such individuals will continue.

If our internal controls are found to be ineffective, our financial results or our stock price could be adversely affected.

We believe that we currently have adequate internal control procedures in place.  However, increased risk of internal control breakdowns generally exists in a business environment that is decentralized.  In addition, if our internal control over financial reporting is found to be ineffective, investors may lose confidence in the reliability of our financial statements, which may adversely affect our stock price.

Our services depend on the reliability of computer systems we and our vendors maintain.  If these systems fail, our operations may be adversely affected.

We depend on information technology and data processing systems to operate our business, and a significant malfunction or disruption in the operation of our systems may disrupt our business and adversely affect our ability to operate and compete in the markets we serve.  These systems include systems that we own and operate, as well as systems of our vendors.  Such systems are susceptible to malfunctions and interruptions.  We also periodically upgrade and install new systems, which if installed or programmed incorrectly, may cause significant disruptions.  The disruptions could interrupt our operations and adversely affect our results of operations, financial condition and cash flows.

We may suffer a data breach of sensitive information, which may result in significant costs to investigate and remediate the breach, litigation expenses and government enforcement actions and penalties, all of which could have an adverse effect on our operations and reputation.

It is critically important for us to maintain the confidentiality, integrity and availability of our systems, software and solutions.  Many of our clients provide us with information they consider confidential or sensitive, and many of our client’s industries have established standards for safeguarding the confidentiality, integrity and availability of information relating to their businesses and customers.  Confidential and sensitive information stored in our systems or available through web portals are susceptible to cybercrime or intentional disruption, which generally have increased across all industries in terms of sophistication and frequency.  Disclosure of confidential information maintained on our systems or available through web portals due to human error, breach of our systems through cybercrime, a leak of confidential information due to employee misconduct or similar events may damage our reputation, subject us to regulatory enforcement action and cause significant reputational harm for our clients.  Any of these outcomes may adversely affect our results of operations, financial condition and cash flows.

Increases in the cost of employee benefits could impact our financial results and cash flow.

Our expenses relating to employee health benefits are significant.  Unfavorable changes in the cost of such benefits could impact our financial results and cash flow.  Healthcare costs have risen significantly in recent years,

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and recent legislative and private sector initiatives regarding healthcare reform could result in significant changes to the U.S. healthcare system.  While the Company has various cost controls measures in place and employs outsight and outside cost reviews on larger claims, this has been and is expected to continue to be a significant cost to the Company.  As seen during the fiscal year 2017, the Company incurred significant additional medical costs in excess of what we anticipated.  As such, effective with the start of calendar year 2017, the Company made changes to its medical reimbursement program.  Indications through the current fiscal year were positive with medical claims now trending more in line with historical levels.  Even so, medical costs are and will continue to be a significant expense to the Company.

ITEM 1B.  UNRESOLVED STAFF COMMENTS

There are no unresolved SEC staff comments.

ITEM 2.  PROPERTIES

Our corporate headquarters are located in Midlothian, Texas. We operate manufacturing facilities throughout the United States. See the table below for additional information on our locations.

All of the properties are used for the production, warehousing and shipping of the following: business forms, flexographic printing, advertising specialties and Post-it^® Notes (Wolfe City, Texas); presentation products (Macomb, Michigan and Anaheim, California); printed and electronic promotional media (Denver, Colorado); envelopes (Portland, Oregon; Columbus, Kansas and Tullahoma, Tennessee); financial forms (Minneapolis/St. Paul, Minnesota; Nevada, Iowa and Bridgewater, Virginia) and other business products.

Our plants are operated at production levels required to meet our forecasted customer demands.  Production levels fluctuate with market demands and depend upon the product mix at any given point in time. Equipment is added as existing machinery becomes obsolete or not repairable, and as new equipment becomes necessary to meet market demands; however, at any given time, these additions and replacements are not considered to be material additions to property, plant and equipment, although such additions or replacements may increase a plant’s efficiency or capacity.

All of the foregoing facilities are considered to be in good condition. We do not anticipate that substantial expansion, refurbishing, or re-equipping will be required in the near future.

All of the rented property is held under leases with original terms of one or more years, expiring at various times through October 2024. No difficulties are presently foreseen in maintaining or renewing leases as they expire.

The accompanying list contains each of our owned and leased locations:

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ITEM 3.  LEGAL PROCEEDINGS

From time to time we are involved in various litigation matters arising in the ordinary course of our business. We do not believe the disposition of any current matter will have a material adverse effect on our consolidated financial position or results of operations.

