Educational Development Corporation — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended November 30, 2018; comparisons are with the corresponding 2017 periods. The company sells children’s books through its UBAM independent-consultant network and its wholesale Publishing segment. Results are seasonal. Dollar figures below are approximate unless stated otherwise.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net revenue | $40.48 million, up 4.0% | $95.19 million, up 5.7% |
| Gross margin | $27.34 million; 67.5% of revenue | $63.91 million; 67.1% of revenue |
| Operating expenses | $23.71 million, up 1.5% | $56.04 million, up 2.3% |
| Earnings before tax | $3.80 million, up 10.8% | $8.34 million, up 17.4% |
| Net earnings / diluted EPS | $2.82 million / $0.34, versus $2.13 million / $0.26 | $6.12 million / $0.75, versus $4.39 million / $0.54 |
| Operating cash flow | Not presented separately for the quarter | $7.80 million, versus $11.33 million |
Gross-margin percentages were approximately 68.6% for the prior-year quarter and 68.4% for the prior-year nine-month period. The company says lower percentages mainly reflect order mix; adoption of the revenue standard also changed presentation and lowered reported gross-margin percentages, without materially affecting net revenue or earnings.
- Segments: Quarter UBAM revenue rose 2.2% to $37.32 million, but segment operating income fell 5.8% to $6.46 million; active consultants averaged 30,200, down 2.9%. Nine-month UBAM revenue rose 4.3% to $87.11 million, with operating income essentially flat at $15.84 million. Publishing revenue increased 33.3% to $3.16 million in the quarter and 24.6% to $8.07 million year to date; operating income rose to $1.00 million and $2.14 million, respectively.
- Cash flow and investment: Nine-month operating cash flow declined to $7.80 million, including a $4.44 million inventory increase. Capital expenditures were $1.36 million, primarily for warehouse picking, inventory systems and facility improvements. Financing used $1.33 million, including $0.70 million of debt payments and $0.82 million of dividends.
- Liquidity and debt, November 30: Cash was $7.84 million; current assets were $43.62 million and current liabilities $26.00 million (working capital $17.62 million). Long-term debt, including current maturities, was $20.00 million; no revolving credit was drawn, and $10.60 million of availability remained. The company also had an unused $3.0 million advancing term loan for capacity expansion.
Changes, outlook and notable items
- Cash increased from $2.72 million at February 28, 2018, while total debt declined from $20.71 million to $20.00 million. Inventory increased from $26.62 million to $30.65 million current and from $0.44 million to $0.60 million noncurrent.
- Management attributed warehouse payroll savings to automation and operational improvements, which allowed the seasonal quarter to be handled with one shift rather than two. It cited increased freight and commission costs, and a less favorable order mix, as pressures on UBAM quarterly profitability. Publishing growth reflected higher orders from large customers that had lower volumes the prior year.
- Management expects operating cash flow and the credit facility to meet liquidity needs; cash is expected to support higher inventory for anticipated sales growth, debt reduction and, if available, shareholder distributions. No numerical revenue or earnings guidance was provided.
- The June 2018 bank amendment extended the revolving facility to August 15, 2019, lowered floating-rate pricing, established the unused $3.0 million expansion loan and relaxed certain covenant restrictions. Debt agreements continue to impose financial tests and restrictions, including on dividends, capital expenditures and additional debt.
- The company adopted ASC 606 retrospectively on March 1, 2018. It changed accounting for hostess awards, principally moving amounts between gross sales, discounts, cost of goods sold and operating expenses; adoption had no effect on net earnings or retained earnings. A two-for-one stock split was distributed in August 2018, and share data was adjusted retroactively.
- On January 10, 2019, the board declared a $0.05-per-share cash distribution, payable on or about March 12, 2019. Management identifies risks including consultant recruitment and retention, book sourcing and long supplier lead times, shipping capacity, financing, competition and economic conditions. Usborne accounted for approximately $23.5 million of nine-month inventory purchases, versus $18.2 million a year earlier.
Key investor verification points
- Assess whether inventory growth and seasonal working-capital needs are converting into sales and cash flow; operating cash flow was lower year over year despite higher earnings.
- Track UBAM consultant counts, order mix, gross-margin trends and freight costs, as well as whether Publishing growth continues.
- Review the debt covenant requirements, facility availability and refinancing needs, particularly the revolving facility’s August 2019 termination date.
- Verify the performance conditions, potential share dilution and future expense from the 2019 Long-Term Incentive Plan; approximately $2.95 million of compensation expense remained to be recognized for specified awards.
- Consider seasonality, supplier concentration and the potential effect of long book-production and delivery lead times on product availability and fulfillment.