Educational Development Corporation — Form 10-Q Summary
Reporting period: Three and six months ended August 31, 2018, the second quarter and first half of fiscal 2019. The company sells children’s books through Usborne Books & More (UBAM) independent consultants and its Publishing wholesale business. Results are seasonal and interim results may not indicate full-year performance.
Financial results and position
| Metric | Three months ended Aug. 31, 2018 | Six months ended Aug. 31, 2018 |
|---|---|---|
| Net revenue | $24.68 million, up 2.0% year over year | $54.70 million, up 7.0% |
| Gross margin | $16.22 million; 65.7% of revenue | $36.57 million; 66.9% of revenue |
| Operating expenses | $14.31 million, down 4.5% | $32.33 million, up 2.8% |
| Net earnings | $1.49 million, up 43.7%; diluted EPS $0.18 versus $0.13 | $3.31 million, up 46.2%; diluted EPS $0.40 versus $0.28 |
- Cash flow: Operating activities used $2.35 million in the first half, versus $0.96 million used a year earlier. Investing used $1.33 million, mainly for warehouse and distribution improvements; financing provided $1.80 million. Cash fell $1.89 million to $0.83 million.
- Liquidity and working capital: Current assets were $38.80 million and current liabilities $23.96 million at August 31; current ratio was approximately 1.62. Inventory increased to $33.52 million from $26.62 million at fiscal year-end.
- Debt: Long-term debt was $20.24 million, plus $2.60 million drawn on the revolving credit line. Available revolving capacity was $8.87 million. Floating-rate borrowings carried a 4.58% rate at August 31; the company also has a $3.0 million advancing term loan for expansion, with no amount drawn at period-end.
- Shareholder distributions: The company paid $0.05 per share during the first half, totaling $0.41 million. A further $0.05-per-share distribution, approximately $0.41 million, was paid in September 2018.
Changes versus the prior comparable period
- Second-quarter revenue rose modestly, but gross margin dollars declined 1.9% and gross margin percentage fell from approximately 68.4% to 65.7%. Management attributed pressure mainly to order mix, including more discounted book-fair orders and lower transportation revenue.
- First-half revenue and earnings increased, but gross margin percentage declined from approximately 68.2% to 66.9%. Inventory growth was the principal working-capital use contributing to negative operating cash flow.
- UBAM second-quarter net revenue was nearly flat at $22.08 million, while segment operating income fell to $4.28 million from $4.57 million. For the half year, UBAM revenue rose to $49.79 million and operating income to $9.38 million. Average active consultants increased 10.4% in the quarter and 18.9% for the half year.
- Publishing second-quarter revenue increased 30.0% to $2.61 million and operating income rose to $0.64 million. First-half revenue increased 19.5% to $4.91 million and operating income to $1.14 million.
- The effective tax rate declined to 26.8% for the quarter and 27.0% for the half year, compared with 38.4% and 38.3%, respectively, primarily reflecting the lower federal rate under the Tax Cuts and Jobs Act.
Outlook, risks, and unusual items
- No numerical earnings or revenue guidance is provided. Management expects operating cash flow and the expanded bank credit facility to meet liquidity needs; cash is expected to support inventory for sales growth, debt reduction, and distributions of excess cash.
- Risks noted include recruiting and retaining consultants, sourcing books, shipping orders without backlogs, financing working capital and capital spending, and economic, competitive, and regulatory conditions. Longer supplier lead times and inventory estimation are also relevant; significant purchases are concentrated with UK-based Usborne.
- At August 31, inventory purchase commitments totaled approximately $13.63 million, due during fiscal 2019, including $8.34 million with Usborne. Inventory purchases from Usborne were $15.5 million in the first half, compared with $11.3 million a year earlier.
- The bank agreement requires financial-ratio compliance and restricts, among other matters, additional debt, dividends, capital expenditures, and share repurchases. The June 2018 amendment extended the revolving facility to August 15, 2019, reduced pricing on floating-rate borrowings, established the undrawn $3.0 million advancing term loan, and relaxed certain covenants.
- Adoption of revenue standard ASC 606 changed the presentation of hostess awards and sales returns; management reported no effect on net earnings or retained earnings and an immaterial effect on net revenue. The 2017 comparative periods were restated under the standard.
- A two-for-one stock split was distributed in August 2018, with share and per-share data retroactively adjusted. A new incentive plan permits up to 600,000 restricted shares tied to revenue and pre-tax performance targets; approximately 239,000 shares were granted and approximately 80,000 authorized with grant dates not yet established.
- The filing reports no applicable legal proceedings or market-risk disclosure. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether consultant growth and Publishing account demand persist, and whether order mix continues to weigh on gross margin.
- Inventory levels, sell-through, valuation allowances, and the resulting operating cash flow and revolving-credit usage.
- Usborne supplier concentration, purchase commitments, and the company’s ability to secure inventory and ship orders on time.
- Available borrowing capacity and compliance with loan covenants, including restrictions affecting dividends, capital spending, and repurchases.
- Performance conditions and potential dilution associated with the long-term incentive plan, and the sustainability of cash distributions.