Educational Development Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended February 29, 2012; comparative year ended February 28, 2011. The filing also reports fourth-quarter results. EDC distributes Usborne children’s books in the U.S. and owns Kane/Miller Book Publishers. Its two channels are Publishing and Usborne Books and More (UBAM).
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Gross sales | $40.91 million | $39.63 million | +$1.28 million |
| Net revenue | $26.27 million | $27.24 million | −$0.97 million (3.6%) |
| Gross margin | $15.72 million (59.8%) | $16.96 million (62.2%) | Margin down 2.4 percentage points |
| Earnings before tax | $2.28 million | $1.87 million | +$0.41 million |
| Net earnings | $1.42 million | $1.17 million | +$0.25 million |
| Net margin | 5.4% | 4.3% | Up 1.1 percentage points |
| Basic and diluted EPS | $0.36 | $0.30 | +$0.06 |
| Cash from operations | $0.78 million | $2.82 million | −$2.03 million |
Revenue fell despite higher gross sales, reflecting increased discounts and allowances and lower transportation revenue. Total operating expenses declined to $13.54 million from $15.21 million; FY2011 included a $188,500 casualty loss that did not recur. Income tax expense was $856,800, with a 37.6% effective rate.
Fourth quarter: FY2012 revenue was $5.88 million and net earnings were $269,600 ($0.06 per share), versus $5.71 million and $12,900 (reported EPS $0.00) in FY2011’s fourth quarter.
Segment trends and material changes
- Publishing: Revenue increased 11.7% to $10.98 million; pretax segment earnings rose to $3.64 million from $3.20 million. Sales increased across smaller retail accounts and national chains.
- UBAM: Revenue fell 12.2% to $15.29 million; pretax segment earnings declined to $2.58 million from $3.26 million. Gross sales decreased 6.2%, orders fell 16.4%, and average sales per order rose 3.7%. Home-show, school/library, and Internet sales weakened. A new Cards for a Cause fundraising program generated $364,800.
- Publishing’s share of net revenue increased to 42% from 36%; UBAM’s fell to 58% from 64%. Active UBAM consultants ended the year at approximately 6,100, down from 6,200, despite 4,300 new representatives during the year.
- Gross margin contracted as cost of sales rose to 40.2% of net revenue from 37.8%. UBAM discounts and allowances increased to 20.2% of its gross sales from 15.7%.
Cash, liquidity, debt, and capital allocation
- Year-end cash was $760,100, down from $1.99 million. Current assets were $14.85 million and current liabilities $3.79 million.
- Operating cash flow of $783,900 was more than offset by $326,100 used in investing and $1.69 million used in financing. Investing included a $250,000 initial investment in Demibooks and $76,100 of capital expenditures.
- Year-end debt was $250,000 drawn on a $2.5 million revolving facility, leaving $2.25 million available. The rate was 4.0%; the facility was secured by substantially all assets and matured June 30, 2012. Management intended to renew it or obtain other financing.
- Cash dividends paid were $1.87 million; the company said dividends equaled 132% of FY2012 net earnings. It also repurchased $214,300 of stock and sold treasury stock for $223,600.
- Management expected operating cash flow to exceed operating needs and projected FY2013 investing cash use below $200,000. It stated short-term borrowings should remain minimal, subject to renewal or replacement of the credit facility.
Outlook, risks, contingencies, and unusual items
- Management identified recruiting and retaining UBAM consultants as central to that division’s growth. The business is seasonal, with strongest sales in fall, and faces direct-selling, book-fair, and publishing competition.
- Approximately 73% of products came from one supplier; supplier concentration, minimum print runs, and three-to-four-month replenishment lead times create sourcing and inventory risks. Inventory valuation and sales-return reserves depend on management estimates.
- At February 29, 2012, a $364,500 receivable from a customer in bankruptcy remained outstanding, with $340,000 reserved.
- EDC invested $250,000 for an 11% interest in Demibooks, with a possible additional $250,000 investment for an 18% total position upon specified milestones.
- Inventory purchase commitments were approximately $3.86 million. No material pending legal proceedings were reported. The filing identifies no clear quantified company-wide revenue or earnings guidance.
- The independent auditor reported that the financial statements fairly presented the company’s financial position and results under U.S. GAAP. Management concluded internal controls were effective; the auditor did not attest to that conclusion.
Key facts for investors to verify
- Whether the revolving credit facility was renewed or replaced at its June 2012 maturity, and whether its covenants or borrowing terms changed.
- Whether UBAM orders, consultant retention, and home-show, school/library, and Internet sales stabilized after their FY2012 declines.
- Whether Publishing growth continued and how customer concentration in national chains affected sales and margins.
- Whether discounting, gross-margin pressure, and the high dividend payout remain sustainable given lower operating cash flow and year-end cash.
- Recoverability of the bankruptcy receivable and performance, milestones, and any further funding required for Demibooks.
- Inventory quality and valuation, supplier dependence, and execution of the approximately $3.86 million of purchase commitments.