Educational Development Corporation — Form 10-Q
Business context and reporting period: The company sells Usborne and Kane Miller children’s books through EDC Publishing, which serves retail accounts, and Usborne Books & More (UBAM), which sells through independent consultants. This report covers the quarter and six months ended August 31, 2015 (the second quarter of fiscal 2016); comparisons are with the periods ended August 31, 2014.
Financial performance
| Metric | Three months ended Aug. 31, 2015 | Three months ended Aug. 31, 2014 | Six months ended Aug. 31, 2015 | Six months ended Aug. 31, 2014 |
|---|---|---|---|---|
| Net revenues | $12.61 million | $6.81 million | $22.24 million | $13.99 million |
| Gross margin | $8.03 million; 63.7% | $3.80 million; 55.7% | $14.09 million; 63.4% | $8.13 million; 58.1% |
| Earnings before income taxes | $1.04 million | $8,300 | $1.57 million | $395,900 |
| Net earnings (loss) | $644,400 | $(3,900) | $969,000 | $235,800 |
| Basic and diluted EPS | $0.16 | $(0.00) | $0.24 | $0.06 |
- Quarterly net revenue rose 85.2%; six-month net revenue rose 59.0%. UBAM was the principal growth driver: its revenue increased to $8.93 million for the quarter and $15.95 million year to date. EDC Publishing revenue was $3.67 million and $6.29 million, respectively.
- For the six months, gross margin improved to 63.4% from 58.1%, while net margin increased to 4.4% from 1.7%. Quarterly net margin was 5.1%, compared with a slight loss in the prior-year quarter.
- Operating expenses increased with sales. Six-month sales commissions rose 107.0%, primarily reflecting UBAM growth; UBAM commissions were 29.3% of gross sales versus 25.6% a year earlier.
- Cash from operating activities was $927,800 for the six months, versus cash used of $2.43 million a year earlier. Investing activities used $397,300, principally for data-processing systems. Financing activities used $602,300; dividends paid were $645,000.
Financial position and liquidity
- At August 31, 2015, cash was $312,100; current assets were $18.51 million and current liabilities $8.83 million. The resulting current ratio was approximately 2.1, down from approximately 2.7 at February 28, 2015.
- Net inventory was $13.36 million current and $304,500 non-current, up from combined net inventory of $11.53 million at fiscal year-end. Management attributed the increase to sales growth and preparation for the fall selling season.
- Accounts receivable increased to $4.16 million from $3.08 million. Accounts payable rose to $4.57 million from $2.24 million.
- Revolving-credit borrowings were $1.35 million, compared with $1.40 million at February 28. The amended Arvest Bank facility provides up to $4.0 million through June 30, 2016; available credit was $2.65 million. The August 31 rate was 3.25%, and substantially all assets collateralize the facility.
- Shareholders’ equity was $12.70 million, up from $12.33 million at fiscal year-end. The company declared dividends of $0.09 per share for the quarter and paid $0.08 per share during the six-month period.
Material changes, outlook and risks
- Management attributed UBAM growth to more consultants and increased online activity, including social-media virtual events. Quarterly UBAM internet sales increased 379%; school and library sales rose 57%. Publishing sales growth was more modest and partly reflected timing of national-account reorders.
- Management expects positive cash flow in fiscal 2016 and believes operating cash flow and the bank facility will meet foreseeable liquidity needs. The filing provides no quantified revenue or earnings guidance.
- Sales are seasonal, and interim results are not necessarily indicative of full-year performance. Inventory purchases are concentrated with an England-based publishing company: purchases from that supplier were $8.5 million of $11.2 million total inventory purchases year to date.
- The credit agreement imposes financial-ratio requirements and restrictions on additional debt, capital expenditures, compensation and certain other activities. The filing reports no letters of credit outstanding and no commitments extending beyond one year.
- After quarter-end, the company signed an October 2, 2015 letter of intent to sell its current facility, with a carrying value of $1.51 million, while exploring a larger facility for warehouse and office capacity. Management expected the sale to be finalized during the fiscal year; the filing does not state sale terms or the cost and timing of replacement facilities.
- The company reported no legal proceedings. Management concluded disclosure controls were effective. The company was assessing the potential impact of the forthcoming revenue-recognition standard.
Important facts for investors to verify
- Whether strong UBAM growth and the increase in consultant-driven orders continue, and how sales commissions and discounts affect profitability.
- Whether higher inventory and receivables convert to cash as expected, particularly through the seasonal fall selling period.
- Compliance with bank covenants and continued availability of the $2.65 million undrawn credit capacity.
- Progress, terms and financial effects of the proposed facility sale and any replacement-facility investment.
- Whether management’s positive fiscal-2016 cash-flow expectation is realized; interim results are seasonal and are not a full-year forecast.