Educational Development Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended February 28, 2013; comparisons are with the year ended February 29, 2012. The filing also reports quarterly results, including a net loss in FY2013’s fourth quarter. EDC distributes Usborne children’s books in the U.S. and owns Kane/Miller Book Publishers. Sales are divided between Publishing and Usborne Books and More (UBAM), representing 42% and 58% of net revenue, respectively.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net revenue | $25.49 million | $26.27 million | Down $785,800 (3.0%) |
| Gross margin | $14.99 million (58.8%) | $15.72 million (59.8%) | Down $731,000; down 1.0 percentage point |
| Operating expenses | $13.77 million | $13.54 million | Up $227,100 |
| Earnings before tax | $1.28 million | $2.28 million | Down $995,700 |
| Net earnings | $802,900 | $1.42 million | Down $618,000 (43.5%) |
| Diluted EPS | $0.20 | $0.36 | Down $0.16 |
| Cash from operations | $639,000 | $783,900 | Down $144,900 |
- Cost of sales was $10.49 million. Operating and selling expense was $6.71 million, commissions $4.76 million, and general and administrative expense $2.29 million; G&A increased $313,200.
- Gross sales fell 4.1%, while discounts and allowances declined by $1.01 million. Net revenue also included $858,000 of transportation revenue, down $101,100.
- FY2013 net cash decreased $291,000 to $469,100. Investing activities used $209,600, including an additional $180,300 investment in Demibooks; financing activities used $720,400, primarily dividends, partly offset by net revolver borrowing.
- At year-end, total assets were $17.90 million, current assets $14.66 million, current liabilities $4.45 million, and shareholders’ equity $13.45 million. Current ratio was approximately 3.3x, calculated from reported balances.
- Revolver borrowings were $1.25 million, up from $250,000 a year earlier, under a $2.5 million facility; $1.25 million remained available. The facility’s stated maturity was June 30, 2013. Interest was 4.00% at year-end.
Material changes and operating trends
- Publishing revenue declined 1.5% to $10.81 million. National-chain sales fell 31%, partly offset by growth in smaller retail and inside sales. Chains’ share of Publishing sales decreased from 40% to 28%.
- UBAM revenue declined 4.0% to $14.68 million. UBAM gross sales fell 6.9%; total orders decreased 3.8% and average sales per order declined 0.3%. Active consultants fell to 4,700 from 6,100, and new representatives recruited during the year fell to 2,700 from 4,300.
- Within UBAM, school and library sales increased 2%, while home-show revenue after commissions decreased 14%, and internet revenue after commissions decreased 10%. The Cards for a Cause fundraising program grew 39% from its inaugural year.
- Margins weakened as gross margin declined and operating expenses rose. Net earnings were 3.1% of net revenue, compared with 5.4% the prior year.
- Quarterly results were seasonal and uneven: FY2013 fourth-quarter revenue was $5.56 million and net loss was $211,200, versus fourth-quarter FY2012 net earnings of $269,600.
Outlook, risks, and notable items
- Management expected operating cash flow to exceed operating needs and anticipated paying down short-term borrowings in FY2014. It estimated FY2014 investing cash use below $200,000. No revenue or earnings guidance was provided.
- Management intended to renew the revolving credit agreement or obtain other financing before its June 30, 2013 maturity. The filing does not report the outcome of that financing plan.
- EDC depends substantially on Usborne as its principal supplier: purchases from that supplier were approximately $8.6 million of $11.3 million in total inventory purchases in FY2013. The supplier’s minimum print runs and three-to-four-month replenishment lead times contribute to inventory requirements.
- Inventory totaled $10.28 million, including $559,000 classified as noncurrent. The inventory valuation allowance was $400,000. Management’s estimates for inventory, receivables, and sales returns could differ from actual outcomes.
- A bankrupt customer owed $364,500; $340,000 was reserved. EDC also held a 15.6% investment in private company Demibooks at a cost of $430,300; the investment is illiquid and could be written down or written off.
- Dividends paid in FY2013 totaled $1.885 million. Management disclosed that dividends declared in FY2013 equaled 216% of net earnings. The board had declared an additional $0.08-per-share dividend, paid after year-end.
- The company reported no material pending legal proceedings. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an attestation on internal controls.
Important facts for investors to verify
- Whether the credit facility was renewed or replaced at maturity, and whether subsequent borrowing and repayment reduced year-end liquidity pressure.
- Whether consultant recruitment and retention improved after the decline in active UBAM representatives, and whether UBAM order volume recovered.
- Whether Publishing sales to national chains stabilized and growth in smaller accounts continued.
- Actual inventory sell-through, reserve adequacy, and collections from the bankrupt customer.
- The carrying value and subsequent performance of the illiquid Demibooks investment, as well as the sustainability of dividends relative to earnings and cash flow.
- The filing reports FY2013 dividends per share of $0.42 in the earnings statement, while its narrative reports $0.48 paid during the year plus a separately declared $0.08 dividend; investors should verify the timing and reconciliation of these amounts.