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EDUC > SEC Filings for EDUC > Form 10-Q on 14-Jan-2014All Recent SEC Filings

Show all filings for EDUCATIONAL DEVELOPMENT CORP

Form 10-Q for EDUCATIONAL DEVELOPMENT CORP


14-Jan-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Factors Affecting Forward Looking Statements

MD&A contains statements that are forward-looking and include numerous risks which you should carefully consider. Additional risks and uncertainties can also materially and adversely affect our business. You should read the following discussion in connection with our financial statements, including the notes to those statements, included in this document. Our fiscal years end on February 28.

Overview

We operate two separate divisions, Publishing and Usborne Books and More ("UBAM"), to sell the Usborne and Kane Miller lines of children's books. These two divisions each have their own customer base. The Publishing Division markets its products on a wholesale basis to various retail accounts. The UBAM Division markets its products to individual consumers as well as school and public libraries. We have implemented electronic publishing capabilities to enhance our existing products.

The following table shows statements of earnings data as a percentage of net revenues.

                                            Earnings as a Percent of Net Revenues
                                           Three Months Ended November 30,              Nine Months Ended November 30,
                                            2013                     2012                2013                    2012
Net revenues                                     100.0 %                  100.0 %             100.0 %                 100.0 %
Cost of sales                                     38.8 %                   38.8 %              41.7 %                  40.0 %
 Gross margin                                     61.2 %                   61.2 %              58.3 %                  60.0 %
Operating expenses:
 Operating and selling                            24.1 %                   24.2 %              26.7 %                  25.1 %
 Sales commissions                                20.5 %                   20.1 %              18.6 %                  18.9 %
 General and administrative                        5.8 %                    6.1 %               7.5 %                   7.8 %
 Total operating expenses                         50.4 %                   50.4 %              52.8 %                  51.8 %
Other income (expense)                             0.1 %                   -0.1 %               0.0 %                   0.0 %
Earnings before income taxes                      10.9 %                   10.7 %               5.5 %                   8.2 %
Income taxes                                       4.5 %                    4.0 %               2.2 %                   3.1 %
Net earnings                                       6.4 %                    6.7 %               3.3 %                   5.1 %

Operating Results for the Three Months Ended November 30, 2013

We earned income before income taxes of $927,400 for the three months ended
November 30, 2013 compared with $844,400 for the three months ended November 30,
2012.

Revenues

                                           For the Three Months Ended November 30,
                                           2013                 2012          $ Change       % Change
Gross sales                           $    12,360,600       $ 11,710,800     $  649,800             5.5
Less discounts and allowances              (4,195,000 )       (4,129,800 )      (65,200 )           1.6
Transportation revenue                        336,400            283,400         53,000            18.7
Net revenues                          $     8,502,000       $  7,864,400     $  637,600             8.1

The UBAM Division's gross sales increased $211,100 during the three-month period ending November 30, 2013 when compared with the same quarterly period a year ago. This increase resulted from increases of 28% in internet sales, 10% in home party sales, and 5% in school and library sales, offset by decreases of 41% in fundraiser sales and 18% in direct sales.


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The increase in internet sales is attributed to a 22% increase in the total number of orders and a 5% increase in order size. The increase in home party sales is attributed to a 12% increase in the total number of orders, offset by a 1% decrease in average order size. The increase in school and library sales is attributed to a 12% increase in the total number of orders. The decrease in fundraiser sales is attributed to a 36% decrease in the total number of orders and an 8% decrease in average order size. The decrease in direct sales is attributed to a 10% decrease in the average order size and a 9% decrease in the total number of orders.

The Publishing Division's gross sales increased $438,700 during the three-month period ending November 30, 2013 when compared with the same quarterly period a year ago. We attribute this to a 13% increase in sales to smaller retail stores, a 10% increase in inside sales and a 1% increase in sales to major national accounts.

The UBAM Division's discounts and allowances were $773,300 and $935,400 for the quarterly periods ended November 30, 2013 and 2012, respectively. The UBAM Division is a multi-level selling organization that markets its products through independent sales representatives ("consultants"). Sales are made to individual purchasers and school and public libraries. Gross sales in the UBAM Division are based on the retail sales prices of the products. As a part of the UBAM Division's varied marketing programs, discounts relevant to the particular program are offered. The discounts and allowances in the UBAM Division will vary from year-to-year depending on the marketing programs in place during any given period. The UBAM Division's discounts and allowances were 13.4% and 16.8% of UBAM's gross sales for the quarterly periods ended November 30, 2013 and 2012, respectively.

