Educational Development Corporation — Form 10-Q
Reporting period: Second quarter and six months ended August 31, 2011; fiscal year ends in February. The company sells children’s books through its Publishing and Usborne Books and More (UBAM) divisions. Results are unaudited and subject to seasonal variation.
Financial results
| Metric | Three months ended Aug. 31, 2011 | Prior year | Six months ended Aug. 31, 2011 | Prior year |
|---|---|---|---|---|
| Net revenues | $5.437 million | $5.750 million | $11.702 million | $12.046 million |
| Gross margin | $3.037 million; 55.9% | $3.387 million; 58.9% | $6.861 million; 58.6% | $7.361 million; 61.1% |
| Earnings before taxes | $200,100 | $303,100 | $680,800 | $603,400 |
| Net earnings | $126,200 | $190,200 | $426,400 | $378,400 |
| Diluted EPS | $0.03 | $0.05 | $0.11 | $0.10 |
- For the quarter, gross sales rose 3.1%, but net revenues fell 5.4% as discounts and allowances increased 14.3%; transportation revenue also declined. Six-month gross sales rose 4.5%, while net revenues fell 2.9%, largely reflecting higher discounts and allowances.
- Quarterly net earnings decreased 33.6%; six-month earnings increased 12.7%. Six-month operating expenses declined 3.9%, including the absence of the prior-year $188,500 casualty loss. Six-month cost of sales rose 3.3%.
- At August 31, cash was $932,000, down from $1.988 million at February 28. Six-month operating cash flow was $46,900, compared with $1.499 million in the prior-year period. Investing cash outflow was $61,000; financing cash outflow was $1.042 million, including $935,400 in dividends and $214,300 of treasury-stock purchases, partly offset by treasury-stock sales.
- Current assets were $15.175 million and current liabilities $3.993 million. Inventory was $10.196 million current and $500,000 noncurrent. Shareholders’ equity was $14.045 million.
- Current maturities of long-term debt were $75,000. The company reported no borrowings under its $2.5 million Arvest revolving line, leaving the full facility available at August 31. The line runs through June 30, 2012, bears interest at a minimum of 4.0% at the reported date, and is secured by substantially all company assets.
Changes, outlook and matters to monitor
- Publishing net revenues increased year over year to $2.833 million for the quarter and $5.236 million for six months. UBAM net revenues declined to $2.604 million and $6.465 million, respectively. Management attributed UBAM’s six-month sales weakness to lower direct, school/library, home-party and internet sales; publishing growth included higher sales to national accounts and smaller retailers.
- UBAM discounting increased substantially: discounts and allowances were 30.5% of division gross sales for the quarter versus 18.2% a year earlier, which management linked primarily to new incentives introduced in fiscal Q4 2011. Consolidated gross margin declined in both comparison periods.
- Management expected positive cash flow in fiscal 2012 and said operating cash flow plus the bank facility should meet foreseeable liquidity needs. It estimated fiscal-year investing cash outlays below $200,000, including technology, property and warehouse investments. This is management’s expectation, not a quantified earnings forecast.
- On October 13, 2011, after quarter-end, the company signed an agreement to acquire an investment position in Demibooks, a platform for creating interactive books; additional investment may depend on specified milestones.
- A customer in Chapter 11 owed $364,500 at August 31, of which $340,000 was reserved. The filing notes the debtor planned to sell itself to liquidators after failing to secure further financing.
- Inventory purchasing is concentrated with an England-based publishing supplier: purchases were approximately $4.3 million of total six-month supplier purchases of $5.4 million. Management identifies inventory valuation, sales returns, and doubtful-account allowances as significant estimates. A $188,500 travel-deposit-related casualty loss was recorded in fiscal 2011, not in the current six-month period.
- The company declared a $0.12-per-share dividend, paid September 16 to shareholders of record September 9. Management stated there were no commitments extending beyond one year as of August 31. Disclosure controls were assessed as effective; legal proceedings were reported as not applicable.
Important facts for investors to verify
- Whether UBAM sales and discounting trends persist, and whether Publishing growth offsets that weakness.
- Whether higher discounts and cost-of-sales pressure continue to weigh on gross margin and quarterly profitability.
- Cash conversion and working-capital needs, particularly inventory levels, receivable collection and continued dividends and share repurchases.
- Recovery prospects for the bankrupt customer receivable and the adequacy of its $340,000 reserve.
- Supplier concentration, inventory valuation, and the terms, cost and milestones of the Demibooks investment.
- The filing reports $75,000 of current debt maturities alongside no revolver borrowing; investors should consult the full statements and notes for the complete debt schedule.