Educational Development Corporation — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2015; fiscal year ends February 28. The company sells children’s books through EDC Publishing, a wholesale channel, and Usborne Books & More (UBAM), a direct-sales consultant network. Interim results are unaudited, and management cautions that seasonality makes them not necessarily indicative of full-year results.
Financial results
| Metric | Three months ended Nov. 30, 2015 | Prior-year quarter | Nine months ended Nov. 30, 2015 | Prior-year nine months |
|---|---|---|---|---|
| Net revenue | $24.42 million | $10.94 million | $46.67 million | $24.92 million |
| Gross margin | $17.04 million; 69.8% | $6.82 million; 62.4% | $31.13 million; 66.7% | $14.95 million; 60.0% |
| Operating expenses | $15.00 million | $5.94 million | $27.49 million | $13.67 million |
| Pre-tax earnings | $2.03 million | $0.86 million | $3.60 million | $1.25 million |
| Net earnings | $1.26 million; $0.31 diluted EPS | $0.53 million; $0.13 diluted EPS | $2.23 million; $0.55 diluted EPS | $0.76 million; $0.19 diluted EPS |
- For the quarter, net revenue rose 123.3%; for the nine-month period, it rose 87.3%. UBAM drove the increase: its revenue was $21.78 million for the quarter and $37.73 million year to date. EDC Publishing revenue was $2.64 million and $8.94 million, respectively, down slightly year over year.
- UBAM gross-sales growth reflected a 119% increase in active consultants, to 17,200. Internet sales rose sharply; management attributed growth to more orders and consultant-led online events. Transportation revenue also increased substantially, partly following a higher per-order minimum charge introduced in September 2014.
- Profitability improved, with nine-month gross margin up 6.7 percentage points and net margin up from 3.1% to 4.8%. However, sales commissions and operating and selling expenses grew materially; UBAM commission expense rose faster than sales commissions as a percentage of gross sales.
- Nine-month operating cash flow was $9.41 million, versus cash used of $0.33 million in the prior-year period. Management attributed much of the 2015 inflow to higher accounts payable and UBAM commissions payable, as well as earnings and tax payable movements. Investing cash use was $0.85 million, primarily capital expenditures; financing cash use was $2.26 million, including dividends and net repayment of revolving borrowings.
Balance sheet, liquidity and debt
- At November 30, cash was $6.69 million, current assets $22.63 million, and current liabilities $12.38 million. Inventory was $11.37 million current and $0.25 million non-current. Total assets were $26.03 million and shareholders’ equity $13.65 million.
- No revolving credit borrowings or credit agreement were in place at November 30. The prior $4 million Arvest facility was terminated November 18; the company had borrowed $1.4 million under it at February 28. A new $4 million MidFirst revolving line was signed effective December 1, through December 1, 2016, subject to a borrowing base and financial and other covenants.
- On December 1, after quarter-end, the company acquired a larger office and warehouse facility for approximately $23 million. Approximately $18.4 million was financed with a ten-year bank loan and the balance paid from working capital. The filing describes two loan tranches: $13.4 million at 4.23% and $5 million at a LIBOR-based rate plus 2.75% (reported as 4.23% on December 1). The seller will lease about 45.3% of the facility for 15 years at $105,800 monthly, with 2% annual increases and one five-year extension option.
- At quarter-end, $1.51 million of the existing facility was classified as held for sale; a letter of intent had been signed, and management expected the sale to close during the fiscal year.
Outlook, risks and notable items
- Management expected positive cash flow in fiscal 2016 and believed it would meet foreseeable liquidity needs. No quantified revenue or earnings guidance was provided.
- Management cited timing of major-account reorders as a factor in weaker EDC Publishing sales. Results depend heavily on UBAM consultant growth and sales activity; commission rates vary by sale type and include overrides and bonuses. The company also disclosed significant inventory purchasing concentration with an England-based publisher.
- Sales are recognized when shipped. At November 30, $1.375 million of customer payments for orders shipped in December was recorded as deferred revenue.
- Management identified estimates for inventory valuation, receivable allowances, sales returns, long-lived assets and deferred taxes as important accounting judgments. The filing reports effective tax rates of 38.1% for the quarter and 38.2% year to date.
- The company reported effective disclosure controls, no applicable legal proceedings, and no quantitative or qualitative market-risk disclosure. Risk factors were not required for this smaller reporting company.
Important facts for investors to verify
- Whether UBAM consultant growth and the sharp increase in online orders can be sustained, and how commissions and selling costs affect incremental profitability.
- Whether the large operating-cash-flow improvement is repeatable, given management’s emphasis on increased payables and commissions payable.
- The final terms, balances, covenants and borrowing-base availability under the MidFirst revolving line and the $18.4 million facility loan.
- Facility-sale completion, proceeds and any gain or loss, along with the operating and occupancy economics of the new property and seller lease.
- Seasonal performance and the timing of EDC Publishing national-account reorders; the filing cautions that interim results may not predict year-end results.