Business Context and Reporting Period
Company: Educational Development Corporation (EDC)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: May 31, 2009
Business Overview: EDC operates two primary segments: the Publishing Division (wholesale distribution of children's books to retail accounts) and Usborne Books and More (UBAM) (direct sales via independent consultants, home shows, and the internet).
Key Financial Metrics
| Metric | Q1 2010 (Ended May 31, 2009) | Q1 2009 (Ended May 31, 2008) |
|---|---|---|
| Net Revenues | $6,390,600 | $7,374,800 |
| Gross Margin | $4,090,400 (64.0%) | $4,703,700 (63.8%) |
| Net Earnings | $415,400 | $479,700 |
| Earnings Per Share (Diluted) | $0.11 | $0.13 |
| Cash and Equivalents | $1,204,300 | $2,896,200 (Prior Period End) |
| Operating Cash Flow | $(254,300) | $860,000 |
| Total Debt Outstanding | $300,000 | $300,000 |
| Available Credit Line | $5,000,000 | N/A |
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 13.3% ($984,200) year-over-year. This was driven primarily by a 19.3% decline in the UBAM segment ($1,051,800 decrease), while the Publishing segment saw a modest 3.5% increase.
- UBAM Segment Drivers: The UBAM decline was attributed to a 29% drop in internet sales, a 21% drop in home party sales (due to fewer shows and smaller average orders), and decreases in school/library and direct sales.
- Profitability: Net earnings decreased 13.4% to $415,400. Despite the revenue drop, gross margin percentage improved slightly to 64.0% due to cost of sales decreasing 13.9%.
- Cash Flow: Operating cash flow turned negative at $(254,300), a significant shift from the $860,000 positive flow in the prior year. This was caused by a $999,800 increase in inventory and a $389,800 increase in accounts receivable.
- Liquidity: Cash and cash equivalents dropped by $1.69 million during the quarter, primarily due to dividend payments of $1.54 million and the negative operating cash flow.
Guidance, Outlook, and Risks
- Outlook: Management expects positive cash flow for the remainder of fiscal year 2010, believing that operating cash flow combined with the bank credit facility will meet liquidity requirements.
- Capital Allocation: The company continues a stock repurchase plan (up to 3,000,000 shares total authorized). In this quarter, 637 shares were repurchased for $3,100. Dividends of $0.40 per share were paid.
- Seasonality: Management notes that results for the three months ended May 31 are not necessarily indicative of year-end results due to the seasonality of product sales.
- Supplier Concentration: A significant portion of inventory purchases is concentrated with a single England-based publishing company ($3.4 million in the quarter).
- Inventory Risk: The company holds non-current inventory ($437,000) due to minimum order requirements from suppliers. Management maintains a valuation allowance for slow-moving inventory.
Investor Verification Checklist
- Inventory Build-up: Verify the necessity of the $1 million increase in inventory and the associated cash outflow, given the revenue decline.
- UBAM Sales Trends: Assess the sustainability of the 29% drop in internet sales and the 17% reduction in home shows for the UBAM segment.
- Cash Burn Rate: Monitor the negative operating cash flow to ensure it is a temporary seasonal fluctuation rather than a structural issue.
- Dividend Sustainability: Confirm that the $1.54 million dividend payout is sustainable given the reduced cash reserves and negative operating cash flow.
- Credit Facility: Note that while the line of credit was reduced to $2.5 million (effective June 30, 2009), the company had no borrowings outstanding at period end.