Educational Development Corporation — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2013; fiscal year ends February 28. The company sells Usborne and Kane Miller children’s books through Publishing and Usborne Books & More (UBAM). Results are unaudited, and management cautions that seasonality makes interim results not necessarily indicative of year-end performance.
Financial performance
| Metric | Three months ended Nov. 30, 2013 | Year-to-date through Nov. 30, 2013 | Comparable 2012 period |
|---|---|---|---|
| Net revenue | $8.502 million; up 8.1% | $20.208 million; up 1.4% | $7.864 million quarter; $19.923 million year-to-date |
| Gross margin | $5.208 million; 61.2% of revenue | $11.776 million; 58.3% of revenue | $4.813 million and 61.2% quarter; $11.956 million and 60.0% year-to-date |
| Operating expenses | $4.286 million | $10.670 million | $3.962 million quarter; $10.325 million year-to-date |
| Pre-tax earnings | $927,400 | $1.118 million | $844,400 quarter; $1.626 million year-to-date |
| Net earnings / diluted EPS | $547,800 / $0.14 | $670,800 / $0.17 | $525,700 / $0.13 quarter; $1.014 million / $0.26 year-to-date |
| Operating cash flow | Not separately provided for the quarter | $1.753 million | $884,700 year-to-date |
Cash, liquidity and debt: Cash was $461,300 at November 30, versus $469,100 at February 28. Current assets were $15.301 million and current liabilities $5.167 million. The company had $500,000 outstanding on its $2.5 million revolving credit facility, with $2.0 million reported available; the facility is secured by substantially all company assets and matures June 30, 2014. Year-to-date cash used in financing was $1.703 million, including $954,600 in dividends and net credit-line repayments. Capital expenditures were $57,800.
Changes versus prior comparable periods
- Quarterly net revenue increased 8.1% and net earnings increased about 4.2% year over year. Quarterly gross margin percentage was unchanged at 61.2%.
- Year-to-date revenue rose 1.4%, but net earnings declined about 33.8%; gross margin fell from 60.0% to 58.3%. Cost of sales rose 5.8%, faster than revenue, and total operating expenses rose 3.3%.
- Quarterly revenue gains reflected higher sales in both divisions. UBAM gross sales increased $211,100, led by internet and home-party sales; Publishing gross sales increased $438,700.
- Year-to-date UBAM gross sales fell $712,600, with declines in fundraising and direct sales partly offset by internet and home-party growth. Publishing gross sales rose $812,600.
- Operating cash flow improved from $884,700 to $1.753 million year to date. Cash flow included a $1.238 million increase in accounts receivable, partly offset by higher current liabilities and lower inventory.
Outlook, risks and notable items
- Management expects positive cash flow in fiscal 2014 and believes operating cash flow plus the credit facility will meet foreseeable liquidity needs. It estimated fiscal-year investing cash outflows below $250,000. No revenue or earnings guidance was provided.
- The bank facility expires June 30, 2014; management intends to renew it or obtain other financing. Covenants restrict additional debt and certain business and spending activities.
- Inventory purchases are concentrated with an England-based publisher: purchases from that supplier were approximately $6.7 million of $8.7 million total inventory purchases year to date. Minimum-order requirements can create excess inventory; net non-current inventory was $400,200.
- A bankrupt customer receivable was $319,500 and fully reserved at November 30. The 15.6% investment in privately held Demibooks was carried at cost of $430,300; management says it is illiquid and could require a write-down or write-off.
- The company declared a $0.08-per-share dividend, paid December 20, 2013. It repurchased 26,451 shares during the quarter for approximately $71,600, and 304,654 shares remained available under the repurchase plan at quarter-end.
- Management reported effective disclosure controls. Legal proceedings were reported as not applicable; no market-risk disclosure was applicable. The filing lists no commitments in excess of one year.
Investor verification priorities
- Assess whether the year-to-date margin and earnings decline persists, particularly as cost of sales and operating/selling costs grew faster than revenue.
- Review receivables growth, customer credit exposure, and the fully reserved bankruptcy-related balance.
- Monitor inventory turnover, valuation allowances, and dependence on the major publishing supplier.
- Confirm renewal or replacement of the credit facility before its June 30, 2014 maturity, including compliance with its covenants.
- Evaluate whether management’s positive-cash-flow outlook is supported by operating cash generation after working-capital movements, dividends, and share repurchases.