Educational Development Corporation — Q1 FY2023 Form 10-Q
Business and period: The filing covers the three months ended May 31, 2022. The company distributes Usborne children’s books through its Usborne Books & More (UBAM) consultant network and publishes and wholesales books through its Publishing segment. Its fiscal year ends February 28.
Financial results
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net revenues | $23.16 million | $40.81 million |
| Gross margin | $15.31 million (66.1% of revenue) | $28.78 million (70.5%) |
| Operating expenses | $15.03 million | $24.55 million |
| Earnings before income taxes | $285,300 | $4.66 million |
| Net earnings / diluted EPS | $215,800 / $0.03 | $3.44 million / $0.41 |
| Cash from operations | $(2.20) million | $(4.88) million |
UBAM revenue fell 46.8% to $20.02 million; average active consultants fell 41.6% to 32,200. Publishing revenue was down 3.1% to $3.14 million. Gross margin rate declined overall, with management citing changes in UBAM order mix, lower transportation revenue, and higher inbound ocean freight costs. Interest expense rose to $388,100, primarily due to higher line-of-credit borrowing and the Advancing Term Loan #2.
Liquidity and debt
At May 31, 2022, cash was $1.42 million, current assets were $72.98 million, and current liabilities were $38.08 million. Current assets were largely inventory ($66.70 million). The company had $22.51 million drawn on its revolving credit line and $24.38 million in gross term debt, or about $46.89 million of total bank borrowings. The filing reports approximately $582,300 of available revolving credit. The line’s effective interest rate was 4.02%.
Operating cash outflow was driven in part by a $5.70 million reduction in accounts payable and a $1.47 million decrease in accrued salaries, commissions, and other liabilities; inventory reduction and higher deferred revenue partly offset these uses. Investing cash outflow was $108,800, primarily for software upgrades. Financing provided $3.36 million, including $4.79 million of net line-of-credit borrowings, offset partly by term-debt payments and $870,700 of dividends paid.
Material changes, outlook, and risks
- Revenue declined 43.2% year over year and net earnings fell substantially. Management attributed UBAM weakness to consultant departures as families returned to in-person schooling and consultants returned to full-time employment, as well as inflation reducing customers’ disposable income.
- Management said it expects inflationary pressure to continue affecting sales. It also noted that historically difficult inflationary periods have sometimes increased consultant participation as families seek additional income.
- Management expects operating cash flow and the credit facility to support ongoing operations; it expects cash to fund inventory and debt reduction, with excess cash potentially distributed to shareholders. No specific revenue or earnings guidance was provided.
- A loan amendment temporarily raised the revolving-line maximum from $20 million to $25 million through September 15, 2022, after which it reverts to $20 million. The facility matures April 11, 2023, and borrowings are subject to borrowing-base and covenant limits, including financial-ratio and dividend restrictions.
- Inventory sourcing is concentrated with Usborne in England. The distribution agreement includes an annual minimum purchase volume; failure to meet it could shorten certain termination notice provisions. Long overseas production and delivery lead times, supplier minimum-order requirements, and inventory obsolescence are additional risks.
- The company cited uncertainty around COVID-19 impacts and its ability to recruit and retain consultants, obtain books, ship orders without backlogs, and secure adequate working capital. Management reported no subsequent events and concluded disclosure controls were effective; it reported no material change in internal control over financial reporting.
Investor verification points
- Check whether consultant counts and UBAM sales stabilize, and whether inflation continues to constrain customer demand.
- Monitor revolving-line availability, the September 15, 2022 facility-capacity reset, the April 2023 maturity, interest costs, and compliance with loan covenants.
- Assess inventory levels, sell-through, valuation reserves, and the ability to meet Usborne minimum-purchase commitments.
- Compare operating cash flow with reported earnings, especially the effects of payables and other working-capital movements.
- Review the May 16, 2022 Usborne distribution agreement and the terms of the loan amendment referenced in the filing.