ITEM 4.  MINE SAFETY DISCLOSURES

Not applicable.

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PART II

ITEM 5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is traded on the New York Stock Exchange (“NYSE”) under the trading symbol “EBF”. The following table sets forth the high and low sales prices, the common stock trading volume as reported by the New York Stock Exchange and dividends per share paid by the Company for the periods indicated:

Dividends paid in the fourth quarter of fiscal year 2018 included a special one-time cash dividend of $0.10 per share of common stock in response to the signing of the Tax Act.  Dividends paid in the second quarter of 2017 included a  special one-time cash dividend of $1.50 per share of common stock as a result of the Company’s sale of the Apparel Segment.

The last reported sale price of our common stock on NYSE on April 30, 2018 was $17.90. As of that date, there were approximately 716 shareholders of record of our common stock. Cash dividends may be paid or repurchases of our common stock may be made from time to time, as our Board of Directors deems appropriate, after considering our growth rate, operating results, financial condition, cash requirements, restrictive lending covenants, and such other factors as the Board of Directors may deem appropriate.

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In the 2016 calendar year, the Board authorized the repurchase of up to an aggregate of $40.0 million of the Company’s stock through the Company’s stock repurchase program.  Under the repurchase program, share 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.  Such purchases, if any, will be made in accordance with applicable insider trading and other securities laws and regulations.  These repurchases may be commenced or suspended at any time or from time to time without prior notice.  During our fiscal year ended February 28, 2018, the Company, under the program, repurchased 191,033 shares of common stock at an average price of $17.33 per share.  Since the program’s inception in October 2008, there have been 1,442,236 common shares repurchased at an average price of $14.99 per share. As of February 28, 2018 there was $18.4 million available to repurchase shares of the Company’s common stock under the program.  Unrelated to the stock repurchase program, the Company purchased 145 shares of its common stock during the fiscal year ended February 28, 2018.

The following table details shares of stock repurchased during the three months ended February 28, 2018 and the remaining amount available to repurchase additional shares of the Company’s stock under the program.

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Stock Performance Graph

The graph below matches our cumulative 5-year total shareholder return on common stock with the cumulative total returns of the S&P 500 Index and the Russell 2000 Index. The graph tracks the performance of a $100 investment in our common stock and in each of the indexes (with the reinvestment of all dividends) from February 28, 2013 to February 28, 2018.

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

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ITEM 6.  SELECTED FINANCIAL DATA

The following tables set forth key operating metrics as of and for the periods indicated and have been derived from our audited historical consolidated financial statements for the four years ended February 28, 2018.  The selected financial data for the year ended February 28, 2014, was derived from audited financial statements with certain adjustments to reflect discontinued operations. Our consolidated financial statements and notes thereto as of February 28, 2018, February 28, 2017, and for the three years in the period ended February 28, 2018, and the reports of Grant Thornton LLP are included in Item 15 of this Report. The selected financial data should be read in conjunction with Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and notes thereto included in Item 15 of this Report.

(1) Fiscal year 2018 included a special one-time cash dividend of $0.10 per share of common stock in response to the signing of the Tax Act.  Fiscal year 2017 included a special one-time cash dividend of $1.50 per share of common stock as a result of the Company’s sale of the Apparel Segment.

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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 starting on page 7 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 includes the following sections and is for the continuing operations of the Company, which is comprised of the production and sale of business forms and other business products, and excludes the discontinued operations of the Apparel Segment:

References to 2018, 2017 and 2016 refer to the fiscal years ended February 28, 2018, February 28, 2017 and February 29, 2016, respectively.

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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 - 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, 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 dollar during the first half of fiscal year 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 dollar, the price advantage of foreign imports has for the most part dissipated which has led to lower volumes of imported paper and an increase in domestic exports.  Meanwhile, a significant amount of capacity has come out of the market this past year, either planned or unplanned, as through the bankruptcy filing of several mills.  In addition, some mills moved capacity formerly used for coated production to uncoated production due to their ability to get higher margins on these products.  Even with shrinking demand, this has led to a supply/demand imbalance with most mills running in excess of 90% of capacity across all grades.  At this level historically, suppliers have raised prices in the marketplace and recently several increases have been announced across all paper grades. It is too early to tell whether all or some of these announced increases will be implemented.  In the past, the Company has been fairly successful in passing cost increases through to the marketplace over time.  We will continue to focus our efforts on effectively managing and controlling our product costs to minimize these effects on our operational results, primarily through the use of forecasting, production and costing models, as well as working closely with our domestic suppliers to reduce our procurement costs.  We will continue to look for ways to reduce as well as leverage our fixed costs.  As always, some of these negative factors are cyclical and we will continue to focus on maintaining our margins when these negative factors swing the other way.

