Educational Development Corporation — Q3 FY2012 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2011. The company sells children’s books through its Publishing and Usborne Books & More (UBAM) divisions. The filing notes that results are seasonal and interim results may not indicate full-year performance.
Financial performance
| Metric | Quarter ended Nov. 30, 2011 | Prior-year quarter | Nine months ended Nov. 30, 2011 | Prior-year nine months |
|---|---|---|---|---|
| Net revenues | $8.690 million | $9.485 million | $20.392 million | $21.530 million |
| Gross margin | $5.284 million (60.8%) | $6.006 million (63.3%) | $12.144 million (59.6%) | $13.367 million (62.1%) |
| Income before taxes | $1.167 million | $1.248 million | $1.848 million | $1.852 million |
| Net earnings | $724,900 | $776,900 | $1.151 million | $1.155 million |
| Basic and diluted EPS | $0.19 | $0.20 | $0.30 | $0.30 |
| Operating cash flow | Not separately stated | Not separately stated | $927,700 | $3.982 million |
Quarterly net revenue fell 8.4%; nine-month net revenue fell 5.3%, despite higher gross sales, as discounts and allowances increased and transportation revenue declined. Quarterly and year-to-date net earnings were slightly below the comparable periods. Operating expenses declined year over year, but did not fully offset lower gross margin. Effective tax rates were 37.9% for the quarter and 37.7% year to date.
Balance sheet, cash and financing
- At November 30, cash was $1.395 million, down from $1.988 million at February 28, 2011. Total assets were $19.056 million; current assets were $15.954 million and current liabilities were $4.697 million.
- Debt included $250,000 drawn on the revolving credit facility and $75,000 of current maturities of long-term debt. The $2.5 million Arvest Bank facility runs through June 30, 2012; available credit was $2.25 million, and the stated interest rate was 4.0%. Borrowings are secured by substantially all company assets and subject to financial and reporting covenants.
- Nine-month cash used in investing was $320,000, including a $250,000 investment in Demibooks and $70,000 of property and equipment spending. Cash used in financing was $1.201 million, chiefly dividends and treasury-stock purchases. Cash declined by $593,700 over the period.
- The company declared dividends of $0.36 per share during the nine months; $0.12 per share was paid on December 16, 2011. It repurchased 36,721 shares for $214,300 year to date, but none during the reported quarter.
Changes, outlook and risks
- Publishing net revenue increased to $3.202 million for the quarter and $8.438 million year to date. UBAM net revenue declined to $5.488 million and $11.954 million, respectively. Management attributed UBAM weakness mainly to fewer orders across home parties, internet, direct, and school/library channels; Publishing growth reflected stronger national-account and smaller-retail sales.
- Management expected positive cash flow for fiscal 2012 and said operating cash flow plus the credit facility should meet foreseeable liquidity needs. It estimated fiscal-year investing cash use below $450,000. No specific earnings or revenue guidance was provided.
- The $250,000 Demibooks investment represents an initial 11% interest to support interactive-book development. The agreement permits an additional $250,000 investment, potentially increasing ownership to 18%, upon specified milestones.
- A customer bankruptcy-related receivable remained $364,500, with $340,000 reserved. Inventory purchases are concentrated with an England-based publisher; that supplier accounted for approximately $6.4 million of purchases in the nine-month period. Inventory valuation, returns and doubtful-account allowances rely on management estimates.
- Management cited seasonality and risks from sales trends, estimates and credit-facility covenants. It reported effective disclosure controls; legal proceedings were listed as not applicable. The prior-year nine-month comparison included a $188,500 casualty loss related to unused travel deposits; there was no such charge in the current period.
Key facts for investors to verify
- Whether the UBAM order declines continued or stabilized after November 30, and whether Publishing growth persisted.
- Whether higher discounts and allowances and lower transportation revenue continued to pressure net revenue and gross margin.
- Operating cash generation, liquidity after dividends and repurchases, and compliance with Arvest facility covenants and its June 2012 maturity.
- Recoverability of the customer receivable and valuation of inventory, including the effects of supplier concentration and slow-moving stock.
- Progress against Demibooks milestones and the expected commercial contribution of interactive publishing products.