The Publishing Division's discounts and allowances are a much larger percentage of gross sales than discounts and allowances in the UBAM Division due to the different customer markets that each division targets. The Publishing Division's discounts and allowances were $3,421,700 and $3,194,400 for the quarterly periods ended November 30, 2013 and 2012, respectively. The Publishing Division sells to retail book chains, regional and local bookstores, toy and gift stores, school supply stores and museums. To be competitive with other wholesale book distributors, the Publishing Division sells at discounts between 48% and 55% of the retail sales prices of the products, based upon the quantity of books ordered and the dollar amount of the order. The Publishing Division's discounts and allowances were 51.9% of Publishing's gross sales for the quarterly periods ended November 30, 2013 and November 30, 2012.

Expenses

                                  For the Three Months Ended November 30,
                                  2013                 2012          $ Change       % Change
Cost of sales                $    3,294,500       $    3,051,200     $ 243,300            8.0
Operating and selling             2,048,800            1,899,100       149,700            7.9
Sales commissions                 1,741,900            1,582,700       159,200           10.1
General and administrative          495,500              480,100        15,400            3.2
Total                        $    7,580,700       $    7,013,100     $ 567,600            8.1

Cost of sales increased 8.0% for the three months ended November 30, 2013 when compared with the three months ended November 30, 2012. Cost of sales as a percentage of gross sales were 26.7% and 26.1%, respectively, for each of the three-month periods ended November 30, 2013 and 2012, respectively. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales. These costs totaled $300,100 in the quarter ended November 30, 2013 and $274,200 in the quarter ended November 30, 2012.

In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 16.6% for the quarter ended November 30, 2013 and 16.2% for the quarter ended November 30, 2012.


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Sales commissions in the Publishing Division increased 10.2% to $89,900 for the three months ended November 30, 2013. Publishing Division sales commissions are paid on net sales and were 2.8% of net sales for the quarter ended November 30, 2013 and 2.7% for the quarter ended November 30, 2012. Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our "house accounts," which are the Publishing Division's largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.

Sales commissions in the UBAM Division increased 10.1% to $1,652,000 for the three months ended November 30, 2013, primarily due to the increase in net sales for the same period. UBAM Division sales commissions were 28.6% of gross sales for the three months ended November 30, 2013 and 27.0% of gross sales for the three months ended November 30, 2012. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Home shows, book fairs, school and library sales, and direct sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants' monthly sales and downline sales.

Our effective tax rate was 37.7% for the both quarterly periods ended November 30, 2013 and 2012. These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes, which is partially offset by the Federal Indian Employment Credit.

Operating Results for the Nine-month period Ended November 30, 2013

We earned income before income taxes of $1,118,400 for the nine months ended November 30, 2013 compared with $1,625,500 for the nine-month period ended November 30, 2012.

Revenues

                                      For the Nine Months Ended November
                                                      30,
                                           2013                 2012           $ Change       % Change
Gross sales                           $   30,802,800       $   30,702,800     $  100,000             0.3
Less discounts and allowances            (11,317,500 )        (11,455,600 )      138,100            (1.2 )
Transportation revenue                       722,300              676,200         46,100             6.8
Net revenues                          $   20,207,600       $   19,923,400     $  284,200             1.4

The UBAM Division's gross sales decreased $712,600 during the nine-month period ending November 30, 2013 when compared with the same nine-month period a year ago. This decrease resulted from decreases of 37% in fundraiser sales, 22% in direct sales, 3% in school and library sales, offset by an increase of 19% in internet sales and 2% in home party sales.

The decrease in fundraiser sales is attributed to a 30% decrease in the total number of orders and a 10% decrease in average order size. The decrease in direct sales is attributed to a 13% decrease in the total number of orders and an 11% decrease in the average order size. The decrease in school and library sales is attributed to a 2% decrease in the total number of orders and a 1% decrease in average order size. The increase in internet sales is attributed to a 15% increase in the total number of orders and 3% increase in average order size. The increase in home party sales is attributed to a 3% increase in the total number of orders, offset by a 1% decrease in average order size.

The Publishing Division's gross sales increased $812,600 during the nine-month period ending November 30, 2013 when compared with the same nine-month period a year ago. We attribute this to a 9% increase in sales to smaller retail stores and a 4% increase in inside sales, offset by a 1% decrease in sales to major national accounts.