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

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

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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.

We maintain the Pension Plan for employees. Included in our financial results are Pension Plan costs that are measured using actuarial valuations. The actuarial assumptions used may differ from actual results.  As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funding status and associated liability recorded.

Amounts allocated to intangibles and goodwill are determined based on valuation analysis 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 exercise judgment in evaluating our goodwill for impairment.  We assess the impairment of goodwill as of November 30 of each fiscal year or earlier if events or changes in circumstances indicate that the carrying value may not be recoverable.

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 business, overall financial performance of the business, and performance of the 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 approach is applied in making an evaluation. The 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, the 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 evaluation results in the fair value of the goodwill for the reporting unit being lower than the carrying value, an impairment charge is recorded.  A goodwill impairment charge was not required for the fiscal year ended February 28, 2018 and 2017.

We recognize revenues from product sales upon shipment to the customer if the terms of the sale are freight on board (“FOB”) shipping point (and therefore title and all risks of ownership, including risk of loss, passes to the customer upon shipping) or, to a lesser extent, upon delivery to the customer if the terms of the sale are FOB destination (and therefore title and all risks of ownership, including risk of loss, passes to the customer upon delivery).  Net sales consist of gross sales invoiced to customers, less certain related charges, including discounts, returns and other allowances. Returns, discounts and other allowances have historically been insignificant. In some cases and upon customer request, we print and store custom print product for customer specified future delivery, generally within twelve months. In this case, risk of loss from obsolescence passes to the customer, the customer is invoiced under normal credit terms and revenue is recognized when manufacturing is complete. Approximately $9.7 million, $10.7 million, and $12.9 million of revenue were recognized under these agreements during fiscal years ended February 28, 2018, February 28, 2017, and February 29, 2016, respectively.

We maintain an allowance for doubtful receivables to reflect estimated losses resulting from the inability of customers to make required payments. On an on-going basis, we evaluate the collectability of accounts receivable based upon historical collection trends, current economic factors, and the assessment of the collectability of specific accounts. We evaluate the collectability of specific accounts using a combination of factors, including the age of the outstanding balances, evaluation of customers’ current and past financial condition and credit scores, recent payment history, current economic environment, discussions with our sales managers, and discussions with the customers directly.

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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.

As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each jurisdiction in which we operate. This process involves estimating our actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and financial reporting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheets. We must then assess the likelihood that our deferred tax assets will be recovered based on our history of earnings expectations for future taxable income including taxable income in prior carry-back years, as well as future taxable income.  To the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance, we must include an expense within the tax provision in the consolidated statements of operations. In the event that actual results differ from these estimates, our provision for income taxes could be materially impacted.

On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act (the "Tax Act"). The Tax Act includes significant changes to the U.S. corporate income tax system including, among other things, a federal corporate rate reduction from 35% to 21%; limitations on the deductibility of interest expense and executive compensation and the transition of U.S. international taxation from a worldwide tax system to a modified territorial tax system.  A majority of the provisions in the Tax Act are effective January 1, 2018. In response to the Tax Act, the SEC staff issued guidance on accounting for the tax effects of the Tax Act. The guidance provides a one-year measurement period for companies to complete the accounting. We reflected the income tax effects of those aspects of the Tax Act for which the accounting is complete. To the extent our accounting for certain income tax effects of the Tax Act is incomplete but we are able to determine a reasonable estimate, we recorded a provisional estimate in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.  As a result of the reduction of the corporate tax rate to 21%, we re-valued our deferred tax assets and liabilities as of the date of enactment, with resulting tax effects accounted for in the reporting period of enactment. This change in the statutory tax rate resulted in reduction in income tax expense being recognized of $3.6 million due to the adjustment of deferred tax liabilities based on the expected prevailing tax rate at the expected time of their realization.

In addition to the above, we also have to make assessments as to the adequacy of our accrued liabilities, more specifically our liabilities recorded in connection with our workers compensation and health insurance, as these plans are self-funded. To help us in this evaluation process, we routinely get outside third-party assessments of our potential liabilities under each plan.

