Educational Development Corporation — Form 10-Q Summary
Reporting period: Three months ended May 31, 2020 (the first quarter of fiscal 2021). The prior comparable period ended May 31, 2019. The company publishes Usborne and Kane Miller children’s books through its Publishing and Usborne Books & More (UBAM) segments.
Financial performance and position
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Net revenues | $38.29 million | $27.59 million | +38.8% |
| Gross margin | $26.90 million (70.2% of revenue) | $18.53 million (67.2%) | +45.1% |
| Operating expenses | $24.48 million | $16.86 million | +45.2% |
| Earnings before income taxes | $2.64 million | $1.85 million | +43.2% |
| Net earnings | $1.93 million | $1.36 million | +41.6% |
| Basic and diluted EPS | $0.23 | $0.17 | +$0.06 |
| Net cash from operating activities | $12.60 million | $(0.84) million | Improved |
- Revenue and segments: UBAM revenue rose 46.4% to $36.93 million, while Publishing revenue fell 39.1% to $1.37 million. UBAM segment earnings before income taxes increased 33.4% to $5.83 million; Publishing segment earnings fell 45.5% to $0.35 million.
- Cash flow: Operating cash generation benefited from lower inventory ($3.08 million decrease) and increases in accrued salaries and commissions, deferred revenue, and accounts payable. Investing used $0.14 million, mainly for software-related capital expenditures; financing used $0.69 million.
- Liquidity: Cash was $14.77 million at May 31, 2020, compared with $3.00 million at February 29, 2020. Current assets were $45.37 million and current liabilities $22.74 million.
- Debt: Long-term debt was $18.55 million, including current maturities, at May 31. There were no revolving-credit borrowings and approximately $9.0 million of availability under the $15.0 million facility. The company repaid Term Loan #2, with a final payment of $2.91 million, on June 3, after quarter-end.
- Other: The company declared a $0.06-per-share dividend for the quarter, versus $0.05 a year earlier. The effective tax rate was 27.0%, up from 26.2%.
Material changes and management commentary
- Management attributed UBAM’s growth to more active consultants (33,100 average versus 31,600) and increased demand for educational materials delivered to homes while schools were closed. Online orders rose, while home parties, school and library sales, and book fairs declined. Online orders typically carry fewer discounts but higher consultant commissions.
- Publishing sales were hurt by temporary retail-store closures related to COVID-19. Management said many customers began reopening in May; canceled trade shows also reduced segment expenses.
- Despite pandemic-related weakness in Publishing and certain UBAM channels, the company reported higher total quarterly net revenue than in the prior-year period. Management said the pandemic’s duration and its future effects could not be accurately predicted.
- The company borrowed approximately $1.4 million under the CARES Act Paycheck Protection Program on April 16, then repaid the loan in full, with accrued interest, on May 12, after determining it was no longer needed.
- Management expected operating cash and the credit line to meet fiscal 2021 liquidity needs, with cash used to replenish inventory and reduce debt; excess cash could be distributed to shareholders or used for share repurchases. No specific revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- COVID-19 created uncertainty around retail closures, school and book-fair sales, supply, and operations. The filing identifies recruiting and retaining consultants, sourcing books, shipping orders without backlogs, financing, and economic and competitive conditions as additional risks.
- The revolving-credit facility was scheduled to terminate August 15, 2020; the filing does not describe a later extension. Loan terms include financial-ratio and borrowing-base requirements and restrictions on dividends, repurchases, debt, investments, capital expenditures, and leases.
- Purchases are concentrated with England-based Usborne Publishing: approximately $4.0 million of the quarter’s $5.8 million total inventory purchases came from that supplier. Book supply lead times are typically four to six months.
- Cash flow included material working-capital movements, so quarterly operating cash should be assessed alongside inventory, payables, accrued expenses, and advance customer payments. Deferred revenue increased to $2.41 million from $0.39 million at fiscal year-end, largely for orders shipped after quarter-end.
- The company reported no legal proceedings and stated that disclosure controls were effective as of May 31, 2020. Its risk-factor discussion was not required as a smaller reporting company.
Important facts for investors to verify
- Whether the strong UBAM demand and online-sales mix persisted after school closures eased, and how those sales affected margins and consultant commissions.
- Whether Publishing revenue recovered as retail customers reopened, and the continuing effects of COVID-19 on schools, book fairs, and trade events.
- The status and terms of the credit facility after its stated August 15, 2020 termination date, remaining availability, and compliance with loan covenants.
- How operating cash flow changes as inventory is replenished and quarter-end increases in deferred revenue, payables, and accrued compensation unwind.
- The impact of the June 3 Term Loan #2 repayment on cash, total debt, interest expense, and liquidity, and the payment of the subsequent $0.06 dividend approved July 9.