The UBAM Division's discounts and allowances were $1,834,300 and $2,447,500 for the nine-month periods ended November 30, 2013 and 2012, respectively. The UBAM Division's discounts and allowances were 14.6% and 18.4% of UBAM's gross sales for the nine-month periods ended November 30, 2013 and 2012, respectively.

The Publishing Division's discounts and allowances were $9,483,200 and $9,008,100 for the nine-month periods ended November 30, 2013 and 2012, respectively. The Publishing Division's discounts and allowances were 52.1% and 51.8% of Publishing's gross sales for the respective nine-month periods ended November 30, 2013 and November 30, 2012.


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Expenses

                                 For the Nine Months Ended November 30,
                                  2013                2012         $ Change       % Change
Cost of sales                $     8,431,700      $  7,967,300     $ 464,400            5.8
Operating and selling              5,386,300         5,004,800       381,500            7.6
Sales commissions                  3,767,700         3,759,200         8,500            0.2
General and administrative         1,516,000         1,560,800       (44,800 )         (2.9 )
Total                        $    19,101,700      $ 18,292,100     $ 809,600            4.4

Cost of sales increased 5.8% for the nine-month period ended November 30, 2013 when compared with the nine months ended November 30, 2012. Cost of sales as a percentage of gross sales were 27.4% and 25.9%, respectively, for each of the nine-month periods ended November 30, 2013 and November 30, 2012. Cost of sales is the inventory cost of the product sold, which includes the cost of the product itself and inbound freight charges. Purchasing and receiving costs, inspection costs, warehousing costs, and other costs of our distribution network are included in operating and selling expenses, not in cost of sales. These costs totaled $872,300 in the nine-month period ended November 30, 2013 and $760,800 in the nine-month period ended November 30, 2012.

In addition to costs associated with our distribution network (noted above), operating and selling costs include expenses of the Publishing Division, the UBAM Division and the order entry and customer service functions. Operating and selling expenses as a percentage of gross sales were 17.5% for the nine-month period ended November 30, 2013 and 16.3% for the nine-month period ended November 30, 2012.

Sales commissions in the Publishing Division increased 8.7% to $251,500 for the nine months ended November 30, 2013. Publishing Division sales commissions are paid on net sales and were 2.9% of net sales for the nine-month period ended November 30, 2013 and 2.8% for the nine-month period ended November 30, 2012. Sales commissions in the Publishing Division fluctuate depending upon the amount of sales made to our "house accounts," which are the Publishing Division's largest customers and do not have any commission expense associated with them, and sales made by our outside sales representatives.

Sales commissions in the UBAM Division decreased slightly to $3,516,200 for the nine-month period ended November 30, 2013 from $3,527,800 for the same period a year ago, primarily due to the decrease in net sales for the same period. UBAM Division sales commissions were 27.9% of gross sales for the nine months ended November 30, 2013 and 26.5% of gross sales for the nine months ended November 30, 2012. The fluctuation in the percentages of commission expense to gross sales is the result of the type of sale. Home shows, book fairs, school and library sales and direct sales have different commission rates. Also contributing to the fluctuations in the percentages is the payment of overrides and bonuses, both dependent on consultants' monthly sales and downline sales.

Our effective tax rate was 37.4% and 37.6% for the nine-month periods ended November 30, 2013 and 2012, respectively. These rates are higher than the federal statutory rate due to the inclusion of state income and franchise taxes, which is partially offset by the Federal Indian Employment Credit.

Liquidity and Capital Resources

Our primary source of cash is typically operating cash flow. Typically, our primary uses of cash are to pay dividends, repurchase outstanding shares of stock, and purchase property and equipment. We utilize our bank credit facility to meet our short-term cash needs when necessary.

Our Board of Directors has adopted a stock repurchase plan in which we may purchase up to a total of 3,000,000 shares as market conditions warrant. Management believes the stock is undervalued and when stock becomes available at an attractive price, we will utilize free cash flow to repurchase shares. Management believes this enhances the value to the remaining stockholders and that these repurchases will have no adverse effect on our short-term and long-term liquidity. We repurchased 43,349 shares at a cost of $129,200 during the nine-month period ended November 30, 2013.