In view of such uncertainties, investors should not place undue reliance on our forward-looking statements since such statements 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.

Results of Operations

The discussion that follows provides information which we believe is relevant to an understanding of our results of operations and financial condition.  The discussion and analysis should be read in conjunction with the accompanying consolidated financial statements and notes thereto, which are incorporated herein by reference.  Unless otherwise indicated, this financial overview is for the continuing operations of the Company, which are comprised of the production and sales of business forms and other business products, and exclude the discontinued operations of the Apparel Segment, which we sold in May 2016.  The operating results of the Company for fiscal year 2018 and the comparative fiscal years 2017 and 2016 are included in the tables below.

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Consolidated Summary

Net Sales.  Our net sales increased from $356.9 million for the fiscal year ended February 28, 2017 to $370.2 million for the fiscal year ended February 28, 2018, an increase of 3.7%.  The market continues to be fairly soft with competitive pricing pressures.  However, the current reversal of some of the dollar’s strength has made domestic paper production more attractive.  This factor, along with the shrinking of some domestic mill capacity, has resulted in the announcement of some recent paper price increases.  It is still too early to tell whether or not these developments will remain and be passed through to the marketplace.  If so, this may offset some of the normal industry sales attrition expected in the marketplace.   The acquisition of Independent, which was completed in January 2017 and is an integral part of our strategy to offset normal industry print attrition and other changes, had a comparative impact of approximately $36.0 million on our net sales during the current fiscal year.

Our net sales decreased from $385.9 million for the fiscal year ended February 29, 2016 to $356.9 million for the fiscal year ended February 28, 2017, a decrease of 7.5%.  Management has estimated that the move of our folder operations from Omaha, Nebraska to Columbus, Kansas negatively impacted sales by approximately $5.8 million during the fiscal year 2017.  In previous years, acquisitions have been an integral part of our strategy to offset industry revenue declines that result from normal print attrition and general economic conditions.  We were able to complete the acquisition of Independent on January 27, 2017, which contributed $3.0 million in net sales during fiscal year 2017.

Cost of Goods Sold. Our manufacturing costs increased slightly from $252.9 million for the fiscal year 2017 to $253.3 million for the fiscal year 2018, or 0.2%.  Our gross profit margin (“margin”) increased from 29.1% for the fiscal year 2017 to 31.6% for the fiscal year 2018. In fiscal year 2017, our margin was negatively impacted by increased medical expenses due to our medical claims exceeding historical levels.  We implemented a new cost reimbursement program, as well as other changes to our health plan, at the start of calendar year 2017.    While the program is still relatively new, we were encouraged by our medical claims trend line and feel the program positively impacted our margin by over $4.0 million during fiscal year 2018.  

Our manufacturing costs decreased by $16.7 million from $269.6 million for the fiscal year 2016 to $252.9 million for the fiscal year 2017, or 6.2%.  Our margin decreased from 30.1% for the fiscal year 2016 to 29.1% for the fiscal year 2017. Our margin was negatively impacted by increased medical expenses due to our medical claims

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exceeding historical levels, impacting our margin for the fiscal year 2017 by approximately $2.9 million.  To mitigate the increase in medical expenses, we implemented a new cost reimbursement program, as well as other changes to our health plan, at the start of calendar year 2017.

Selling, general, and administrative expenses. For fiscal year 2018, our selling, general, and administrative (“SG&A”) expenses increased approximately $6.4 million, or 10.1%, from $63.1 million for the fiscal year 2017 to $69.5 million for the fiscal year 2018.  As a percentage of sales, SG&A expenses were 18.8% and 17.6% for the fiscal years 2018 and 2017, respectively. The acquisition of Independent added approximately $8.0 million in SG&A expenses during fiscal year 2018, or 20.3% of its respective net sales.  As we continue to integrate this acquisition into our culture and systems, we will continue to look for ways to reduce these expenses to be more in line with our historical SG&A percentage.  In addition, the Company (i) changed its accounting practice for handling its trademarks/trade names from an indefinite life to a finite life method on March 1, 2017 which added approximately $0.8 million to SG&A expense during the period, (ii) paid a special bonus to our non-management level employees of $500 per employee in December 2017 in connection with the enactment of the Tax Cuts and Jobs Act of 2017 which impacted our SG&A expense by $1.2 million, and (iii) paid approximately $1.8 million more in performance related bonuses in fiscal year 2108 in connection with its operating performance.

