Educational Development Corporation — Q2 FY2023 Form 10-Q
Business context and reporting period. The quarter and six months ended August 31, 2022 (fiscal year ending February 28, 2023). The company distributes Usborne children’s books through its independent-consultant UBAM segment and sells books to retail accounts through its Publishing segment. Results are seasonal and interim performance may not indicate full-year results.
Key financial metrics
| Metric | Three months ended Aug. 31, 2022 | Six months ended Aug. 31, 2022 |
|---|---|---|
| Net revenues | $19.4 million | $42.6 million |
| Gross margin | $12.5 million; 64.3% of revenue | $27.8 million; 65.3% of revenue |
| Operating expenses | $13.5 million | $28.5 million |
| Interest expense | $0.5 million | $0.9 million |
| Net earnings (loss) | $(0.8) million; $(0.10) per share | $(0.6) million; $(0.07) per share |
| Cash from operations | $(3.6) million for six months; cash at Aug. 31 was $0.8 million | |
| Debt | $36.0 million term debt plus $12.1 million line-of-credit borrowings at Aug. 31 |
Total assets were $103.7 million and shareholders’ equity was $46.6 million at August 31, 2022. The company had approximately $2.9 million available on its $15 million revolving line. No dividends were declared or paid in the current six-month period; the comparable prior-year period paid $0.20 per share.
Changes versus prior comparable periods
- Quarterly net revenue fell 41.2% from $33.0 million; six-month revenue fell 42.3% from $73.8 million. Net losses compared with net earnings of $1.9 million and $5.3 million, respectively, in the prior-year periods.
- UBAM revenue declined 46.1% for the quarter and 46.5% for six months. Average active consultants fell 41.9% in the quarter and 41.2% over six months. Management cited consultants returning to full-time work, children returning to classrooms, recruiting disruption related to a revised Usborne agreement, and inflation reducing customers’ disposable income.
- Publishing revenue was broadly stable: $3.5 million for the quarter and $6.6 million for six months. Segment operating income declined in both periods, partly due to higher expenses following the December 2021 Learning Wrap-Ups acquisition.
- Consolidated gross margin as a share of revenue declined from 68.2% to 64.3% for the quarter and from 69.5% to 65.3% for six months. The company attributed pressure to order mix, freight costs, and lower purchasing-volume discounts or rebates.
- Six-month operating cash use improved from $12.4 million to $3.6 million, helped by a $6.0 million inventory reduction, but was offset in part by lower accounts payable and accrued liabilities.
Outlook, financing, and risks
- Management expects cash from operations and the available credit line to support operations, and expects positive operating cash flow as inventory levels normalize. It plans to use cash for inventory, debt reduction, and, following a return to profitability, potentially shareholder distributions. No quantitative earnings or revenue guidance was provided.
- On August 9, 2022, the company repaid MidFirst Bank and entered a new BOKF credit agreement: $15 million fixed-rate term debt at 4.26%, $21 million floating-rate term debt at Term SOFR plus 1.75%, and a revolving facility of up to $15 million at Term SOFR plus 2.50%. The term loans mature August 9, 2027; the revolving facility matures August 9, 2023. The agreement includes a minimum fixed-charge ratio and limits additional borrowing.
- Usborne is a significant inventory supplier. Its distribution agreement has annual minimum purchase and payment terms; failure to comply may result in termination. The company also cited risks around recruiting and retaining consultants, sourcing and shipping inventory, financing needs, competition, economic conditions, and COVID-19 uncertainty.
- Inventory totaled about $67.6 million, including $3.3 million classified as noncurrent. Management estimates noncurrent inventory using anticipated sales and notes longer supplier lead times. Rising rates also pose a financing cost risk; floating-rate loans reference SOFR.
- The company reported no subsequent events or applicable legal proceedings. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Investor facts to verify
- Whether UBAM consultant counts and sales stabilize, and how persistent inflation affects customer demand.
- Whether inventory normalizes and operating cash flow turns positive, particularly given the large inventory balance and supplier purchase requirements.
- Compliance with the new loan’s fixed-charge covenant, revolving-line renewal or repayment by August 2023, and sensitivity to SOFR rates.
- Whether Usborne agreement minimums and payment terms are being met, and whether the revised agreement affects recruitment or supply continuity.
- Whether margins recover as freight costs, discounts, and purchasing-volume rebates change.