Business Context and Reporting Period
Company: Educational Development Corporation (EDC)
Filing Type: Form 10-K (Annual Report)
Period Ended: February 29, 2008
Business Overview: EDC is the exclusive U.S. trade publisher for the Usborne line of educational children's books. Operations are divided into two segments: the Publishing Division (wholesale to bookstores, toy stores, and retailers) and the Usborne Books at Home (UBAH) Division (direct sales via independent consultants, home shows, and book fairs). The company operates from a single facility in Tulsa, Oklahoma.
Key Financial Metrics
| Metric | Fiscal 2008 | Fiscal 2007 | Fiscal 2006 |
|---|---|---|---|
| Net Revenues | $30,520,700 | $31,403,500 | $31,788,900 |
| Gross Margin | $19,770,500 (64.8%) | $20,128,900 (64.1%) | $20,137,700 (63.4%) |
| Net Earnings | $2,324,400 | $2,407,100 | $2,398,400 |
| Earnings Per Share (Diluted) | $0.60 | $0.62 | $0.62 |
| Cash Flow from Operations | $2,511,500 | $2,478,900 | $1,379,800 |
| Total Assets | $20,065,000 | $19,701,900 | $18,397,900 |
| Cash and Equivalents | $2,440,300 | $1,254,300 | $321,500 |
| Long-Term Debt | $0 | $0 | $0 |
Liquidity: The company maintains a $5,000,000 revolving credit facility with Arvest Bank. As of February 29, 2008, there were no borrowings outstanding, leaving the full $5,000,000 available.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased by $882,800 (2.8%) compared to fiscal 2007. This was driven by a 9.4% drop in gross sales for the UBAH Division, partially offset by a slight increase in the Publishing Division.
- Segment Performance:
- UBAH: Gross sales fell due to declines in home shows, direct sales, and school/library markets. However, Internet sales grew significantly by 28% ($381,900).
- Publishing: Net revenues remained relatively flat ($8.14M vs $8.12M), with a 7% decrease in sales to national chain stores offset by growth in smaller retail accounts.
- Expense Reduction: Total operating expenses decreased by $946,900. Cost of sales dropped 4.7%, and sales commissions decreased by $260,200, largely due to lower UBAH sales volume.
- Shareholder Returns: The company paid a $0.22 per share annual dividend in 2008 (up from $0.20 in 2007). Additionally, a special dividend of $0.10 per share was declared in April 2008.
Outlook, Risks, and Management Commentary
- Guidance: Management expects cash flow to continue exceeding operating requirements. Capital expenditures for fiscal 2009 are estimated to be under $500,000. The company anticipates continuing cash dividends of 25% to 35% of net earnings.
- Key Risks:
- Sole Source Supplier: EDC relies exclusively on Usborne Publishing Limited (UK) for its product line. While the relationship is strong, the contract has a two-year termination notice.
- Consultant Dependency: Growth in the UBAH division is heavily dependent on recruiting and retaining independent sales consultants.
- Single Facility: All distribution is handled from one facility in Tulsa, creating operational risk in the event of natural disasters or system failures.
- Seasonality: Sales are heavily concentrated in the third fiscal quarter (fall/holiday season).
- Unusual Items: In fiscal 2007, the company received a $250,000 breakup fee from a failed acquisition attempt of a Chapter 11 bankrupt company, recorded as "Other Income."
Investor Verification Checklist
- Supplier Concentration: Verify the stability of the relationship with Usborne Publishing Limited, given it is the sole source of inventory.
- Consultant Retention: Monitor the number of active UBAH consultants (7,900 in 2008 vs. 9,800 in 2007) to assess the health of the direct sales channel.
- Inventory Valuation: Review the valuation allowance for slow-moving inventory ($331,200 in 2008), as the company holds significant inventory due to minimum order requirements from the supplier.
- Stock Repurchases: Note the active share repurchase program; 81,059 shares were bought back in 2008, with 79,000 shares remaining available under the plan.
- Debt Covenants: Confirm compliance with the $5M credit facility covenants, though no debt was outstanding at period end.