Educational Development Corporation — Form 10-Q Summary
Reporting period: Three months ended May 31, 2015, compared with the three months ended May 31, 2014. The company sells children’s books through EDC Publishing and Usborne Books & More (UBAM). Interim results are unaudited, and management cautions that seasonality means they may not indicate full-year results.
Financial performance and position
| Metric | Q1 2015 | Q1 2014 / prior date | Change or context |
|---|---|---|---|
| Gross sales | $13.303 million | $10.720 million | Up 24.1% |
| Net revenues | $9.638 million | $7.178 million | Up 34.3% |
| Gross margin | $6.064 million; 62.9% | $4.335 million; 60.4% | Margin expanded 2.5 percentage points |
| Operating expenses | $5.522 million | $3.951 million | Up 39.8%; 57.3% of net revenue versus 55.1% |
| Earnings before taxes | $531,700 | $387,600 | Up 37.2%; pretax margin 5.5% versus 5.4% |
| Net earnings / diluted EPS | $324,600 / $0.08 | $239,700 / $0.06 | Net earnings up 35.4% |
| Operating cash flow | $82,800 | $(484,200) | Improved; inventory growth absorbed cash |
| Cash and cash equivalents | $371,400 | $383,900 at Feb. 28, 2015 | Down $12,500 during the quarter |
| Revolving credit borrowings | $1.700 million | $1.400 million at Feb. 28, 2015 | Previous facility had $1.500 million available at May 31 |
| Current assets / liabilities | $17.017 million / $7.478 million | $15.266 million / $5.685 million at Feb. 28, 2015 | Working capital was approximately $9.539 million |
Investing activities used $118,900, primarily for data-processing systems. Financing activities provided $23,600: $300,000 in credit-facility borrowings and $45,800 from treasury-stock sales were partly offset by $322,000 in dividends. Inventory (current and non-current, net) was $13.281 million, up from $11.532 million at February 28, 2015. The company paid a previously declared $0.08-per-share dividend on June 19, 2015.
Material changes and operating drivers
- UBAM net revenue increased to $7.018 million from $4.414 million; EDC Publishing decreased to $2.620 million from $2.764 million. UBAM’s growth more than offset weakness in EDC Publishing.
- Management attributed UBAM growth to gains in internet, school and library, home-party, direct, and fundraiser sales, and a 32% increase in active consultants. Internet sales rose 204%, supported by more online orders and social-media-led virtual events.
- EDC Publishing gross sales declined $236,200, including a 43% decrease in sales to major national accounts, partly offset by higher sales to smaller retailers; management cited reorder timing as one factor.
- Sales commissions rose 63.0%, primarily with UBAM sales growth. Operating and selling expenses increased 32.3%; outbound freight and handling costs increased to $1.057 million from $740,700.
Outlook, risks, and notable items
- Management expected positive overall cash flow in fiscal 2016 and believed cash flow plus the bank facility would meet foreseeable liquidity needs. It estimated investing cash use for fiscal year 2015 would be below $500,000, primarily for data-processing implementation.
- Effective July 7, 2015, the company amended its Arvest Bank agreement to provide a $4.0 million line of credit through June 30, 2016, with interest payable monthly at prime. The facility is subject to a borrowing base and financial-ratio and other restrictive covenants, including limits on additional debt, capital expenditures, compensation, and certain transactions.
- Inventory purchases are concentrated with an England-based publishing company: purchases from it were approximately $4.4 million in the quarter, compared with $3.3 million a year earlier. Management said inventory increased for new catalog titles and to support higher sales; minimum supplier order requirements also contribute to non-current inventory.
- Key estimation exposures include inventory valuation, sales returns, doubtful accounts, and deferred taxes. The filing reports a $390,300 inventory valuation allowance and a $100,000 sales-return reserve at May 31, 2015.
- The company was assessing the impact of the new revenue-recognition standard, expected to apply beginning in its first quarter of fiscal 2019. Management reported effective disclosure controls. Legal proceedings were reported as not applicable; the filing states that risk-factor disclosure was not required for this smaller reporting company.
Important facts for investors to verify
- Whether UBAM’s rapid growth, consultant expansion, and online-sales gains continue, and whether they offset EDC Publishing’s account weakness.
- Inventory levels, turnover, valuation allowances, and dependence on the principal publishing supplier, particularly as inventory rose by about $1.749 million during the quarter.
- Availability and borrowing-base capacity under the amended credit facility, compliance with its covenants, and the cost of prime-rate borrowing.
- Whether operating cash generation can support inventory needs, capital spending, dividends, and any share repurchases; management’s outlook is forward-looking.
- The filing contains an apparent fiscal-year reference inconsistency: it describes the quarter ended May 31, 2015 but labels its below-$500,000 investing-cash estimate as applying to fiscal year 2015. Verify the intended forecast period.