Educational Development Corporation — Q2 FY2015 10-Q
Reporting period: Quarter and six months ended August 31, 2014; fiscal year ends February 28. The company sells children’s books through EDC Publishing (wholesale) and Usborne Books & More (UBAM, direct and consultant-led sales). Interim results are unaudited, and management cautions that seasonality makes them not necessarily indicative of full-year results.
Financial performance
| Metric | Three months ended Aug. 31, 2014 | Prior year | Six months ended Aug. 31, 2014 | Prior year |
|---|---|---|---|---|
| Net revenue | $6.81 million | $5.72 million | $13.99 million | $11.71 million |
| Gross margin | $3.80 million; 55.7% | $3.05 million; 53.5% | $8.13 million; 58.1% | $6.57 million; 56.1% |
| Income before taxes | $8,300 | $86,200 | $395,900 | $191,000 |
| Net income (loss) | $(3,900) | $56,400 | $235,800 | $123,000 |
| Basic and diluted EPS | $(0.00) | $0.01 | $0.06 | $0.03 |
Quarterly revenue grew 19.1%, but expenses rose faster overall: operating and selling expense increased 29.0% and commissions increased 35.9%; the quarter ended with a small net loss. Six-month revenue grew 19.5%, while net income increased to $235,800 from $123,000. Gross margin improved in both comparisons, while the six-month effective tax rate rose to 40.4% from 35.6%; the quarterly rate was 147.0% on very low pretax income.
Segments: Six-month Publishing revenue was $6.02 million (prior year $5.56 million), with segment pretax earnings of $1.77 million ($1.70 million). UBAM revenue was $7.96 million ($6.14 million), with segment pretax earnings of $769,500 ($603,300). For the quarter, Publishing revenue was $3.26 million and pretax earnings $965,400; UBAM revenue was $3.55 million and pretax earnings $154,100.
Cash flow, balance sheet and financing
- Six-month operating cash flow was a use of $2.43 million, versus a source of $460,100 in the prior-year period. Management attributed the outflow mainly to inventory growth of $1.79 million ahead of the fall selling season and a larger-than-normal addition of new titles, plus a $1.26 million increase in receivables.
- Investing cash outflow was $114,300, primarily for facility repairs/remodeling and equipment. Financing provided $1.94 million, including $2.50 million net borrowings under the revolving facility, partly offset by $637,400 in dividends.
- Cash was $79,900 at August 31, down from $680,000 at February 28. Current assets were $16.58 million and current liabilities $7.03 million; inventory was $11.70 million current and $430,400 non-current.
- Revolver borrowings were $2.50 million at August 31, versus none at February 28; the facility was fully drawn at quarter-end. The rate was 4.00%, secured by substantially all company assets, and subject to financial covenants and other restrictions. A September 19, 2014 amendment increased the facility to $3.20 million through June 30, 2015. The company said it intends to renew or obtain financing at maturity.
- Shareholders’ equity was $12.26 million, down from $12.58 million at February 28. The company declared dividends of $0.08 per share; it paid $0.08 per share on September 19 to holders of record September 12.
Changes, outlook and risks
- UBAM drove most of the sales increase. Quarterly UBAM gross sales rose $1.65 million; internet sales increased 168%, and active consultants were up 25% year over year. Management linked online growth to consultants’ social-media events. Publishing quarterly gross sales increased $170,900, with gains at smaller retailers partly offset by lower sales to major national accounts.
- For the six months, UBAM gross sales rose $2.58 million and Publishing gross sales rose $1.03 million. UBAM discounts and allowances increased as a share of gross sales, reflecting changing marketing programs.
- Management expects overall positive cash flow in FY2015 and believes cash flow plus the bank facility will meet foreseeable liquidity needs. It estimated FY2015 investing cash outflows below $250,000, primarily for data-processing system enhancements. No specific revenue or earnings guidance was provided.
- Inventory purchases are concentrated with an England-based publisher: purchases from that supplier were approximately $6.7 million of total six-month purchases of $8.1 million, compared with $4.1 million of total purchases of $5.5 million in the prior-year period. Inventory and receivables growth, seasonality, supplier concentration, and the fully drawn quarter-end line of credit are notable monitoring points.
- Management noted the Federal Indian Employment Credit had expired for fiscal years beginning January 1, 2014, affecting tax comparisons. The company reported no legal proceedings, no commitments in excess of one year, and effective disclosure controls as of August 31. It was not reporting any assets or liabilities at fair value.
Important facts for investors to verify
- Whether fall-season sales convert the elevated inventory and receivables into operating cash, and whether the stated FY2015 positive-cash-flow expectation is achieved.
- Availability and covenant compliance under the amended $3.20 million credit facility, including renewal or replacement financing before June 30, 2015.
- Whether UBAM’s rapid online and consultant growth continues, and the effect of discounts, commissions and selling costs on profitability.
- Exposure to the concentrated publisher, inventory valuation and slow-moving stock, and customer returns and credit losses.
- Seasonal performance and full-year results: the filing expressly warns that interim results may not predict year-end outcomes.