For fiscal year 2017, our SG&A expenses decreased approximately $2.6 million, or 4.0%, from $65.7 million for the fiscal year 2016 to $63.1 million for the fiscal year 2017.  As a percentage of sales, SG&A expenses were 17.6% and 17.0% for the fiscal years 2017 and 2016, respectively, which increased as compared to the prior fiscal year due to lower sales volumes and the impact of the acquisition of Independent Printing.  The transition services provided to the buyer of our Apparel Segment concluded during the last quarter of fiscal year 2017. Also, our SG&A expense line was further impacted during the 2017 fiscal year by the approximately $1.3 million associated with the additional medical expenses.

(Gain) loss from disposal of assets. The $0.2 million loss from disposal of assets for fiscal year 2018 related primarily to the sale of manufacturing equipment as well as the closing and consolidation of manufacturing facilities.  The $0.3 million loss from disposal of assets for the fiscal year 2017 related primarily to the $0.5 million loss on the sale of an unused manufacturing facility and its associated property offset by the $0.2 million gain on the sale of a second unused manufacturing facility and manufacturing equipment.  The gain from disposal of assets of $0.5 million for the fiscal year 2016 related primarily to the sale of an unused manufacturing facility, as well as manufacturing equipment.

Income from operations. As a result of the above factors, our income from continuing operations for fiscal year 2018 was $47.3 million, or 12.8% of net sales, as compared to $40.5 million, or 11.4% of net sales, for fiscal year 2017.  The acquisition of Independent positively impacted our operational results for fiscal year 2018 by  approximately $4.9 million.

Our income from continuing operations for fiscal year 2017 was $40.5 million or 11.4% of sales, as compared to $51.0 million, or 13.2% of sales for fiscal year 2016.  The negative impact of the additional charge to our medical reserve during fiscal year 2017 was $4.3 million.

Other expense.  Other expense was $0.4 million for fiscal year 2018 as compared to $0.5 million for fiscal year 2017.  This decrease related primarily to the increase of investment income in fiscal year 2018.  Other expense increased by approximately $0.5 million for the fiscal year 2017 as compared to the fiscal year 2016.  This related primarily to the reallocation of interest expense from the Print Segment to our former Apparel Segment as part of discontinued operations for last fiscal year.

Provision for income taxes. Our effective tax rates for fiscal years 2018, 2017 and 2016 were 30.2%, 34.0%, and 36.8%, respectively.  The lower effective tax rate for fiscal year 2018 was primarily due to the enactment of the Tax Cuts and Jobs Act of 2017.  The lower effective tax rate for fiscal year 2017 as compared to fiscal year 2016 was due to the reversal of the valuation allowance relating to certain foreign tax credits.  During fiscal year 2017, the Company also filed amended tax returns to fully utilize all remaining foreign tax credits.

Net earnings (loss). Our net earnings from continuing operations were $32.3 million, or $1.25 per diluted share for fiscal year 2016, $26.4 million, or $1.03 per diluted share for fiscal year 2017 and $32.8 million, or $1.29 per diluted share for fiscal year 2018.  Net earnings from discontinued operations for fiscal year 2018 was $0.01 per

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diluted share, which consisted of a write-off of a $2.0 million receivable ($1.4 million, net of tax) relating to the escrowed purchase price from the sale of our Apparel Segment and a $1.6 million tax benefit related to the determination of the final tax basis on assets sold in the sale of the Apparel Segment.  Net loss from discontinued operations for fiscal year 2017 was ($0.96) per diluted share, which consisted of the net earnings prior to the sale of the Apparel Segment of $0.09 per diluted share and the net loss from the sale of $27.1 million, net of tax, or ($1.05) per diluted share.  The loss from the sale included the write-off of the balance of foreign currency translation adjustments of $16.1 million, or $10.7 million, net of taxes.  Net earnings from discontinued operations for fiscal year 2016 was $3.5 million, or $0.14 per diluted share.  Overall, the Company realized net earnings of $32.9 million, or $1.30 per diluted share for fiscal year 2018, $1.8 million, or $0.07 per diluted share for fiscal year 2017 and $35.7 million, or $1.39 per diluted share for fiscal year 2016.

