Educational Development Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2019 (fiscal 2020), compared with the corresponding 2018 periods. The company publishes Usborne and Kane Miller children’s books through its retail Publishing segment and its independent-consultant UBAM segment.
Financial performance
| Metric | Three months ended Aug. 31, 2019 | Year-over-year change | Six months ended Aug. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net revenue | $24.44 million | Down 1.0% | $52.03 million | Down 4.9% |
| Gross profit | $16.39 million | Up 1.1% | $34.92 million | Down 4.5% |
| Gross margin | 67.1% | Up from 65.7% | 67.1% | Up from 66.9% |
| Net earnings | $1.01 million | Down 32.4% | $2.37 million | Down 28.3% |
| Basic and diluted EPS | $0.12 | Down from $0.18 | $0.29 | Down from $0.40 |
Second-quarter operating expenses increased 6.0% to $15.17 million, with operating and selling expense rising to $4.19 million from $3.26 million. Six-month operating expenses declined slightly to $32.03 million. Interest expense was $0.24 million for the quarter and $0.47 million for the six months. Effective tax rates were 26.3% and 26.2%, respectively.
- Segments: UBAM revenue was $21.74 million in the quarter, down 1.5%, and $46.98 million for six months, down 5.6%. UBAM operating income fell 18.4% to $3.49 million for the quarter and 16.2% to $7.86 million for six months. Publishing revenue rose 3.7% to $2.70 million for the quarter and 2.7% to $5.04 million for six months; segment operating income increased to $0.78 million and $1.42 million, respectively.
- Cash flow: Operating activities used $1.27 million in the first six months, versus $2.35 million used a year earlier. Inventory growth used $2.39 million of cash; decreases in accrued and other liabilities and accounts payable also weighed on cash flow. Investing activities used $0.23 million, mainly for website improvements. Financing activities used $0.72 million, including dividends, share repurchases, and debt payments, partly offset by revolving-credit borrowings.
- Liquidity and balance sheet: Cash was $0.97 million at August 31, down from $3.20 million at February 28. Current assets were $41.09 million and current liabilities $21.70 million. Net working capital was approximately $19.39 million, including $35.62 million of current inventory.
- Debt: Long-term debt, including current maturities, was $19.30 million; revolving-credit borrowings were $1.06 million. The company reported $11.71 million of available revolving credit under its $15 million facility. Variable-rate borrowings carried a stated rate of 4.42% at quarter-end. The credit facility was amended to extend its termination date to August 15, 2020; financial and other covenants restrict, among other things, dividends and share repurchases.
Changes, outlook, and risks
- UBAM’s six-month revenue decline reflected fewer average active consultants, partly related to a prior-year recruiting promotion. A five-week 30th-anniversary promotion recruited more than 10,000 new consultants; management said their sales contribution could be greater in the second half as new consultants gain experience. Average active consultants were 33,600 in the quarter, up 2.4% year over year, but 32,600 for six months, down 4.1%.
- UBAM’s quarterly operating and selling costs rose due to a prior-year resort refund comparison, higher postal pricing, promotion-related freight, and other costs. Gross margin percentage improved in both segments, reflecting product and customer/order mix.
- Management said operating cash and the credit facility were expected to meet fiscal 2020 liquidity needs. Cash was expected to support inventory replacement and debt reduction, with excess cash potentially returned to shareholders or used for share repurchases. The filing provides no specific revenue or earnings guidance.
- Risks highlighted include recruiting and retaining consultants, sourcing desired books, shipping orders without backlogs, working-capital and financing needs, competitive and economic conditions, and inventory estimates. Inventory purchases are concentrated with England-based Usborne Publishing; products can have four-to-six-month production and delivery lead times. Results are seasonal and interim performance may not predict full-year results.
- The company adopted the new lease standard; recognition of right-of-use assets and lease liabilities increased assets and liabilities by approximately $52,900, with no material effect on results or cash flows. It declared a subsequent $0.05-per-share distribution, payable on or about December 5, 2019. No legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the newly recruited UBAM consultants become productive and reverse the six-month sales decline.
- Whether inventory levels, supplier concentration, and long lead times affect future sales, cash conversion, or obsolescence reserves.
- Availability and borrowing-base conditions for the revolving facility, compliance with loan covenants, and debt maturities.
- Whether operating cash flow improves after the first-half inventory and working-capital outflows while dividends and share repurchases continue.
- The sustainability of segment margins and the drivers of higher UBAM operating and selling expenses.