Educational Development Corporation — Q3 FY2013 Form 10-Q
Reporting period: Three and nine months ended November 30, 2012; comparisons are with the same periods in 2011. The company sells children’s books through its Publishing and Usborne Books & More (UBAM) divisions. Results are unaudited, and the filing cautions that seasonality means interim results may not indicate full-year performance.
Financial results
| Metric | Quarter ended Nov. 30, 2012 | Quarter ended Nov. 30, 2011 | Nine months ended Nov. 30, 2012 | Nine months ended Nov. 30, 2011 |
|---|---|---|---|---|
| Net revenues | $7.864 million | $8.690 million | $19.923 million | $20.392 million |
| Gross margin | $4.813 million (61.2%) | $5.284 million (60.8%) | $11.956 million (60.0%) | $12.144 million (59.6%) |
| Income before taxes | $844,400 | $1.167 million | $1.626 million | $1.848 million |
| Net earnings | $525,700 | $724,900 | $1.014 million | $1.151 million |
| Basic and diluted EPS | $0.13 | $0.19 | $0.26 | $0.30 |
| Net earnings as % of revenue | 6.7% | 8.3% | 5.1% | 5.6% |
For the quarter, revenue declined 9.5% and net earnings fell 27.5% year over year. For the nine-month period, revenue declined 2.3% and net earnings fell 11.9%. Gross margin improved modestly, but higher operating expenses as a share of revenue weighed on earnings. Quarterly operating expenses were $3.962 million, or 50.4% of revenue, versus $4.121 million, or 47.4%, a year earlier. The effective tax rate was 37.7% for the quarter and 37.6% year to date.
Cash flow and liquidity: Nine-month operating cash flow was $884,700, compared with $927,700 in 2011. Investing used $180,100, including $155,300 invested in Demibooks and $24,800 in capital expenditures. Financing used $1.050 million, principally reflecting $1.411 million of dividends. Cash declined by $345,800 to $414,300. At November 30, current assets were $15.617 million and current liabilities were $4.984 million.
Debt: The company had $500,000 outstanding on its $2.5 million revolving credit facility, with $2.0 million available. The facility bears interest at the greater of prime less 0.75% or 4.00%; the rate was 4.00%. It is secured by substantially all company assets and matures June 30, 2013. The filing reports financial covenants and other restrictions.
Other balance-sheet items: Net inventory was $10.596 million, including $577,000 classified as noncurrent; accounts receivable was $4.512 million. Shareholders’ equity was $13.927 million. Dividends declared were $0.12 per share for the quarter and $0.36 per share for the nine-month period.
Performance drivers and changes
- Quarterly UBAM gross sales declined $956,400, with lower direct, home-party, fundraiser, and internet sales; school and library sales increased 3%. Year to date, UBAM gross sales fell $953,600: home-party and internet sales declined, while Cards For a Cause fundraisers, school and library, and direct sales grew.
- Publishing gross sales declined $510,900 for the quarter and $216,500 year to date. Lower sales to major national accounts offset growth in smaller retail accounts and inside sales.
- Quarterly net revenue fell less than gross sales, partly because discounts and allowances declined. UBAM discounts were 16.8% of gross sales versus 20.9% a year earlier; Publishing discounts were 51.9% versus 52.1%.
- Quarterly operating and selling expense was nearly flat, while sales commissions declined with sales. General and administrative expense increased 2.8% for the quarter and 7.1% year to date.
- Segment pretax earnings declined year over year in both divisions. For the quarter, Publishing reported $1.016 million and UBAM $884,300; for nine months, Publishing reported $2.805 million and UBAM $1.972 million. Corporate and other costs were $1.056 million for the quarter and $3.152 million year to date.
Outlook, risks, and unusual items
- Management expected positive operating cash flow in FY2013 and believed cash flow plus the credit facility would meet foreseeable liquidity needs. It estimated FY2013 investing cash use below $250,000. These are management expectations, not earnings guidance.
- The credit facility expires June 30, 2013; management intended to renew it or obtain other financing. Renewal, covenant compliance, and the effect of restrictions on financing and operations merit attention.
- Inventory purchases are concentrated with an England-based publishing company. The company also held $364,500 due from a Chapter 11 customer, of which $340,000 was reserved.
- Inventory valuation, doubtful accounts, and sales-return estimates involve management judgment. Net inventory included a $381,500 valuation allowance; the sales-return reserve was $100,000.
- The company made an additional $155,300 investment in Demibooks during the period, bringing the recorded investment to $405,300. An agreement permits a further investment subject to specified milestones.
- The filing reported no legal proceedings, no material market-risk disclosure, and no commitments extending beyond one year. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the revenue weakness, particularly in UBAM and major national accounts, continued after November 30.
- Cash conversion and working-capital trends, including the rise in receivables and inventory and the relatively low cash balance.
- Renewal or replacement of the bank facility before its June 30, 2013 maturity, and compliance with its covenants.
- Recoverability of the Chapter 11 receivable, inventory valuation assumptions, and reliance on the concentrated supplier.
- Progress and milestone conditions for the additional Demibooks investment, and returns from the interactive-publishing initiative.