Educational Development Corporation (NASDAQ: EDUC) — Form 10-Q
Reporting period: Fiscal third quarter and nine months ended November 30, 2020; comparisons are with the corresponding 2019 periods. The company sells Usborne and Kane Miller children’s books through its UBAM consultant network and its Publishing wholesale segment. Results are unaudited and seasonal.
Financial performance
| Metric | Three months ended Nov. 30, 2020 | Three months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2020 | Nine months ended Nov. 30, 2019 |
|---|---|---|---|---|
| Net revenues | $66.8 million | $40.8 million | $164.3 million | $92.9 million |
| Gross margin | $47.2 million | $27.5 million | $116.0 million | $62.5 million |
| Operating expenses | $41.7 million | $23.9 million | $102.6 million | $55.9 million |
| Earnings before taxes | $5.8 million | $3.8 million | $14.2 million | $7.0 million |
| Net earnings | $4.3 million | $2.7 million | $10.5 million | $5.1 million |
| Basic and diluted EPS | $0.51 | $0.33 | $1.25 basic; $1.25 diluted | $0.62 basic; $0.61 diluted |
- Gross margin was 70.6% of net revenues in the quarter and 70.6% for the nine-month period, versus 67.5% and 67.3%, respectively, in the prior-year periods.
- Operating cash flow for the nine months was $39.6 million, versus $9.0 million. The increase included a $35.5 million rise in accounts payable and an $8.8 million rise in accrued salaries, commissions and other liabilities; inventory used $17.1 million of cash.
- Capital expenditures were $2.0 million. Financing activities used $9.1 million, including $7.7 million of net term-debt repayments and $1.4 million of dividends paid.
Balance sheet and liquidity
- At November 30, 2020, cash was $31.5 million, compared with $3.0 million at February 29, 2020. Current assets were $84.1 million and current liabilities were $62.5 million.
- Current inventory was $47.3 million, up from $30.1 million at fiscal year-end. Accounts payable increased to $45.2 million from $9.7 million.
- Total long-term debt was $11.1 million, down from $18.8 million at February 29, 2020. The company had no line-of-credit borrowings and reported approximately $10.0 million available under its revolver, which runs through August 15, 2021.
- Shareholders’ equity was $38.7 million, compared with $29.4 million at fiscal year-end.
Material changes and operating drivers
- UBAM: Quarterly net revenues rose 68.5% to $64.2 million; nine-month net revenues rose 85.7% to $158.0 million. Average active consultants increased to 57,200 in the quarter from 33,600, and to 45,200 for the nine months from 32,900. Management cited consultant growth, online ordering and home delivery, demand for educational materials, lower-priced starter kits, program changes and technology improvements.
- UBAM’s quarterly operating income increased to $10.8 million from $6.5 million; nine-month operating income increased to $26.3 million from $14.4 million. Management said online sales mix lifted gross-margin percentages but also carried higher consultant commissions; the overall profit effect of the mix shift was described as minimal.
- Publishing: Quarterly net revenues declined 3.7% to $2.6 million; nine-month net revenues declined 19.2% to $6.3 million. Management attributed the weakness mainly to COVID-related retail closures and disruptions. Nine-month operating income fell to $1.9 million from $2.3 million.
- Higher order volumes increased warehouse labor, freight, postage, handling and commissions. Consolidated operating expenses rose to $41.7 million for the quarter and $102.6 million for the nine months.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided. Management expected operating cash flow, the available credit line and any needed equipment financing to meet liquidity needs; cash would support inventory replacement and debt repayment, with excess cash potentially distributed to shareholders or used for share repurchases.
- COVID-19’s duration and business effects remain uncertain. Management noted continuing risks to Publishing, school and library, and book-fair activity, as well as potential consultant consignment-inventory write-offs when consultants become inactive.
- Inventory procurement involves long lead times, and purchases are concentrated with England-based Usborne Publishing: $37.5 million of the company’s $53.2 million in inventory purchases received during the nine months came from Usborne.
- The company repaid its approximately $1.4 million PPP loan in full on May 12, 2020. It also paid off Term Loan #2 and Term Loan #1 Tranche B during the second quarter, with final payments of approximately $2.9 million and $4.2 million, respectively, including accrued interest.
- The board declared a $0.10-per-share distribution on January 7, 2021, payable on or about March 11, 2021. The filing reports no legal proceedings; management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether unusually strong UBAM consultant growth and online demand persist, and whether those sales translate into sustainable margins after commissions and fulfillment costs.
- How much of operating cash flow reflects ongoing earnings versus the large increase in accounts payable and accrued liabilities, and how those balances change as inventory is replenished.
- Inventory sell-through, obsolescence and consignment exposure, particularly given supplier concentration and extended printing and delivery lead times.
- The pace of Publishing recovery as retail, school, library and book-fair channels respond to the pandemic.
- Debt-covenant compliance, revolver availability and renewal beyond August 2021, along with the sustainability of distributions and potential share repurchases.