Educational Development Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2020, three months ended May 31, 2019; comparisons are with the three months ended May 31, 2018. The company distributes Usborne and Kane Miller children’s books through its UBAM consultant network and its Publishing segment. Results are subject to seasonal variation.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net revenues | $27.59 million | $30.02 million | Down 8.1% |
| Gross margin | $18.53 million; 67.2% of revenue | $20.35 million; 67.8% | Down $1.82 million; margin down 0.6 percentage points |
| Operating expenses | $16.86 million | $18.02 million | Down 6.4% |
| Earnings before income taxes | $1.85 million | $2.50 million | Down 26.0% |
| Net earnings | $1.36 million | $1.82 million | Down 24.9% |
| Basic and diluted EPS | $0.17 | $0.22 | Down $0.05 |
| Operating cash flow | $(0.84) million | $2.77 million | Declined $3.61 million |
- Segment performance: UBAM revenue fell 9.0% to $25.25 million, and segment earnings before tax fell 14.3% to $4.37 million. Publishing revenue was nearly flat at $2.34 million, while segment earnings before tax increased to $0.64 million from $0.51 million.
- Cash and liquidity: Cash was $1.40 million at May 31, down from $3.20 million at February 28. Current assets were $39.08 million and current liabilities $20.20 million, for working capital of approximately $18.88 million.
- Debt: Long-term debt totaled $19.54 million, including $0.94 million of current maturities. The company had no revolving-credit borrowings and reported $12.57 million of available credit, subject to borrowing-base limits. The variable borrowing rate was 4.95% at quarter-end; Tranche A carried a fixed 4.23% rate.
- Other cash uses and returns: Capital expenditures were $0.13 million; financing cash outflow was $0.83 million, including debt payments, $0.41 million in dividends paid, and $0.30 million of treasury-stock purchases, partly offset by treasury-stock sales.
Material changes and management commentary
- Management attributed the UBAM revenue decline primarily to fewer average active consultants: 31,600 versus 35,100, down 10.0%. It noted a recruiting promotion had boosted the prior-year comparison and cited difficult recruiting conditions, including low unemployment, competition from other work options, and normal consultant turnover.
- UBAM gross margin as a percentage of revenue decreased to 69.1% from 69.6%, attributed to order mix. Lower freight and commission expenses partly offset lower sales.
- Publishing gross margin percentage edged up to 46.2% from 46.0%; lower promotional and marketing costs contributed to higher segment earnings.
- Operating cash flow turned negative, chiefly reflecting decreases in accounts payable, accrued and other liabilities, and deferred revenue. Inventory increased modestly.
- Management expected cash from operations together with the credit line to meet fiscal 2020 liquidity needs. It expected cash to support inventory replacement and debt repayment, with excess cash potentially used for shareholder distributions or share repurchases. No specific revenue or earnings guidance was provided.
Risks, contingencies, and unusual items
- The $15 million revolving-credit facility was scheduled to terminate August 15, 2019. The filing does not disclose a subsequent renewal or replacement; availability was subject to eligible receivables and inventory and the loan agreement’s covenants and other restrictions.
- The company cited risks involving consultant recruitment and retention, sourcing desired books, shipping capacity and delays, financing needs, competition, economic conditions, and regulation. Many products have four-to-six-month print and delivery lead times; inventory purchases are concentrated with Usborne Publishing, Ltd.
- Inventory was $34.06 million, including $0.56 million classified as noncurrent. The inventory valuation allowance rose to approximately $0.47 million from $0.38 million at February 28. Management’s inventory and receivables reserves depend on estimates.
- Adoption of the new lease standard increased assets and liabilities by approximately $52,900 and was reported to have no material effect on results or cash flows. Share-based compensation expense was $166,300 versus none in the prior-year quarter.
- On July 11, 2019, the board declared a $0.05-per-share cash distribution, payable on or about September 10 to shareholders of record August 20. The company reported no applicable legal proceedings; management judged disclosure controls effective.
Important facts for investors to verify
- Whether the revolving-credit facility expiring August 15, 2019 was renewed, replaced, or otherwise extended, and what terms or covenants apply.
- Whether UBAM consultant counts and sales stabilize, and whether management can improve recruiting and retention.
- Whether negative operating cash flow was temporary and how seasonal inventory, payables, and deferred revenue affect cash generation in subsequent quarters.
- Whether inventory reserves, supplier concentration, and long delivery lead times create additional obsolescence or fulfillment risk.
- Whether planned dividends and repurchases remain consistent with liquidity, debt covenants, and the company’s stated capital needs.