Educational Development Corporation — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended August 31, 2016; fiscal year ends February 28/29. The company sells Usborne and Kane Miller children’s books through EDC Publishing (wholesale) and Usborne Books & More (UBAM, consultant-led direct sales). Interim results are unaudited and may be affected by seasonality.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net revenue | $25.893m | $12.607m | $48.677m | $22.245m |
| Gross margin | $18.395m (71.0%) | $8.029m (63.7%) | $34.505m (70.9%) | $14.093m (63.4%) |
| Earnings before tax | $0.521m | $1.039m | $1.525m | $1.571m |
| Net earnings | $0.319m | $0.644m | $0.939m | $0.969m |
| Basic and diluted EPS | $0.08 | $0.16 | $0.23 | $0.24 |
Quarterly revenue rose 105.4%, while net earnings fell about 50.6%. Six-month revenue rose 118.8%, but net earnings declined about 3.1%. Six-month operating expenses increased to $33.264m from $12.491m; higher distribution, shipping and commission costs absorbed much of the increased gross profit. Interest expense was $0.465m for the half year versus $0.043m a year earlier. Dividends were $0.09 per share in the quarter and $0.18 per share for the half year.
Segments and operating changes
- UBAM revenue was $23.857m for Q2 and $44.508m for the half year, versus $8.933m and $15.951m, respectively. Management attributed growth to higher fundraiser, internet, school/library and home-party sales; active consultants increased 141% year over year to approximately 25,800.
- EDC Publishing revenue declined to $2.036m for Q2 and $4.170m for the half year, from $3.674m and $6.294m. Management said UBAM growth strained shipping capacity, reducing Publishing shipments, particularly to major national accounts. It expects Publishing sales to improve as shipping returns to historical timing following facility and systems capital improvements.
- Gross margin as a percentage of net revenue improved, but operating and selling costs and UBAM commissions rose substantially. Management cited higher warehouse and distribution costs, shipping and handling, and consultant commissions.
Cash, liquidity and debt
- Operating cash flow was negative $2.039m for the six months, compared with positive $0.928m in the prior-year period. The principal cash use was a $11.933m increase in inventory to support demand.
- Investing cash outflow was $1.702m, primarily for warehouse, inventory-management and software improvements. Financing provided $4.602m; cash increased $0.861m to $2.045m.
- At August 31, current assets were $36.669m and current liabilities $30.441m; inventory was $29.429m. The balance sheet reported a $4.876m revolving-credit balance and $21.981m long-term debt, including current maturities. Total debt was approximately $26.857m.
- The revolving facility was increased to $7.0m and extended to June 15, 2017; $2.124m was available at quarter-end. A new $4.0m term loan was added in June, maturing in 2021. Term Loan #1 maturities extend to 2025. Debt is secured by company property and, for the new term loan, warehouse, land and inventory.
- The company disclosed a violation of a loan covenant at August 31, 2016, for which the bank granted a waiver through November 30, 2016. Management said it would work with the bank to maintain positive cash flow and meet liquidity needs.
Outlook, risks and other notable items
No quantified earnings or revenue guidance was provided. Management expects EDC Publishing sales to recover as shipping capacity normalizes and notes that results are seasonal and interim performance is not necessarily indicative of year-end results. UBAM growth requires substantial inventory and distribution capacity; cash needs are supported by bank borrowing. A significant share of inventory purchases is concentrated with an England-based publisher. Approximately $4.891m of customer payments for orders shipped in September were recorded as deferred revenue at August 31. The company reported no legal proceedings; management concluded disclosure controls were effective.
Important facts for investors to verify
- Progress in resolving the covenant issue before the November 30, 2016 waiver expiration, and compliance with the amended loan terms.
- Whether warehouse and systems investments restore EDC Publishing shipment timing without further weakening liquidity or margins.
- Whether UBAM sales growth and consultant expansion can continue while controlling commission, freight and fulfillment costs.
- Inventory levels, supplier concentration, deferred orders and the conversion of quarter-end deferred revenue into shipped sales and cash.
- Cash generation, borrowing availability, debt-service needs and the sustainability of dividends amid working-capital demands.