Educational Development Corporation — Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2021. The company sells children’s books through its Usborne Books & More (UBAM) consultant network and its Publishing segment. Comparisons are with the corresponding 2020 periods. Results are unaudited and subject to seasonality.
Key financial results
| Metric | Quarter 2021 | Quarter 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net revenue | $45.1 million | $66.8 million | $118.9 million | $164.3 million |
| Gross margin | $31.2 million; 69.2% | $47.2 million; 70.6% | $82.5 million; 69.4% | $116.0 million; 70.6% |
| Net earnings | $2.6 million | $4.3 million | $8.0 million | $10.5 million |
| Diluted EPS | $0.31 | $0.51 | $0.94 | $1.25 |
| Operating cash flow | Not separately presented for the quarter | $(7.4) million | $39.6 million |
- Quarter revenue declined 32.4% and net earnings declined 38.0%; nine-month revenue declined 27.6% and net earnings declined 23.7%.
- At November 30, cash was $0.9 million, current assets $76.1 million and current liabilities $39.3 million. Inventory totaled $71.1 million, including $69.2 million current inventory.
- Debt consisted of a $3.0 million line-of-credit balance and $25.5 million gross term debt. Available revolving credit was approximately $17.0 million. The line carried a 3.00% effective rate; term loans also had a 3.00% minimum rate.
- Capital expenditures were $3.4 million for the nine months, primarily for shipping-capacity equipment and software upgrades. Dividends paid were $2.6 million.
Business changes and management commentary
- UBAM revenue fell 35.5% in the quarter and 31.3% year to date. Quarterly active consultants declined 27.4% year over year to 41,500, as consultants returned to other employment and families resumed classroom learning. Management said UBAM sales and consultant levels remained above pre-pandemic levels.
- Publishing revenue increased 42.3% in the quarter and 65.1% year to date, reflecting customer reopening, new accounts and stronger demand. Nine-month Publishing gross margin percentage declined to 46.3% from 48.2%, partly due to customer and product mix.
- UBAM’s nine-month operating income fell to $21.0 million from $26.3 million, although its operating margin improved to 19.3% from 16.7%, reflecting cost savings, order mix, shipping-charge changes, volume discounts and vendor rebates.
- Operating cash flow turned negative primarily because inventory rose by $18.8 million. Accounts payable provided a partial offset, increasing $4.5 million. Cash used in operations and capital spending was funded in part by $15.2 million of term-loan proceeds.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management expected operating cash generation and available credit to support operations; planned uses included expanding inventory and product offerings, paying down debt and distributing excess cash to shareholders.
- Management cited uncertainty around the pandemic and identified risks including recruiting and retaining consultants, sourcing books, shipping orders without backlogs, financing working capital and capital spending, and economic and competitive conditions. Many products have four-to-six-month production and delivery lead times; purchases are concentrated with an England-based publisher.
- The loan agreement includes financial-ratio requirements and restrictions on additional debt, dividends and certain share repurchases. The $20 million revolving facility was scheduled to run through August 15, 2022.
- On November 19, 2021, the company added a $10 million, 120-month term loan, maturing November 19, 2031. On December 1, after quarter-end, it acquired Learning Wrap-Ups, Inc. for an initial $800,000; the acquired business had approximately $1.5 million in historical annual sales.
- The board approved a $0.10-per-share dividend on January 5, 2022, payable to shareholders of record February 22, 2022. The company reported no material changes in internal control, and legal proceedings were listed as not applicable.
Important facts for investors to verify
- Whether inventory levels and the associated working-capital cash use are converting into sales, and whether inventory valuation reserves remain adequate.
- Whether consultant counts and UBAM revenue stabilize, and whether Publishing growth persists as customer activity normalizes.
- Compliance with loan covenants, future borrowing availability and debt repayment requirements, including the revolving facility’s maturity.
- The financial contribution, integration costs and final purchase accounting for Learning Wrap-Ups, which are not detailed in this filing.
- Whether the company can sustain dividends while operating cash flow is negative and capital needs and debt levels have increased.