Liquidity and Capital Resources

Working Capital. Our working capital increased by approximately $14.5 million, or 12.1%, from $119.3 million at February 28, 2017 to $133.8 million at February 28, 2018.  Our working capital increased primarily due to the increase in our cash.  Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 5.0-to-1.0 for the fiscal year 2017 to 5.5-to-1.0 for the fiscal year 2018.  Our current ratio increased primarily as a result of the increase in our cash.

Our working capital decreased by approximately $16.2 million, or 11.9%, from $135.4 million at February 29, 2016 to $119.3 million at February 28, 2017.  Our working capital decreased primarily due to the acquisition of Independent as well as the special one-time dividend of $1.50 per share paid in connection with the sale of the Apparel Segment.  Our current ratio, calculated by dividing our current assets by our current liabilities, increased from 4.4-to-1.0 for the fiscal year 2016 to 5.0-to-1.0 for the fiscal year 2017.  Our current ratio increased primarily as a result of the impact associated with the cash sale of the Apparel Segment offset by the acquisition of Independent.

Cash Flow Components

Cash flows from operating activities.  Cash provided by operating activities was $45.3 million for the fiscal year 2018 compared to $58.9 million for the fiscal year 2017 and $86.7 million for the fiscal year 2016, or a decrease of $13.6 million in 2018 over 2017 and a decrease of $27.8 million in 2017 over 2016.  

Our decreased operational cash flows in fiscal year 2018 in comparison to fiscal year 2017 was primarily the result of four factors: (i) a decrease in operating cash flows related to our Apparel Segment of $34.8 million, (ii) a decrease in our deferred taxes of $6.2 million, (iii) an increase in our prepaid income taxes of $2.7 million, and (iv) increased earnings of $31.1 million.  

Our decreased operational cash flows in fiscal year 2017 in comparison to fiscal year 2016 was primarily the result of two factors: (i) a decrease in operating cash flows from the Apparel Segment that was sold on May 25, 2016, and (ii) decreased operational earnings.

Cash flows from investing activities. Cash provided by (used in) investing activities decreased $90.1 million from $86.1 million provided in fiscal year 2018 compared to $4.0 million used for each of the fiscal years 2017 and 2018, respectively, and increased $90.2 million from $4.1 million used in fiscal year 2018 to $86.1 million provided

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for each of the fiscal years 2016 and 2017, respectively.  The decrease in cash in fiscal year 2018 was primarily due to the net proceeds of $107.4 million from the sale of the Apparel Segment which took place on May 25, 2016, offset by a decrease of $17.2 million in cash used for the acquisition of businesses.  The increase in cash provided from investing activities in fiscal year 2017 over fiscal year 2016 was as a result of the net proceeds from the sale of the Apparel Segment and a decrease $1.2 million in capital expenditures offset by $18.6 million in cash consideration used for acquisitions.

Cash flows from financing activities. Cash used in financing activities was $25.6 million in the fiscal year 2018 compared to $72.5 million used in fiscal year 2017 and $84.6 million used in fiscal year 2016.

The decrease in our cash used in the fiscal year 2018 as compared to the fiscal year 2017 resulted from three factors: (i) no debt was paid down in the fiscal year 2018 compared to $10.0 million paid down in 2017, (ii) $34.9 million less in dividends were paid in the fiscal year 2018 compared to 2017, which included a special one-time dividend of $1.50 per share that was paid as a result of the sale of the Apparel Segment, and (iii) $5.1 million less was used to repurchase our common stock under the board-approved repurchase program in the fiscal year 2018 as compared to 2017.

The decrease in our cash used in fiscal year 2017 as compared to fiscal year 2016 resulted from four factors: (i) we paid down our debt by $10.0 million in fiscal year 2017 compared to $59.0 million paid down in fiscal year 2016, (ii) we used $57.2 million to pay dividends in fiscal year 2017 compared to $18.0 million paid in 2016, (iii) we repurchased $8.4 million of our common stock in fiscal year 2017, whereas we did not repurchase any of our common stock in fiscal year 2016, and (iv) we received $2.9 million from the exercise of stock options in fiscal year 2017, whereas in fiscal year 2016 no stock options were exercised.  

