Educational Development Corporation — Form 10-Q
Business and reporting period: The company sells Usborne and Kane/Miller children’s books through its Publishing wholesale division and Usborne Books & More (UBAM), a consultant-based direct-sales division. This fiscal 2013 second-quarter report covers the three and six months ended August 31, 2012; comparisons are with the corresponding 2011 periods. Management notes that results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Three months ended Aug. 31, 2012 | Three months ended Aug. 31, 2011 | Six months ended Aug. 31, 2012 | Six months ended Aug. 31, 2011 |
|---|---|---|---|---|
| Net revenues | $5.464 million | $5.437 million | $12.059 million | $11.702 million |
| Gross margin | $3.024 million (55.3%) | $3.037 million (55.9%) | $7.143 million (59.2%) | $6.861 million (58.6%) |
| Earnings before income taxes | $219,200 | $200,100 | $781,100 | $680,800 |
| Net earnings | $138,200 | $126,200 | $488,400 | $426,400 |
| Diluted EPS | $0.04 | $0.03 | $0.12 | $0.11 |
| Net margin | 2.5% | 2.3% | 4.1% | 3.6% |
For the quarter, net revenue rose 0.5% and net earnings rose about 9.5%; gross margin narrowed 0.6 percentage points. For the six-month period, net revenue increased 3.1% and net earnings increased about 14.5%; gross margin improved 0.6 percentage points. Effective tax rates were 37.0% for the quarter and 37.5% year to date.
Divisions and operating changes
- Quarter: Publishing net revenue increased to $3.130 million from $2.833 million, while UBAM declined to $2.334 million from $2.604 million. Publishing segment pretax earnings increased to $1.014 million from $910,300; UBAM segment pretax earnings fell to $182,300 from $291,600.
- Six months: Publishing net revenue increased to $5.437 million from $5.236 million; UBAM increased to $6.622 million from $6.465 million. Segment pretax earnings were $1.789 million for Publishing and $1.088 million for UBAM, both above the prior-year period.
- Management attributed Publishing growth mainly to smaller retail stores and inside sales, partly offset by lower major national-account sales. UBAM’s quarterly decline reflected lower internet, home-party, and school/library sales, partly offset by direct sales. Year-to-date UBAM sales benefited from the “Cards For a Cause” fundraiser.
- Six-month operating expenses increased 2.3% to $11.279 million, including higher sales commissions and general and administrative expenses.
Cash flow, liquidity, and capital
- Operating cash flow was $171,700 for the six months, versus $46,900 in the prior-year period. The filing attributes cash-flow pressure in part to a $1.095 million inventory build ahead of the fall selling season and a $193,200 increase in accounts receivable.
- Investing cash outflow was $145,900, including $129,400 invested in Demibooks and $16,500 in property and equipment. Financing cash outflow was $352,900, including $939,600 of dividends paid, partly offset by net revolving-credit borrowings and treasury-stock sales.
- Cash fell to $433,000 from $760,100 at February 29, 2012. Current assets were $15.743 million and current liabilities $5.141 million at August 31.
- Revolving-credit borrowings were $775,000, up from $250,000 at fiscal year-end. The $2.5 million Arvest Bank facility had $1.725 million available; its interest rate was 4.00%. It is secured by substantially all company assets and contains financial and operating covenants. The agreement runs through June 30, 2013; management intends to renew it or obtain other financing.
- Dividends were $0.12 per share for the quarter and $0.24 per share year to date. The company paid $939,600 in dividends during the six-month period, compared with $488,400 in net earnings.
Outlook, risks, and unusual items
- Management expects positive operating cash flow in fiscal 2013 and believes cash flow plus the bank facility will meet foreseeable liquidity needs. It estimates fiscal-year investing cash outflows will be below $250,000. These are management expectations, not guarantees.
- Inventory purchases are concentrated with an England-based publisher: purchases from that supplier were approximately $5.1 million of $6.4 million total inventory purchases in the six-month period. Inventory increased to $10.981 million current and $515,900 noncurrent, net of valuation allowances.
- A customer in Chapter 11 owes $364,500; $340,000 is reserved. The filing reports no legal proceedings and no commitments in excess of one year.
- The company invested an additional $129,400 in Demibooks, bringing the recorded investment to $379,400. The agreement permits a further $250,000 investment, subject to specified milestones, potentially increasing the ownership interest from 11% to 18%.
- Management identifies estimates for sales returns, doubtful accounts, and inventory valuation as significant accounting judgments. Disclosure controls were assessed as effective as of August 31, 2012.
Important facts for investors to verify
- Whether the fall-season inventory build converts into sales and operating cash flow, given the company’s stated seasonality.
- Whether UBAM’s quarterly sales weakness persists and whether Publishing growth can offset declines in major national accounts.
- The customer’s Chapter 11 recovery and whether the $340,000 reserve adequately reflects potential losses.
- Availability and renewal terms for the secured credit facility before its June 30, 2013 maturity, including compliance with its covenants.
- Dividend sustainability in light of dividends paid exceeding first-half net earnings and the reduced cash balance.
- Performance and milestone requirements for the Demibooks investment and the potential additional investment.