Educational Development Corporation — Q1 FY2014
Reporting period: Three months ended May 31, 2013. The company sells Usborne and Kane Miller children’s books through its Publishing and Usborne Books & More (UBAM) divisions. Results are unaudited; management cautions that seasonality means the quarter may not indicate full-year results.
Financial results and liquidity
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net revenue | $5.991 million | $6.595 million | Down 9.2% |
| Gross margin | $3.514 million; 58.7% | $4.119 million; 62.5% | Down $604,400; down 3.8 percentage points |
| Operating expenses | $3.414 million | $3.559 million | Down 4.1% |
| Earnings before taxes | $104,800 | $561,900 | Down 81.3% |
| Net earnings / diluted EPS | $66,600 / $0.02 | $350,200 / $0.09 | Net earnings down 81.0% |
| Operating cash flow | $999,100 | $1,017,500 | Down $18,400 |
Operating margin was approximately 1.7% of net revenue, versus 8.5% in the prior-year quarter; net margin was 1.2%, versus 5.3%. Cost of sales was essentially unchanged in dollars, but increased to 41.3% of net revenue from 37.5%. Operating and selling expense rose 8.4%, while commissions and general and administrative expense declined.
Cash and cash equivalents were $357,600 at May 31, down from $469,100 at February 28. Current assets were $13.852 million and current liabilities $3.799 million. Inventory, current and noncurrent, totaled $9.904 million net. The revolving credit balance declined to $425,000 from $1.250 million; the company reported $2.075 million available under its $2.5 million facility. Financing activities used $1.102 million, including $317,900 of dividends paid and $900,000 of net credit-facility repayments. Investing activities used $8,900.
Changes and business drivers
- UBAM gross sales fell $893,800 year over year, with declines across fundraising, direct, home-party, school/library, and internet channels. Management attributed these mainly to fewer orders and, in some channels, smaller average orders.
- Publishing gross sales increased $219,100, supported by inside sales and smaller retail accounts, partly offset by lower sales to major national accounts.
- Net revenue declined despite lower UBAM discounts and allowances, as Publishing discounts increased as a share of gross sales.
- Segment earnings before taxes fell to $485,600 for UBAM from $905,400 and to $701,500 for Publishing from $775,000. Unallocated “Other” costs were $1.082 million, versus $1.119 million.
- Dividends declared were $0.08 per share, compared with $0.12 in the prior-year quarter. The $0.08 dividend was paid June 21, 2013.
Outlook, risks, and other items
- Management expects positive cash flow in fiscal 2014 and believes operating cash flow plus the credit facility will meet foreseeable liquidity needs. It estimates fiscal-year investing cash use below $250,000. No earnings or revenue guidance was provided.
- A June 30, 2013 amendment extended the Arvest Bank line of credit through June 30, 2014. The rate is the greater of prime less 0.75% or 4.00%; borrowings are secured by substantially all company assets. The agreement has financial covenants and restrictions, and management intends to renew it or obtain other financing at maturity.
- Inventory purchases are concentrated with an England-based publisher; purchases from it were approximately $1.5 million in the quarter, versus $2.5 million a year earlier. Minimum-order requirements can result in excess inventory. Inventory valuation allowances totaled $411,500.
- A customer in Chapter 11 owed $364,500 at May 31, of which $340,000 was reserved. The company also carries a $430,300 cost-method investment in illiquid, untraded Demibooks shares and warns that the investment could be impaired.
- Results depend on estimates for sales returns, doubtful accounts, and inventory valuation. The company reported a $100,000 sales-return reserve and a $483,600 allowance for doubtful accounts. Management also cites seasonality and forward-looking risks.
- Management concluded disclosure controls were effective as of May 31, 2013. Legal proceedings were reported as not applicable; the filing lists no commitments in excess of one year as of May 31.
Investor facts to verify
- Whether UBAM order volume and sales recover, and whether the quarter’s declines reflect persistent demand weakness or seasonal variation.
- Whether lower revenue and weaker gross margin continue to pressure earnings and cash generation.
- Compliance with the credit facility’s covenants and the status of renewal or replacement financing before June 30, 2014.
- Recoverability of the Chapter 11 customer receivable, inventory balances and allowances, and the Demibooks investment.
- Whether management’s fiscal 2014 positive-cash-flow and sub-$250,000 investing-cash-use expectations are achieved.