Educational Development Corporation — Form 10-Q Summary
Business context and reporting period. The company sells Usborne and Kane Miller children’s books through its Usborne Books & More (UBAM) consultant network and its Publishing segment. This report covers the three months ended May 31, 2021, the first quarter of fiscal 2022, compared with the three months ended May 31, 2020. Results may be affected by seasonal product sales.
Financial performance
| Metric | Quarter ended May 31, 2021 | Prior-year quarter |
|---|---|---|
| Net revenues | $40.8 million | $38.3 million |
| Gross margin | $28.8 million; 70.5% of net revenues | $26.9 million; 70.2% |
| Operating expenses | $24.5 million | $24.5 million |
| Earnings before income taxes | $4.7 million | $2.6 million |
| Net earnings | $3.4 million | $1.9 million |
| Basic / diluted EPS | $0.43 / $0.41 | $0.23 / $0.23 |
| Operating cash flow | $(4.9) million | $12.6 million |
| Capital expenditures | $1.6 million | $0.1 million |
Net revenues increased 6.6%, while net earnings increased 78.1%. Interest expense was $167,800 versus $182,200; other income was $598,700 versus $406,600. The effective tax rate was 26.2%, down from 27.0%. The quarterly dividend declared was $0.10 per share, compared with $0.06.
Segments and key operating changes
- UBAM: Net revenues rose 1.9% to $37.6 million, and segment earnings before tax increased 34.9% to $7.9 million. Average active consultants grew to 55,100 from 33,100. Management cited consultant recruitment, lower-priced starter kits, program changes, technology improvements, and higher school and library orders. Higher supplier volume rebates and shipping revenue helped lift segment gross margin as a percentage of revenue to 72.8% from 71.1%.
- Publishing: Net revenues more than doubled to $3.2 million and segment earnings before tax rose to $861,600 from $346,600. Management attributed the rebound partly to customers reopening after COVID-related closures in the prior-year quarter. Segment gross margin rate declined to 44.2% from 48.2%, reflecting customer discounts and product mix.
- Company-wide revenue includes $52.4 million in gross sales, less $16.0 million in discounts and allowances, plus $4.4 million in transportation revenue. Sales are generally recognized when products ship.
Financial position and liquidity
- At May 31, cash was $1.8 million, current assets were $63.7 million, and current liabilities were $37.5 million. Inventory was $56.6 million current and $0.8 million noncurrent, up from $51.8 million and $0.7 million, respectively, at February 28, 2021.
- Operating cash use reflected a $4.9 million increase in inventory, a $3.6 million decrease in accrued salaries, commissions and other liabilities, and other working-capital movements, partly offset by net earnings and higher income taxes payable.
- Cash used in investing was $1.6 million, including $1.4 million for equipment intended to increase daily shipping capacity and $144,400 for software upgrades.
- Total reported borrowings were approximately $23.5 million: $8.7 million on the revolving credit line and $14.7 million in term debt, including a $3.9 million advancing term loan. Borrowings were approximately $16.8 million at February 28, 2021. The company had $6.3 million of available revolving credit at quarter-end.
- The $15 million revolving facility runs through August 15, 2022; its effective rate was 2.75% at May 31. An April 2021 amendment reduced the fixed rate on Term Loan #1 from 4.23% to 3.12% and removed its prepayment premium. The advancing term loan was scheduled to convert from interest-only payments to a 60-month amortizing loan on July 15, 2021.
Outlook, risks and notable items
- No specific revenue or earnings guidance was provided. Management expects operating cash flow and available credit to support operations, plans to expand inventory and repay debt, and expects excess cash may be distributed to shareholders.
- Management said the severity and duration of COVID-19 impacts remain uncertain. Risks discussed include recruiting and retaining consultants, sourcing books, shipping orders without backlogs, working-capital and capital-expenditure financing, competition, economic conditions and the pandemic.
- Inventory sourcing is concentrated with England-based Usborne Publishing; purchases received from Usborne were $12.3 million in the quarter, versus $4.0 million a year earlier. Products often have four-to-six-month print and delivery lead times, and minimum order quantities can contribute to excess or obsolete inventory.
- The bank agreement requires specified financial ratios and limits additional debt, dividends and certain share repurchases. Inventory was the principal working-capital use during the quarter. The filing identifies no legal proceedings; market-risk disclosure was not applicable.
- On July 7, 2021, the board approved a $0.10 dividend payable August 24, 2021 to shareholders of record August 24. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory growth converts to sales and cash, given supplier concentration, long lead times and the increase in inventory-related working-capital needs.
- Whether operating cash flow improves after the quarter’s negative $4.9 million result, and how planned equipment spending and inventory expansion affect liquidity.
- Revolving-credit availability, borrowing-base limits, interest-rate terms and compliance with the loan agreement’s financial and distribution restrictions.
- Whether consultant growth and Publishing’s reopening-driven recovery continue, and whether the improved earnings and margins are sustainable.
- The company’s seasonality and the continuing effects of COVID-19 on consultant activity, customer reopenings, sourcing and order fulfillment.