Educational Development Corporation — Form 10-Q Summary
Business context and reporting period
EDC sells Usborne and Kane Miller children’s books through two segments: Usborne Books & More (UBAM), which uses independent sales consultants, and Publishing, which sells to retail accounts. This report covers the quarter and nine months ended November 30, 2019, the third quarter and first nine months of fiscal 2020. Results are subject to seasonal variation.
Key financial metrics
| Metric | Three months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2019 |
|---|---|---|
| Net revenue | $40.8 million | $92.9 million |
| Gross margin | $27.5 million; 67.5% of revenue | $62.5 million; 67.3% of revenue |
| Operating expenses | $23.9 million | $55.9 million |
| Earnings before income taxes | $3.8 million | $7.0 million |
| Net earnings | $2.7 million | $5.1 million |
| Basic/diluted EPS | $0.33 / $0.33 | $0.62 / $0.61 |
| Operating cash flow | Not separately presented for the quarter | $9.0 million |
Nine-month capital expenditures were $0.4 million. Cash increased to $9.0 million from $3.2 million at February 28, 2019. At November 30, current assets were $43.7 million and current liabilities $22.7 million (current ratio approximately 1.9). Long-term debt, including current maturities, was $19.1 million; the company had no revolving-credit borrowings and reported $11.2 million of available credit. Total liabilities were $41.8 million and shareholders’ equity was $29.4 million.
Material changes versus the prior comparable period
- Quarterly revenue increased 0.8% year over year, while net earnings decreased 2.8%; diluted EPS declined from $0.34 to $0.33.
- For the nine months, revenue fell 2.5%, net earnings fell 16.6%, and diluted EPS declined from $0.75 to $0.61. Gross margin dollars decreased 2.3%, although gross margin percentage edged up to 67.3% from 67.1%.
- UBAM quarterly revenue rose 2.1%, supported by an 11.3% increase in average active consultants to 33,600. Nine-month UBAM revenue declined 2.3%, primarily reflecting fewer consultants in the first quarter; segment operating income fell 8.9% to $14.4 million.
- Publishing revenue declined 15.6% for the quarter, largely because a major customer’s prior-year sales promotion did not recur. Nine-month Publishing operating income increased 9.5% to $2.3 million, aided by lower expenses and improved customer and product mix.
- Operating cash flow increased to $9.0 million from $7.8 million. Inventory reductions contributed $3.1 million, compared with a $4.4 million inventory cash outflow in the prior-year period.
Outlook, risks, contingencies, and unusual items
- Management expects operating cash flow, together with the revolving facility, to meet fiscal 2020 liquidity needs. It expects cash to fund inventory replacement and debt reduction, with excess cash potentially distributed to shareholders or used for share repurchases. No specific earnings or revenue guidance was provided.
- The revolving facility is a $15.0 million commitment, subject to eligible receivables and inventory borrowing-base limits; its termination date was extended to August 15, 2020. Debt agreements impose financial-ratio and other restrictions, including limits on dividends, repurchases, capital spending, leasing, and additional debt.
- Key disclosed operating risks include recruiting and retaining consultants, sourcing desired books, shipping orders without backlogs, and securing working capital and capital-expenditure financing. Inventory sourcing is concentrated: Usborne purchases were $16.1 million of $24.1 million total inventory purchases in the nine-month period. Books sourced internationally have reported four-to-six-month lead times.
- Inventory net of valuation allowances was $30.6 million, including $0.9 million classified as noncurrent. The inventory valuation allowance rose to $0.6 million from $0.4 million at fiscal year-end. Management estimates and assumptions, including inventory obsolescence and sales-return reserves, could differ from actual outcomes.
- The company adopted lease-accounting guidance and reported no material effect; recognized right-of-use assets and lease liabilities were approximately $47,900. The board declared a $0.05-per-share distribution in January 2020, payable in March 2020. No legal proceedings were reported. 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 UBAM’s consultant growth is sustained and translates into sales and earnings, and whether nine-month revenue weakness continues.
- How seasonal fourth-quarter sales, inventory requirements, and operating cash flow affect full-year performance and liquidity.
- Available borrowing capacity under the borrowing base, compliance with loan covenants, and scheduled debt repayments.
- Inventory valuation, supplier concentration and lead times, and the assumptions behind reserves and sales-return estimates.
- The sustainability of dividends and share repurchases given debt restrictions and cash needs; quarterly dividends per share were $0.05 versus $0.10 in the prior-year quarter.