EBF — Q2 2026 Financial Report Analysis

Overview

Ennis, the Texas-based printer of business forms, envelopes, labels, tags and presentation folders sold mainly through independent distributors, reported net sales of $102.0 million for the quarter ended August 31, 2026, up 3.4% from $98.7 million a year earlier. Ennis's fiscal year ends in February, so the company calls this the second quarter of fiscal 2027; we file it as Q2 2026 because the quarter ran June–August 2026.

The headline profit figure fell: net earnings were $9.4 million, or $0.37 per diluted share, down from $13.2 million, or $0.51. That drop comes almost entirely from lawsuits, not from the printing business. A year ago Ennis booked a $5.3 million gain from a court judgment it won against Wright Printing Company. This quarter it booked a $0.7 million charge for a separate lawsuit over a closed Arizona plant. Operating income, which is profit from the business itself before interest, tax and items like legal settlements, rose 9.7% to $13.6 million.

At a glance

• Operating margin of 13.3%, up from 12.5%. Operating margin is the share of sales left after paying for production and overhead. It rose because overhead fell, mainly lower incentive pay, while gross margin slipped.
• Only about $1.0 million of the $3.3 million sales increase came from the existing business. The other ~$2.3 million came from businesses bought in fiscal 2026. That is roughly 1% growth from the existing business. For the six months it was negative: about –$2.1 million.
• $34.1 million of operating cash flow in the first half, against $19.3 million of net earnings. Ennis has $54.0 million of cash and no debt, and the board raised the quarterly dividend 5% to $0.2625.

Key metrics

SG&A = selling, general and administrative costs, the overhead outside the factories. Gross margin = what is left of sales after the direct cost of making the products.

What drove the quarter

Sales: small gains, mostly bought. Ennis says the acquisitions it completed in fiscal 2026 added about $2.3 million in the quarter. These were Northeastern Envelope Company and Envelope Superstore, bought in April 2025 for $35.0 million, and CFC Print & Mail, bought in November 2025 for $3.9 million. The rest of the business grew about $1.0 million, "reflecting the combined impact of pricing actions, sales volume and product mix." That is better than the first quarter. For the six months, existing-business sales fell about $2.1 million, which management puts down to "weaker customer demand and ongoing industry-wide pressure in the U.S. printing market."

Gross margin: paper costs. Cost of goods sold rose 4.2%, faster than sales. Purchased product costs alone were up 7.1%, from $32.5 million to $34.8 million. Management says the decline in gross margin "primarily reflected higher carbonless paper costs." Carbonless paper is the coated paper used in multi-part forms. The only U.S. mill that made carbonless rolls closed permanently. Ennis built up buffer stock last year and has moved to other suppliers, and that replacement paper now costs more as it flows through cost of sales.

Overhead: lower incentive pay. SG&A fell $0.8 million (–4.5%), which Ennis says was "primarily attributable to lower incentive compensation expense." Stock-based pay charged in the quarter dropped to $0.3 million from $0.8 million. This saving offset the weaker gross margin and is the whole reason operating margin rose.

What the headline numbers hide

• Legal items move net earnings in both years. Strip out the $5.3 million judgment gain last year and the $0.7 million reserve this year, and pre-tax earnings went from about $12.8 million to about $13.7 million, roughly +7% (our calculation from the filing's figures). On that basis earnings grew. The reported –29% is mostly a tough comparison, not a weaker business.
• The Arizona lawsuit isn't over. On September 9, 2026, after the quarter ended, the trial court made a preliminary finding that the landlord of the former B&D Litho plant should recover $2.3 million. Ennis calls the ruling legally and factually flawed and plans to challenge it, with an appeal if needed. It has reserved only $1.2 million in total, management's own "best estimate of probable loss." If the $2.3 million finding stands, another charge of roughly $1.1 million before tax would follow.
• Cash conversion is strong, partly because last year was weak. Six-month operating cash flow was 1.8x net earnings. Most of the improvement comes from inventory: Ennis spent $20.8 million building paper stock in the first half of last year, compared with a $0.6 million inventory release this year. Free cash flow (operating cash minus capital spending) was $32.2 million, about 2.5x the $12.8 million paid in dividends.
• Working capital looks clean. Receivables fell to $35.6 million from $38.0 million in February even though sales grew, and inventory was flat at $54.3 million. Neither is building up ahead of sales.
• Lower share count helped a little; tax and interest hurt. Diluted shares fell 1.8% (25.3M vs 25.8M) because of buybacks made last year. Ennis bought back no shares this half, and only $7.2 million of its authorization is left. The tax rate rose to 28.0% from 27.5% (state taxes and nondeductible executive pay). Interest income halved to $0.4 million from $0.8 million, but last year's figure included $0.4 million of interest awarded with the Wright judgment, so underlying interest income was roughly flat.
• A pay-accounting change to watch. In April 2026 the board decided to settle certain stock-unit awards in cash, which moved $2.2 million out of equity into a $2.7 million accrued liability. From now on, changes in that liability go through compensation expense. That could make SG&A move around more than it used to.

Takeaway: The printing business itself had a decent quarter: operating income rose 9.7%, and the existing business grew for the first time this year. The 29% fall in EPS mostly reflects last year's one-time $5.3 million legal win. The real tension is underneath: gross margin is losing ground to carbonless paper costs, and the margin improvement came from lower incentive pay, which can't repeat every quarter.

Outlook

Ennis gives no sales or earnings guidance. Its stated plans: capital spending of $4–7 million over the next twelve months (only $1.9 million spent so far this year), no required pension contribution for fiscal 2027, and more acquisitions funded from cash. The 10-Q warns that "margins remain under pressure due to weak volumes in parts of the market, volatile input costs and price competition." The board's 5% dividend increase, to $0.2625 a quarter (about $6.9 million per payout, payable November 6), signals that management is comfortable with cash generation despite the flat demand.

Our read: this is a slowly shrinking market, and Ennis grows mainly by buying smaller printers. Three things to watch next quarter (September–November 2026):

1. Gross margin vs. paper prices. Can price increases catch up with the higher carbonless paper costs? If gross margin falls below 30% for a second quarter, lower overhead won't be enough to hold operating margin up.
2. The Arizona ruling. Whether the final judgment lands closer to Ennis's $1.2 million reserve or the court's $2.3 million.
3. Use of the $54 million cash pile. With no debt and buybacks paused, the next acquisition is the most likely way Ennis grows its sales.