Educational Development Corporation — Q1 FY2019 10-Q
Reporting period: Three months ended May 31, 2018. The company sells children’s books through Usborne Books & More (UBAM), a consultant-based channel, and its Publishing segment, which sells to retail accounts. Interim results are subject to seasonality and are not necessarily indicative of full-year performance.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net revenues | $30.02 million | $26.94 million | +11.4% |
| Gross margin | $20.35 million (67.8% of revenue) | $18.34 million (68.1%) | +11.0% dollars |
| Operating expenses | $18.02 million | $16.45 million | +9.5% |
| Earnings before tax | $2.50 million | $1.98 million | +25.9% |
| Net earnings | $1.82 million | $1.23 million | +48.3% |
| Basic and diluted EPS | $0.44 | $0.30 | +$0.14 |
| Operating cash flow | $2.77 million | $(0.34) million | Improved |
Net margin was approximately 6.1%, versus 4.5% a year earlier. Interest expense fell to $213,400 from $281,500; management attributed the decrease principally to no revolver borrowings in the quarter, compared with $5.6 million outstanding in the prior-year quarter. The effective tax rate was 27.2%, versus 38.2%.
Segments and drivers
- UBAM: Net revenues rose 11.7% to $27.72 million and segment operating income increased 16.4% to $5.10 million. Average active consultants increased 37.1%, to 35,100 from 25,600. Management cited consultant growth as the primary sales driver. Segment gross margin rate was 69.6%, compared with 69.9%.
- Publishing: Net revenues rose 8.7% to $2.31 million, primarily from increased orders by smaller customers. Operating income declined to $506,300 from $569,100.
Cash, liquidity and debt
- Cash increased to $4.43 million at May 31, 2018, from $2.72 million at February 28, 2018. Operating cash flow was $2.77 million; capital expenditures used $804,100, primarily for warehouse picking and inventory-management improvements. Financing activities used $255,800, including $251,300 of debt payments.
- Current assets were $35.88 million and current liabilities $22.30 million at quarter-end. Current inventory was $27.72 million; total current and noncurrent inventory was $28.21 million.
- Long-term debt was $20.46 million, including $891,100 of current maturities; the revolver balance was zero. Available revolver capacity was reported as $10.45 million. The loan agreement includes financial covenants and restrictions on debt, dividends, capital expenditures and other matters.
- Inventory purchase commitments totaled approximately $18.40 million, due during FY2019, including $13.30 million with Usborne. Usborne purchases were $7.6 million during the quarter, versus $1.9 million in the prior-year quarter.
Material changes, outlook and risks
- The company adopted ASC 606 on March 1, 2018 using the full retrospective method. It changed the presentation of hostess awards from net operating expense to gross sales/discounts and cost of goods sold. Adoption had no effect on net earnings or retained earnings and an immaterial effect on net revenues, but reduced the reported gross-margin percentage. Comparative figures were presented under the new standard.
- After quarter-end, on June 15, 2018, the company amended its bank loan agreement: the facility termination date was extended to August 15, 2019, floating-rate pricing was reduced, a new $3 million advancing term loan was established for shipping-capacity expansion, personal guarantees were released, and certain covenant restrictions were eased.
- Management expected operating cash flow and the expanded credit facility to fund liquidity needs, increased inventory for anticipated sales growth, debt reduction and potential shareholder distributions. No specific revenue or earnings guidance was provided.
- Management identified risks including recruiting and retaining consultants, sourcing desired books, shipping order volumes without backlogs, obtaining working capital and capital-expenditure financing, and economic and competitive conditions. The company noted extended three-to-six-month printing and delivery lead times for most products and supplier minimum-order requirements. Inventory valuation, returns and receivables depend on management estimates.
- The company reported no material change in internal control over financial reporting and concluded disclosure controls were effective. Legal proceedings and market-risk disclosures were reported as not applicable; risk factors were not required for this smaller reporting company.
Key facts for investors to verify
- Whether consultant growth and higher UBAM sales persist, and whether the substantially lower Publishing operating income recovers.
- Inventory turnover, valuation reserves, the $18.40 million of purchase commitments, and dependence on Usborne and overseas supply lead times.
- Progress and returns on warehouse-capacity investments, including use and repayment terms of the new $3 million term loan.
- Available borrowing capacity under the borrowing base, compliance with debt covenants, and the effect of the amended loan terms.
- Whether cash generation supports planned inventory growth, debt reduction and shareholder distributions without constraining liquidity.