Educational Development Corporation — Q2 FY2018 10-Q
Reporting period: Three and six months ended August 31, 2017. The company sells children’s books through Usborne Books & More (UBAM), a network of independent consultants, and its Publishing segment, which sells to retail accounts. Results are seasonal and interim performance may not indicate full-year results.
Financial performance
| Metric | Three months ended Aug. 31, 2017 | Prior-year quarter | Six months ended Aug. 31, 2017 | Prior-year six months |
|---|---|---|---|---|
| Net revenue | $24.18 million | $25.89 million | $51.11 million | $48.68 million |
| Gross margin | $17.52 million; 72.5% of revenue | $18.39 million; 71.0% | $37.03 million; 72.4% | $34.51 million; 70.9% |
| Earnings before taxes | $1.68 million | $0.52 million | $3.66 million | $1.53 million |
| Net earnings | $1.04 million; $0.25 per diluted share | $0.32 million; $0.08 per diluted share | $2.26 million; $0.55 per diluted share | $0.94 million; $0.23 per diluted share |
- Quarterly revenue declined 6.6%, while six-month revenue increased 5.0%. Net earnings rose in both comparison periods.
- Six-month operating cash flow was negative $956,900, versus negative $2.04 million a year earlier. Investing cash outflow was $1.23 million, primarily for warehouse and systems improvements. Financing provided $1.92 million.
- Cash declined to $432,400 from $699,200 at fiscal year-end. Current assets were $33.92 million and current liabilities $22.93 million, a current ratio of approximately 1.48.
- At August 31, line-of-credit borrowings were $6.25 million and long-term debt, including current maturities, was $22.15 million. Available revolving credit was $3.56 million under the then-current facility. The weighted pricing rate on specified variable-rate borrowings was 4.36%.
Changes and operating drivers
- UBAM six-month revenue increased 5.6% to $47.01 million; average active consultants grew 26% to 28,600. UBAM operating income increased 26% to $8.95 million. In the quarter, however, UBAM revenue fell 6.9%, which management attributed primarily to extended shipping lead times during facility expansion.
- UBAM gross margin improved year over year, aided by inventory volume discounts; lower packaging and outbound freight costs also supported operating income. Management said new packaging methods reduced packaging costs, shipment weight, and freight expense.
- Publishing six-month revenue was $4.10 million and operating income $957,400, both below the prior-year period. Management characterized segment results as generally consistent with the comparable periods.
- Accounts payable fell $8.80 million from February 28, 2017, mainly due to payments to suppliers for prior inventory purchases. Inventory declined $4.88 million as management worked down purchases based on sales forecasts that had exceeded actual sales.
- Interest expense rose to $576,200 for the six months, primarily from higher line-of-credit borrowings and the $4.0 million Term Loan #2.
Outlook, risks, and notable items
- Management expected operating cash flow and an expanded bank credit facility to meet fiscal 2018 liquidity needs. It planned to use operating cash for inventory in anticipation of continued sales growth and to repay debt; no numerical earnings or revenue guidance was provided.
- On September 1, 2017, after quarter-end, the company amended its loan agreement to raise the revolving credit limit from $10 million to $15 million. The facility remains subject to borrowing-base limits and financial and other covenants.
- The company had approximately $400,000 remaining on purchase commitments for warehouse equipment; the remaining equipment was scheduled for installation in the fiscal fourth quarter. The planned capacity expansion is intended to increase daily shipping capability.
- Management cited risks including recruiting and retaining consultants, sourcing books, shipping orders without backlog, securing working-capital and capital-expenditure financing, competition, and economic or regulatory conditions. Product sourcing is concentrated: an England-based publisher accounted for approximately $11.3 million of the company’s $16.6 million inventory purchases in the first half.
- The loan agreement restricts additional debt and certain spending and suspends dividends and stock repurchases. No dividends were paid in the reported periods. The filing notes a prior loan amendment waived a default that occurred in fiscal 2017’s fourth quarter.
- Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter. Legal proceedings were reported as not applicable; the filing did not include a separate risk-factors discussion because the company was a smaller reporting company.
Investor facts to verify
- Whether shipping lead times and the warehouse-capacity upgrades improve order fulfillment and restore quarterly UBAM sales momentum.
- Whether consultant growth translates into sustained revenue, while monitoring consultant retention and the divergence between quarterly and year-to-date UBAM sales.
- Cash conversion and working-capital needs, including inventory levels, supplier payments, and availability under the expanded revolver.
- Compliance with loan covenants, refinancing or repayment needs, and the effect of higher borrowings and interest expense.
- Inventory purchasing assumptions and supplier concentration, including the adequacy of reserves for slow-moving inventory, returns, and receivables.