Educational Development Corporation — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended November 30, 2014; fiscal year ends February 28. The company sells children’s books through EDC Publishing, which serves retail accounts, and Usborne Books & More (UBAM), which sells through independent consultants. Interim results are unaudited and subject to seasonality.
Financial performance
| Metric | Three months 2014 | Three months 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net revenues | $10.94 million | $8.50 million | $24.92 million | $20.21 million |
| Gross margin | $6.82 million (62.4%) | $5.21 million (61.2%) | $14.95 million (60.0%) | $11.78 million (58.3%) |
| Earnings before taxes | $858,200 | $927,400 | $1.25 million | $1.12 million |
| Net earnings | $526,400 | $547,800 | $762,200 | $670,800 |
| Diluted EPS | $0.13 | $0.14 | $0.19 | $0.17 |
| Net margin | 4.8% | 6.4% | 3.1% | 3.3% |
- Revenue and profit: Quarterly net revenues rose 28.6%, while net earnings fell 3.9%. For the nine months, net revenues rose 23.3% and net earnings rose 13.6%. Quarterly earnings were pressured by operating costs growing faster than revenue; YTD pretax margin was 5.1%, compared with 5.5%.
- Segments: Q3 UBAM revenue increased to $7.94 million from $5.32 million; Publishing revenue declined to $3.00 million from $3.18 million. For nine months, UBAM revenue was $15.90 million versus $11.46 million and Publishing was $9.02 million versus $8.74 million. YTD segment pretax earnings were $1.85 million for UBAM and $2.75 million for Publishing; unallocated “other” expenses were $3.34 million.
- Cash flow: Operating activities used $328,800 in the first nine months, versus $1.75 million provided in the prior-year period. Investing activities used $269,700, primarily for data-processing systems and facility work. Financing activities provided $566,800. Cash decreased $31,700 to $648,300.
- Liquidity and debt: Current assets were $16.21 million and current liabilities $6.46 million at November 30. The company had $1.40 million drawn on its $3.20 million secured revolving facility, with $1.80 million available; it had no borrowings at February 28. The facility bears at least 4.00% interest and matures June 30, 2015.
- Other metrics: Current and non-current inventory totaled $10.76 million, versus $10.34 million at February 28. Dividends declared were $0.08 per share for the quarter; $0.24 per share was declared for the nine-month period. The declared $0.08 dividend was paid December 19, 2014.
Material changes and management commentary
- UBAM growth reflected strong internet, school and library, home-party, direct and fundraising sales. Active consultants increased 51% year over year at November 30; management cited consultant use of social media and virtual events as a driver of online orders.
- Publishing’s Q3 decline was attributed partly to a large national-account reorder occurring in December this year rather than November as in the prior year. Nine-month Publishing sales increased, led by smaller retail accounts.
- Discounts and allowances rose faster than gross sales in UBAM: they were 19.4% of UBAM gross sales for nine months, compared with 14.6% a year earlier. Management noted that discounts vary with marketing programs.
- Operating cash use primarily reflected a $1.61 million increase in receivables, partly related to a Publishing fall-selling promotion with payment due December 15, and increases in inventory and prepaid assets.
- Management expected positive overall cash flow in FY2015 and believed operating cash flow plus the credit facility would meet foreseeable liquidity needs. It estimated FY2015 investing cash outlays below $500,000, primarily for data-processing-system implementation, and intended to renew the facility or obtain other financing at maturity.
Risks, contingencies and unusual items
- Inventory purchases are concentrated with an England-based publishing company; nine-month purchases from it were approximately $9.2 million, out of $11.4 million total purchases.
- The bank facility is secured by substantially all company assets and includes financial-ratio requirements and restrictions on additional debt, capital spending, compensation and other activities. Renewal or replacement financing will be needed by its June 2015 maturity.
- Sales are seasonal. The company’s estimates for sales returns, doubtful accounts and slow-moving inventory could differ from actual outcomes. It reported a $100,000 sales-return reserve and a $375,000 inventory valuation allowance at November 30.
- No legal proceedings or commitments in excess of one year were reported. Management stated disclosure controls were effective; market-risk disclosure was not applicable. No formal financial guidance was provided.
Important facts for investors to verify
- Whether UBAM’s rapid sales growth and higher discounting can persist while maintaining earnings and margins.
- Whether the December collection of promotion-related receivables supports management’s positive cash-flow outlook.
- Whether the company renews or replaces its secured credit facility before June 30, 2015, and whether it continues to meet facility covenants.
- How supplier concentration, inventory levels and sales-return or doubtful-account estimates affect future results.
- Whether the reported seasonal sales pattern changes the significance of the quarter’s weaker net earnings and cash from operations.