Stock Repurchase – In the 2016 calendar year, the Board authorized the repurchase of up to an aggregate of $40.0 million of the Company’s stock through the Company’s existing stock repurchase program.  Under the repurchase program, share 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.  Such purchases are made in accordance with applicable insider trading and other securities laws and regulations.  These repurchases may be commenced or suspended at any time or from time to time without prior notice.  During our fiscal year ended February 28, 2018, the Company, under the program, repurchased 191,033 shares of common stock at an average price of $17.33 per share.  Since the program’s inception in October 2008, there have been 1,442,236 common shares repurchased at an average price of $14.99 per share. As of February 28, 2018 there was $18.4 million available to repurchase shares of the Company’s common stock under the program.  Unrelated to the stock repurchase program, the Company purchased 145 shares of its common stock during the fiscal year ended February 28, 2018.  The Company expects to continue to repurchase its shares under its repurchase program during fiscal year 2019 as it determines such repurchases to be in its and its shareholders best interest.

Credit Facility – The Company has entered into a Second Amended and Restated Credit Agreement, which has been amended from time to time, pursuant to which a credit facility has been extended to the Company ( the “Credit Facility”) until August 11, 2020 that 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 also 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 imposing 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.

The Credit Facility bears interest at the LIBOR rate plus a spread ranging from 1.0% to 2.0%, which rate was 3.0% (3 month LIBOR + 1.0%) at February 28, 2018 and 1.86% (2 month LIBOR + 1.0%) at February 28, 2017.  The rate is determined by our fixed charge coverage ratio of total funded debt to EBITDA.  As of February 28, 2018, we had $30.0 million of borrowings under the revolving credit line and $1.2 million outstanding under standby letters of credit arrangements, leaving approximately $68.8 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.

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We did not pay any additional amounts on the revolving credit line for fiscal year 2018.  It is anticipated that the available line of credit is sufficient to cover, should it be required, our working capital needs for the foreseeable future.

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 recent enactment of the Moving Ahead for Progress in the 21^st Century (“MAP-21”) in July 2012, plan sponsors can calculate the discount rate used to measure the Pension Plan liability using a 25-year average of interest rates plus or minus a corridor.  Prior to MAP-21, the discount rate used in measuring the pension liability was based on the 24-month average of interest rates.  We anticipate that we will contribute from $2.0 million to $3.0 million during fiscal year 2019. We made contributions of $3.0 million to our Pension Plan during each of our last three fiscal years.  As our Pension Plan assets are invested in marketable securities, fluctuations in market values could potentially impact our funded status, associated liabilities recorded, and future required minimum contributions.  At February 28, 2018, we had an unfunded pension liability recorded on our balance sheet of $0.7 million. During fiscal year 2018, we decreased the discount rate we used to calculate our pension liability to 4.05% from 4.1% used in fiscal year 2017, which increased our recorded pension liability by approximately $0.4 million (each 10 basis point change in the discount rate potentially impacts our computed pension liability by approximately $900,000).  In addition, we adopted the new MP-2017 mortality improvement scale associated with the RP-2014 mortality tables (which were adopted two years ago), which reduced our recorded pension liability by approximately $0.4 million.  The updated mortality improvement scale MP-2017 reflects slightly lower projected mortality experience improvement in the future compared to the previous scale MP-2016 utilized in fiscal year 2017’s valuation of liabilities.  The projected return on our pension assets remained at 7.5% for fiscal year 2018.

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 2019, 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 & Off-Balance Sheet Arrangements – There have been no significant changes in our contractual obligations since February 28, 2017 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 February 28, 2018.  The following table represents our contractual commitments as of February 28, 2018 (in thousands).

We expect future interest payments of $0.8 million for fiscal years February 28, 2019 and February 29, 2020 and $0.4 million for fiscal year February 28, 2021, assuming interest rates and debt levels remain the same throughout the remaining term of the facility.

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ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 totaled $30.0 million at February 28, 2018 and is subject to fluctuations in the LIBOR rate.  The 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 February 28, 2018 would be approximately $0.3 million.

ITEM 8.  CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our Consolidated Financial Statements and Supplementary Data required by this Item 8 are set forth following the signature page of this report and are incorporated herein by reference.

ITEM 9.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

No matter requires disclosure.

ITEM 9A.  CONTROLS AND PROCEDURES

Disclosure Controls and Procedures  

A review and evaluation was 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 Rules 13a-15(e) and 15d-15(e) of the Exchange Act of 1934, as amended (the “Exchange Act”)) as of February 28, 2018.  Based upon that review and evaluation, we have concluded that our disclosure controls and procedures were effective as of February 28, 2018.

