Educational Development Corporation — Q3 FY2018 10-Q
Business context and period: The company sells Usborne and Kane Miller children’s books through its Usborne Books & More (UBAM) consultant network and a wholesale Publishing segment. The quarter and nine-month periods ended November 30, 2017; comparisons are with the corresponding 2016 periods. Results are seasonal, and interim results may not indicate full-year performance.
Financial performance
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net revenue | $38.9 million, up 26.7% from $30.7 million | $90.0 million, up 13.4% from $79.4 million |
| Gross margin | $28.4 million; 73.0% of revenue, versus $22.4 million; 72.9% | $65.4 million; 72.7% of revenue, versus $56.9 million; 71.7% |
| Operating expenses | $25.1 million, up from $20.6 million | $58.7 million, up from $53.8 million |
| Pre-tax earnings | $3.4 million, versus $2.0 million | $7.1 million, versus $3.6 million |
| Net earnings and diluted EPS | $2.1 million and $0.52, versus $1.3 million and $0.31 | $4.4 million and $1.07, versus $2.2 million and $0.54 |
Quarterly net margin was approximately 5.5%, compared with 4.2%; nine-month net margin was approximately 4.9%, compared with 2.8%. Nine-month interest expense rose to $0.9 million from $0.7 million. Effective tax rates were 38.0% for the quarter and 38.1% for the nine months.
Segments and operating drivers
- UBAM: Quarterly revenue increased 32.2% to $36.5 million and segment operating income rose 46.8% to $6.9 million. Nine-month revenue increased 15.8% to $83.5 million and operating income rose 40.7% to $15.9 million. Average active consultants grew to 31,100 for the quarter from 28,100, and to 29,500 for the nine months from 24,800.
- Publishing: Quarterly revenue declined 19.4% to $2.4 million and operating income fell to $0.6 million from $1.0 million. Nine-month revenue declined 9.7% to $6.5 million and operating income fell to $1.5 million from $2.1 million. Management attributed weakness to smaller and fewer customer orders, partly reflecting prior-year shipping delays and customers’ slower-delivery expectations.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $11.3 million, compared with cash used of $0.2 million a year earlier. The improvement included a $9.8 million inventory reduction; accounts payable fell $7.3 million, partly offsetting cash generation.
- Investing cash outflow was $1.3 million, primarily for warehouse automation and other facility and equipment improvements. Financing cash outflow was $4.6 million, including $4.9 million of line-of-credit repayment. Cash increased by $5.4 million to $6.1 million.
- At November 30, current assets were $35.4 million and current liabilities $22.7 million, implying working capital of approximately $12.7 million and a current ratio of approximately 1.56. Current inventory was $24.5 million, down from $34.3 million at February 28.
- Long-term debt, including current maturities, was approximately $21.9 million; the revolving line had no balance, versus $4.9 million at February 28. Available revolving credit was $9.1 million. The revolving facility is subject to borrowing-base limits and expires June 15, 2018. Floating-rate borrowings were priced at 4.41% at quarter-end.
- The loan agreement includes financial covenants and restrictions on additional debt, capital expenditures, certain transactions, dividends and stock buybacks. Debt is secured by company properties; the CEO and his wife also provided a limited guaranty.
Outlook, commentary and risks
Management said operating cash flow and the expanded credit facility were expected to support liquidity needs; cash generation was expected to fund inventory for anticipated sales growth and debt reduction. No quantified revenue or earnings guidance was provided. Warehouse changes and automation increased shipping capacity, allowing shipments to keep pace with incoming orders in the quarter. By contrast, the company reported a $9.6 million order backlog at the prior-year quarter-end; $0.7 million of paid orders remained unshipped at this quarter-end.
Management cited risks including recruiting and retaining consultants, sourcing books, shipping orders without building backlog, financing working capital and capital expenditures, and economic and competitive conditions. Inventory planning is exposed to long supplier lead times and minimum print-run requirements; significant purchases are concentrated with an England-based publisher. Publishing sales are seasonal. The Tax Cuts and Jobs Act was enacted after quarter-end, on December 22, 2017; its financial-statement effects were to be addressed in the fiscal-year 2018 annual report. The filing says disclosure controls were effective and reports no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether consultant growth and increased shipping capacity persist, and whether order backlog or fulfillment delays recur.
- Whether inventory reductions are sustainable without impairing product availability, and how inventory valuation and supplier concentration affect margins.
- Publishing-segment recovery, given customer losses or smaller orders associated with prior-year shipping delays.
- Compliance with bank covenants, borrowing-base availability and refinancing or renewal of the revolving facility before its June 2018 expiration.
- The eventual tax effects of the Tax Cuts and Jobs Act and any resulting changes to reported earnings or deferred tax balances.