Educational Development Corporation — Form 10-Q Summary
Reporting period: Three and six months ended August 31, 2013, the second quarter and first half of fiscal 2014. The company sells children’s books through its Publishing and Usborne Books and More (UBAM) divisions. Interim results are unaudited, and management cautions that seasonality makes them not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Aug. 31, 2013 | Six months ended Aug. 31, 2013 |
|---|---|---|
| Net revenues | $5.72 million, up 4.6% year over year | $11.71 million, down 2.9% |
| Gross margin | $3.05 million; 53.5% of revenue, versus 55.3% | $6.57 million; 56.1%, versus 59.2% |
| Operating expenses | $2.97 million, versus $2.80 million | $6.38 million, versus $6.36 million |
| Pre-tax earnings | $86,200, versus $219,200 | $191,000, versus $781,100 |
| Net earnings and EPS | $56,400; $0.01 per share, versus $138,200 and $0.04 | $123,000; $0.03 per share, versus $488,400 and $0.12 |
For the six months, operating cash flow was $460,100, compared with $171,700 a year earlier. Investing used $43,700 and financing used $606,500, resulting in a $190,100 decrease in cash to $279,000. Cash paid for interest was $20,400. The company declared dividends of $0.08 per share during the quarter; the six-month dividend was $0.16 per share.
At August 31, total assets were $17.85 million, current assets $14.67 million, and current liabilities $4.88 million. Inventory was $10.41 million, including $517,700 classified as non-current. The company had $1.25 million outstanding on its revolving credit line, with $1.25 million available under the $2.5 million facility. Shareholders’ equity was $12.97 million.
Changes and operating drivers
- Quarterly revenue growth reflected higher Publishing sales and lower discounts and allowances; Publishing sales to smaller retailers and inside sales increased, while major national account sales declined.
- UBAM quarterly gross sales fell slightly, as declines in direct sales were offset by growth in internet, fundraising, and home-party sales. For the six-month period, UBAM sales weakness—particularly in fundraising and direct sales—contributed to lower total revenue; internet sales increased.
- Six-month Publishing gross sales increased, but this was more than offset by the decline in UBAM. Six-month gross margin fell year over year as cost of sales increased despite lower revenue.
- Operating and selling costs rose 7.5% for the six months, including higher distribution-related costs. Sales commissions and general and administrative expenses declined overall for the period.
Outlook, risks, and other notable items
- Management expected positive operating cash flow in fiscal 2014 and believed operating cash flow plus the credit facility would meet foreseeable liquidity needs. It estimated fiscal-year investing cash use below $250,000.
- The credit agreement runs through June 30, 2014; management intended to renew it or obtain alternative financing. The facility is secured by substantially all company assets and includes financial-ratio and other operating covenants.
- Inventory purchases are concentrated with an England-based publishing company. The company also identifies estimates for inventory valuation, receivables, sales returns, and deferred taxes as areas involving judgment.
- A customer bankruptcy receivable had a $319,500 balance and was fully reserved after a partial recovery. The 15.6% investment in privately held Demibooks, carried at $430,300, is illiquid and could be impaired.
- On September 20, 2013, the company paid a previously declared $0.08-per-share dividend. It repurchased 16,243 shares during the quarter for an average $3.40 per share. No legal proceedings were reported; management concluded disclosure controls were effective.
Key investor verification points
- Assess whether the first-half decline in UBAM sales and deterioration in gross margin persisted in subsequent quarters.
- Review the cash-flow drivers, particularly working-capital movements, and the sustainability of dividends and share repurchases relative to operating cash generation.
- Confirm renewal or replacement of the credit facility before its June 30, 2014 maturity, and monitor covenant compliance and available borrowing capacity.
- Track inventory levels and valuation allowances, customer receivables and returns, and the fully reserved bankruptcy claim.
- Monitor the carrying value and business relevance of the illiquid Demibooks investment, as well as supplier concentration and seasonal sales patterns.