Educational Development Corporation — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended August 31, 2021. The company sells children’s books through its Usborne Books & More (UBAM) consultant network and its Publishing business. Results are unaudited; management notes seasonality, so interim results may not indicate full-year performance.
Financial performance
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net revenues | $33.0 million | $59.3 million | $73.8 million | $97.5 million |
| Gross margin | $22.5 million; 68.2% | $41.9 million; 70.8% | $51.3 million; 69.5% | $68.8 million; 70.6% |
| Earnings before taxes | $2.7 million | $5.8 million | $7.3 million | $8.4 million |
| Net earnings | $1.9 million | $4.3 million | $5.3 million | $6.2 million |
| Diluted EPS | $0.23 | $0.51 | $0.63 | $0.74 |
- Q2 net revenue declined 44.3% year over year and net earnings declined 55.4%. For the six-month period, revenue fell 24.3% and net earnings fell 13.7%.
- Six-month operating cash flow was negative $12.4 million, versus positive $28.5 million a year earlier. The principal use was a $13.2 million increase in inventory; lower accrued liabilities and deferred revenue also reduced cash flow.
- Cash and cash equivalents were $0.9 million at August 31, down from $1.8 million at February 28. Capital expenditures were $3.2 million, mainly for shipping-capacity equipment, software, and building improvements.
- Current assets were $70.9 million and current liabilities $44.1 million. Inventory was $65.6 million, including $0.8 million classified as noncurrent.
- Borrowings totaled approximately $32.6 million: $16.7 million on the revolving line, $5.2 million on the advancing term loan, and $10.7 million on the existing term loan. Available revolving credit was approximately $3.3 million. Interest expense was $0.2 million for Q2 and $0.4 million for the six months.
Drivers and changes versus prior periods
- UBAM revenue fell 48.2% in Q2 and 28.5% for the six months. Management attributed the comparison largely to unusually high pandemic-related demand in the prior-year periods; current sales per active consultant were described as closer to pre-pandemic levels. Average active consultants were 46,100 in Q2, up 1.5%, and 50,200 for the six months, up 27.7%.
- UBAM operating income declined 42.3% in Q2 to $5.6 million and 13.5% for the six months to $13.4 million. Its operating margin improved to 18.9% in Q2 from 17.0%, and to 20.0% for the six months from 16.5%, helped by volume discounts, vendor rebates, and lower prior-year shipping peak charges.
- Publishing revenue rose 52.2% in Q2 to $3.5 million and 81.1% for the six months to $6.7 million, reflecting customer reopenings after pandemic-related closures. Segment operating income increased to $1.0 million in Q2 and $1.8 million for the six months, although gross-margin percentages declined with customer and product mix.
- Consolidated gross margin percentage fell 2.6 percentage points in Q2, partly reflecting order mix, and fell 1.1 points for the six months. Other income was $1.1 million for the six months, compared with $0.9 million a year earlier.
Liquidity, outlook, risks, and other items
- Management expects operating cash and available bank credit to support ongoing operations. It expects cash to fund inventory expansion and debt reduction, with excess cash potentially distributed to shareholders; no specific earnings or revenue guidance was provided.
- The revolving facility is $20.0 million and expires August 15, 2022. Its borrowing base depends on eligible receivables and inventory. Loan terms require specified financial ratios and restrict additional debt, dividends, and certain repurchases. The filing does not state the company’s covenant headroom.
- Term Loan #1’s fixed rate was reduced from 4.23% to 3.12% effective April 1, 2021, and its prepayment premium was removed. The advancing term loan began amortizing in July 2021. The revolving line and advancing loan had effective rates of 2.75% at August 31.
- Inventory increased substantially amid plans to expand offerings and long supplier lead times of four to six months. Purchases from UK supplier Usborne were $24.4 million for the six months, versus $11.3 million a year earlier; management describes purchases as concentrated with this supplier.
- COVID-19’s duration and business effects remain uncertain. Other stated risks include recruiting and retaining consultants, procuring books, shipping without backlogs, and obtaining working-capital and capital-expenditure financing. Management also highlights estimates for inventory obsolescence and customer receivables.
- The company declared dividends of $0.10 per share in each of the two quarters, versus $0.06 per share in each comparable prior-year quarter. After quarter-end, the board approved another $0.10 dividend, payable November 2021. No legal proceedings were reported; management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether post-pandemic demand, consultant productivity, and Publishing customer recovery support sales and earnings beyond this comparison period.
- Inventory sell-through, aging and valuation reserves, supplier concentration, and the company’s ability to replenish products without creating shipping backlogs.
- Available borrowing-base capacity, covenant compliance and headroom, debt repayment needs, and refinancing timing given the revolving facility’s August 2022 expiration.
- Cash conversion and the extent to which inventory investment and shareholder distributions affect liquidity.
- Whether margin changes and the higher dividend level are sustainable as sales mix and freight costs evolve.