Educational Development Corporation — Q1 FY2013 10-Q
Reporting period: Three months ended May 31, 2012; comparisons are with the three months ended May 31, 2011 unless otherwise stated. The company sells children’s books through its Publishing and Usborne Books and More (UBAM) divisions. Management cautions that quarterly results are seasonal and may not indicate full-year performance.
Financial performance
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Net revenues | $6.595 million | $6.264 million | +5.3% |
| Gross margin | $4.119 million (62.5%) | $3.824 million (61.0%) | +1.5 percentage points |
| Earnings before income taxes | $561,900 | $480,700 | +16.9% |
| Net earnings | $350,200 | $300,200 | +16.7% |
| Basic and diluted EPS | $0.09 | $0.08 | +$0.01 |
| Operating cash flow | $1.018 million | $427,000 | +$590,500 |
Operating expenses increased 6.3% to $3.559 million, including higher commissions (+11.6%) and general and administrative expense (+23.7%); operating and selling expense declined 2.7%. The effective tax rate was 37.7%, versus 37.5%.
Segments and material changes
- UBAM: Net revenues were $4.288 million, up from $3.861 million; pretax segment earnings rose to $905,400 from $700,000. Management cited new “Cards For a Cause” fundraisers and growth in school/library, direct, internet, and home-party sales. Fundraisers represented 7% of total sales.
- Publishing: Net revenues declined to $2.307 million from $2.403 million, while pretax segment earnings increased to $775,000 from $759,900. Lower sales to major national accounts were partly offset by growth in smaller retailers and inside sales.
- Consolidated gross sales rose 3.2%; net revenues grew faster, partly reflecting lower discounts and allowances overall. UBAM discounts increased as a share of its gross sales, from 14.3% to 16.3%.
Cash, liquidity, and capital
At May 31, 2012, cash and cash equivalents were $1.215 million, versus $760,100 at February 29, 2012. Current assets were $15.335 million and current liabilities $4.417 million. Inventory was $10.277 million current and $503,000 noncurrent. Total assets were $18.520 million and shareholders’ equity $14.104 million.
Debt under the revolving credit agreement was $250,000, unchanged from February 29; $2.250 million of the $2.500 million facility was available at May 31. On June 30, 2012, the company signed an amendment extending the facility through June 30, 2013. The rate was 4.00% at May 31; borrowings are secured by substantially all company assets and the agreement includes financial and other restrictive covenants. The company said it intended to renew or obtain other financing at maturity.
Operating cash flow was $1.018 million; investing activities used $99,300, including an additional $82,800 Demibooks investment and $16,500 in capital expenditures. Financing activities used $463,600, primarily for $469,600 in dividends, partly offset by treasury-stock sales. Cash increased $454,600 during the quarter. The company estimated fiscal 2013 investing cash use below $250,000 and expected positive operating cash flow to help meet foreseeable liquidity needs.
The company declared dividends of $0.12 per share, equal to reported quarterly EPS, and paid the dividend on June 22, 2012. It repurchased 10,200 shares for $49,100 during the quarter.
Outlook, risks, and unusual items
- Management expects positive cash flow in fiscal 2013 and believes operating cash flow plus the credit facility will meet liquidity needs for the foreseeable future; it gave no earnings or revenue guidance.
- Purchases are concentrated with an England-based publishing supplier: approximately $2.5 million of first-quarter purchases came from that supplier, out of approximately $2.75 million total inventory purchases.
- A customer in Chapter 11 owed $364,500; $340,000 was reserved at May 31, 2012.
- The company’s $332,800 nonmarketable equity investment in Demibooks included the quarter’s additional $82,800 investment. A further $250,000 investment, potentially increasing ownership from 11% to 18%, is conditional on specified milestones.
- Management identifies estimates for returns, doubtful accounts, inventory valuation, and deferred taxes as significant; actual outcomes could differ. The filing reports no legal proceedings and says market-risk disclosure was not applicable. Management concluded disclosure controls were effective.
Important facts for investors to verify
- Whether UBAM’s new fundraiser channel and other sales gains persist, and whether Publishing’s national-account weakness continues.
- Inventory levels, valuation allowances, and the company’s concentration in its primary supplier.
- Collection or further impairment of the bankrupt customer receivable.
- Compliance with credit-facility covenants and the availability or cost of financing after June 30, 2013.
- Demibooks milestone progress and any additional investment commitment; also compare dividends and repurchases with cash generation and earnings.