Educational Development Corporation — Form 10-Q
Reporting period: Quarter and six months ended August 31, 2020 (fiscal 2021). The company sells Usborne and Kane Miller children’s books through its Publishing segment and its UBAM consultant network.
Financial performance
| Metric | Three months ended Aug. 31, 2020 | Six months ended Aug. 31, 2020 |
|---|---|---|
| Net revenue | $59.3 million, up 142.5% year over year | $97.5 million, up 87.5% |
| Gross margin | $41.9 million; 70.8% of revenue | $68.8 million; 70.6% of revenue |
| Net earnings | $4.3 million; diluted EPS $0.51 | $6.2 million; diluted EPS $0.74 |
| Operating cash flow | Not separately reported for the quarter | $28.5 million, versus cash used of $1.3 million in the prior-year period |
- UBAM revenue rose 162.2% in the quarter and 99.6% for the six months. Publishing revenue fell 14.8% and 26.0%, respectively.
- Six-month operating cash flow included a $14.8 million increase in accounts payable and increases in accrued liabilities, taxes payable, and deferred revenue. These working-capital inflows were significant contributors to cash generation.
- At August 31, cash was $22.6 million, compared with $3.0 million at fiscal year-end. Current assets were $57.8 million and current liabilities $37.9 million, for working capital of $19.8 million.
- Long-term debt, including current maturities, was $11.2 million, down from $18.8 million at February 29. The company had no revolver borrowings and reported $8.4 million of available credit under its $10 million facility.
- Dividends paid during the six months were $0.12 per share. After quarter-end, the board declared a further $0.10 per share distribution, payable in December 2020.
Changes, outlook, and risks
- UBAM’s growth reflected more consultants, increased online ordering and demand for educational materials at home. Average active consultants were 45,400 in the quarter, up 35.1%; the company reported more than 50,300 active consultants at August-end. Online sales increased while book fairs, school and library sales, and other in-person sales declined.
- UBAM’s quarterly gross margin rate rose to 71.7% from 69.2%, but higher commissions and direct costs largely offset the benefit of sales mix changes. The virtual convention contributed an estimated $0.5 million to quarterly segment profitability.
- Publishing remained affected by temporary retail closures and canceled trade shows related to COVID-19. Management said the pandemic’s duration and effects could not be accurately predicted; it did not provide specific revenue or earnings guidance.
- Warehouse labor and freight-handling costs increased as the company added a second shift to support order volumes. Management cited its ability to recruit consultants, source books, ship orders without backlogs, and obtain adequate financing as important uncertainties.
- The company repaid its approximately $1.4 million PPP loan in full on May 12. It also paid off Term Loan #2 and Tranche B during the quarter, reducing interest expense. The remaining Tranche A loan carried a fixed 4.23% rate and matures in December 2025.
- Inventory sourcing is concentrated in part with England-based Usborne Publishing; book production and delivery typically require four to six months. The company also reported increased consignment-inventory reserves amid limits on consultants’ in-person selling activities.
- Management stated that disclosure controls were effective and that no material change in internal control over financial reporting occurred during the quarter. Legal proceedings were reported as not applicable.
Key facts for investors to verify
- Whether the sharp increase in UBAM consultants and online-driven sales is sustainable as pandemic conditions and in-person channels change.
- Whether the large operating cash inflow persists: accounts payable and other liability increases materially supported reported cash generation.
- Whether warehouse capacity, shipping costs, supplier lead times, and inventory availability can support order volumes without backlogs.
- Available borrowing capacity and compliance with loan covenants, particularly given the borrowing-base limits and restrictions on dividends and share repurchases.