Management’s Report on Internal Control over Financial Reporting

The financial statements, financial analysis and all other information in this Annual Report on Form 10-K were prepared by management, who is responsible for their integrity and objectivity and for establishing and maintaining adequate internal controls over financial reporting.

The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Company’s internal control over financial reporting includes those policies and procedures that:

There are inherent limitations in the effectiveness of any internal control, including the possibility of human error and the circumvention or overriding of controls. Accordingly, even effective internal controls can provide only

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reasonable assurances with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of internal controls may vary over time.

Management assessed the design and effectiveness of the Company’s internal control over financial reporting as of February 28, 2018. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in the 2013 Internal Control—Integrated Framework (“2013 COSO framework”).  Based on management’s assessment using those criteria, we believe that, as of February 28, 2018, the Company’s internal control over financial reporting is effective.

Changes in Internal Controls

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

Grant Thornton LLP, an independent registered public accounting firm, has audited the consolidated financial statements of the Company for the fiscal year ended February 28, 2018 and has attested to the effectiveness of the Company’s internal control over financial reporting as of February 28, 2018. Their report on the effectiveness of internal control over financial reporting is presented on page F-3 of this Annual Report on Form 10-K.

ITEM 9B.  OTHER INFORMATION

No matter requires disclosure.

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PART III

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Except as set forth below, the information required by Item 10 is incorporated herein by reference to the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders.

The Securities and Exchange Commission and the New York Stock Exchange have issued multiple regulations requiring policies and procedures in the corporate governance area. In complying with these regulations, it has been the goal of the Company’s Board of Directors and senior leadership to do so in a way which does not inhibit or constrain the Company’s unique culture, and which does not unduly impose a bureaucracy of forms and checklists.  Accordingly, formal, written policies and procedures have been adopted in the simplest possible way, consistent with legal requirements, including a Code of Ethics applicable to the Company’s principal executive officer, principal financial officer, and principal accounting officer or controller.  The Company’s Corporate Governance Guidelines, its charters for each of its Audit, Compensation, Nominating and Corporate Governance Committees and its Code of Ethics covering all Employees are available on the Company’s website, www.ennis.com, and a copy will be mailed upon request to Investor Relations at 2441 Presidential Parkway, Midlothian, TX 76065.  If we make any substantive amendments to the Code, or grant any waivers to the Code for any of our senior officers or directors, we will disclose such amendment or waiver on our website and in a report on Form 8-K.

ITEM 11. EXECUTIVE COMPENSATION

The information required by Item 11 is hereby incorporated herein by reference to the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The information required by Item 12, as to certain beneficial owners and management, is hereby incorporated by reference to the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

The information required by Item 13 is hereby incorporated herein by reference to the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by Item 14 is hereby incorporated herein by reference to the definitive Proxy Statement for our 2018 Annual Meeting of Shareholders.

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PART IV

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

The following documents are filed as part of this report.

An “Index to Consolidated Financial Statements” has been filed as a part of this Report beginning on page F-1 hereof.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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ENNIS, INC. AND SUBSIDIARIES

Index to Consolidated Financial Statements

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Ennis, Inc.

Opinion on the financial statements

We have audited the accompanying consolidated balance sheets of Ennis, Inc. (a Texas corporation) and subsidiaries (the “Company”) as of February 28, 2018 and February 28, 2017, the related consolidated statements of operations, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 28, 2018, and the related notes (collectively referred to as the “financial statements”).  In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2018 and February 28, 2017, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2018, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of February 28, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated May 11, 2018 expressed an unqualified opinion thereon.

Basis for opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.  Such procedures included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ GRANT THORNTON LLP

We have served as the Company’s auditor since 2005.

Dallas, Texas

May 11, 2018

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Board of Directors and Shareholders

Ennis, Inc.

Opinion on internal control over financial reporting

We have audited the internal control over financial reporting of Ennis, Inc. (a Texas corporation) and subsidiaries (the “Company”) as of February 28, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2018, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended February 28, 2018, and our report dated May 11, 2018 expressed an unqualified opinion on those financial statements.

Basis for opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting.  Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.  We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB.  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and limitations of internal control over financial reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ GRANT THORNTON LLP

Dallas, Texas

May 11, 2018

F-3

ENNIS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands)

See accompanying notes to consolidated financial statements.

F-4

ENNIS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS-continued

(in thousands, except for par value and share amounts)

See accompanying notes to consolidated financial statements.

F-5

ENNIS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share amounts)