Business Context and Reporting Period
Company: Educational Development Corporation (EDC)
Filing Type: Form 10-Q (Quarterly Report)
Reporting Period: Three months ended May 31, 2011
Business Overview: EDC operates two reportable segments: the Publishing Division (wholesale distribution to retail accounts) and Usborne Books and More (UBAM) (direct sales via independent consultants). The company sells children's books under the Usborne and Kane/Miller lines.
Key Financial Metrics
| Metric | Q1 2012 (Ended May 31, 2011) | Q1 2011 (Ended May 31, 2010) |
|---|---|---|
| Net Revenues | $6,264,400 | $6,295,400 |
| Gross Margin | $3,824,000 (61.0%) | $3,974,200 (63.1%) |
| Net Earnings | $300,200 | $188,200 |
| Earnings Per Share (Diluted) | $0.08 | $0.05 |
| Cash Flow from Operations | $427,000 | $560,700 |
| Cash and Equivalents (End of Period) | $1,843,900 | $1,182,900 |
| Total Debt Outstanding | $0 | N/A |
| Available Credit Line | $2,500,000 | N/A |
Material Changes vs. Prior Period
- Profitability: Net earnings increased 59.5% to $300,200, driven primarily by the absence of a $188,500 casualty loss recorded in the prior year related to unrecovered travel deposits.
- Revenue: Net revenues decreased slightly by 0.5% ($31,000). Gross sales increased 6.0%, but this was offset by a 19.0% increase in discounts and allowances.
- Segment Performance:
- Publishing: Gross sales increased 39.0% due to growth in major national accounts and smaller retail stores.
- UBAM: Gross sales decreased 3.7%, attributed to a 31% decline in the total number of direct sales orders, partially offset by a 22% increase in average order size.
- Expenses: Total operating expenses decreased 3.5%. Sales commissions dropped 6.1% in line with lower UBAM sales volume. The casualty loss of $188,500 present in the prior year was $0 in the current period.
Outlook, Risks, and Management Commentary
- Liquidity: Management expects positive cash flow for fiscal year 2012. The company maintains a $2.5 million revolving credit facility with Arvest Bank (interest rate 5.00% as of May 31, 2011) with no outstanding borrowings.
- Capital Allocation: The company continues to repurchase shares and pay dividends. During the quarter, 25,417 shares were repurchased for $154,200, and a dividend of $0.12 per share was declared.
- Seasonality: Management notes that results for the three months ended May 31 are not necessarily indicative of year-end results due to the seasonality of product sales.
- Risks and Contingencies:
- Customer Concentration: A significant portion of inventory purchases is concentrated with a single England-based publishing company.
- Bad Debt: A receivable of $364,500 is due from a customer in Chapter 11 bankruptcy; $340,000 of this amount is reserved.
- Inventory Valuation: Management relies on estimates for inventory valuation allowances, which totaled $337,200 as of May 31, 2011.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the 39% sales growth in the Publishing Division versus the decline in order volume in the UBAM Division.
- Discount Trends: Monitor the increasing trend in discounts and allowances (up 19% YoY), which eroded gross sales growth.
- Bankruptcy Exposure: Confirm the status of the $364,500 receivable from the Chapter 11 customer and the adequacy of the $340,000 reserve.
- Cash Flow Usage: Track the impact of continued share repurchases and dividend payments on liquidity, given the net decrease in cash of $144,300 for the quarter.
- Supplier Concentration: Assess the risk associated with reliance on a single primary supplier for significant inventory purchases.