Educational Development Corporation — Form 10-Q
Reporting period: Three months ended May 31, 2014, the first quarter of the company’s fiscal year ending February 28, 2015. The company sells children’s books through EDC Publishing and Usborne Books & More (UBAM). Results are unaudited; management cautions that seasonality means quarterly results may not indicate full-year performance.
Financial performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Gross sales | $10.72 million | $8.93 million |
| Net revenues | $7.18 million | $5.99 million |
| Gross margin | $4.33 million; 60.4% of net revenue | $3.51 million; 58.7% |
| Earnings before income taxes | $387,600 | $104,800 |
| Net earnings | $239,700 | $66,600 |
| Basic and diluted EPS | $0.06 | $0.02 |
| Operating cash flow | $(484,200) | $999,100 |
- Net revenue increased 19.8% year over year. Segment revenue was $4.41 million for UBAM and $2.76 million for Publishing. Earnings before tax by segment were $615,400 and $809,300, respectively; unallocated “other” costs were $1.04 million.
- Cost of sales was 39.6% of net revenue, compared with 41.3%. Total operating expenses rose 15.7% to $3.95 million, but declined as a share of net revenue to 55.1% from 57.0%. Net margin increased to 3.3% from 1.2%.
- Cash and cash equivalents were $303,400 at May 31, versus $680,000 at February 28. Current assets were $15.24 million and current liabilities $5.34 million. Inventory was $11.22 million, including $360,000 classified as non-current.
- Revolving-credit borrowings were $475,000, up from none at February 28. The $2.5 million facility had $2.025 million available; the rate was 4.00%, and substantially all assets collateralize the facility. The company amended and extended the facility through June 30, 2015.
- Investing cash outflow was $87,100, mainly for facility improvements and equipment. Financing cash inflow was $194,700, including $475,000 of credit-facility borrowings; dividends paid were $318,200. Dividends declared were $0.08 per share.
Changes, outlook and risks
- UBAM gross sales rose $931,900, with internet sales up 87%; management attributed online growth partly to consultants’ use of social media and virtual events. Publishing gross sales rose $859,300, including stronger sales to major national accounts.
- Management attributed negative operating cash flow primarily to increased inventory and receivables, partly offset by higher current liabilities and net earnings. It said cash flow plus the credit facility would meet foreseeable liquidity needs, and expected positive cash flow. The filing states this expectation is for “fiscal year 2014”; investors should note that wording alongside the May 2014 quarter and fiscal year-end of February 28.
- Management estimated fiscal 2015 investing cash use below $250,000, for technology upgrades and property improvements. It also said it may repurchase shares when prices are attractive; 1,180 shares were repurchased for $4,400 during the quarter.
- Key exposures include seasonal sales, inventory valuation and obsolescence, customer returns and credit losses, and dependence on an England-based publishing supplier. Purchases from that supplier were approximately $3.3 million, versus $1.5 million a year earlier. The credit agreement includes financial-ratio requirements and restrictions on debt, capital expenditures, compensation and other activities; the company intends to renew or replace the facility at maturity.
- No legal proceedings were reported. The company said disclosure controls were effective. The filing identifies no commitments extending beyond one year as of May 31, 2014.
Important facts for investors to verify
- Whether the revenue and earnings growth is sustained beyond this seasonally affected quarter, and whether online-sales momentum continues.
- How inventory and receivables convert to cash, given the operating cash outflow and sizable inventory balance.
- Compliance with the credit facility’s financial covenants and the availability and terms of refinancing after June 30, 2015.
- The impact of supplier concentration, inventory valuation allowances, and sales-return and doubtful-account estimates.
- The intended fiscal-year reference in management’s positive-cash-flow outlook, which the filing labels “fiscal year 2014.”