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We have a history of profitability and positive cash flow. We can sustain planned operating levels with minimal capital requirements. Consequently, cash generated from operations is used to liquidate any existing debt, pay capital distributions through dividends or repurchase shares outstanding.

For the nine-month period ended November 30, 2013, we experienced a positive cash flow from operating activities of $1,752,900. Cash flow from operating activities resulted primarily from an increase in certain current liabilities of $1,325,600, net income after taxes of $670,800, an increase in income taxes payable of $372,300, an decrease in inventory of $298,400, a decrease in certain prepaid expenses and other current assets of $185,600, and a decrease in deferred income taxes of $52,700. These were offset by an increase in accounts receivable of $1,238,000.

We believe that in fiscal year 2014 we will experience a positive cash flow and that this positive cash flow along with the bank credit facility will be adequate to meet our liquidity requirements for the foreseeable future.

Cash used in investing activities was $57,800 for the nine-month period ended November 30, 2013. This was for capital expenditures to replace our stock-picking forklift, upgrade our computer equipment, office facilities and equipment, and warehouse lighting and shelving. We estimate that total cash used in investing activities for fiscal year 2014 will be less than $250,000. This would consist of software and hardware enhancements to our existing data processing equipment and property improvements.

For the nine-month period ended November 30, 2013, cash used in financing activities was $1,702,900, resulting from payments under our revolving credit agreement of $2,000,000, dividend payments of $954,600 and the purchase of $129,200 of treasury stock, offset by borrowings under our revolving credit agreement of $1,250,000 and the sale of $130,900 of treasury stock.

Effective June 30, 2013, we signed a Fifteenth Amendment to the Credit and Security Agreement with Arvest Bank (the Bank) which provides a $2,500,000 line of credit through June 30, 2014. Interest is payable monthly at the greater of
(a) prime-floating rate minus 0.75% or (b) 4.00%. At November 30, 2013, the rate in effect was 4.00%. Borrowings are collateralized by substantially all the assets of the Company.

We had $500,000 in borrowings outstanding on the above revolving credit agreement at November 30, 2013 and at $1,250,000 February 28, 2013. Available credit under the revolving credit agreement was $2,000,000 at November 30, 2013. This agreement also contains a provision for our use of the Bank's letters of credit. The Bank agrees to issue, or obtain issuance of, commercial or stand-by letters of credit provided that no letters of credit will have an expiry date later than June 30, 2014 and that the sum of the line of credit plus the letters of credit would not exceed the borrowing base in effect at the time. The agreement contains provisions that require us to maintain specified financial ratios, restrict transactions with related parties, prohibit mergers or consolidation, disallow additional debt, and limit the amount of compensation, salaries, investments, capital expenditures and leasing transactions. We intend to renew the bank agreement or obtain other financing upon maturity. For the quarter ended November 30, 2013, we had no letters of credit outstanding.

As of November 30, 2013 we did not have any commitments in excess of one year.

Critical Accounting Policies

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to our valuation of inventory, allowance for uncollectible accounts receivable, allowance for sales returns, long-lived assets and deferred income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.

Actual results may materially differ from these estimates under different assumptions or conditions. Historically, however, actual results have not differed materially from those determined using required estimates. Our significant accounting policies are described in the notes accompanying the financial statements included elsewhere in this report. However, we consider the following accounting policies to be more significantly dependent on the use of estimates and assumptions.


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Revenue Recognition

Sales are recognized and recorded when products are shipped. Products are shipped FOB shipping point. The UBAM Division's sales are paid at the time the product is shipped. These sales accounted for 56.7% of net revenues for the nine-month period ended November 30, 2013 and 57.8% for the nine-month period ended November 30, 2012. The provisions of the Accounting Standards Codification
605 "Revenue Recognition" (ASC 605) have been applied, and as a result, a reserve is provided for estimated future sales returns.

Estimated allowances for sales returns are recorded as sales are recognized and recorded. Management uses a moving average calculation to estimate the allowance for sales returns. We are not responsible for product damaged in transit. Damaged returns are primarily from the retail stores. The damages occur in the stores, not in shipping to the stores. It is industry practice to accept returns from wholesale customers. Transportation revenue, the amount billed to the customer for shipping the product, is recorded when products are shipped. Management has estimated and included a reserve for sales returns of $100,000 as of November 30, 2013 and February 28, 2013.

Allowance for Doubtful Accounts

We maintain an allowance for estimated losses resulting from the inability of our customers to make required payments. An estimate of uncollectable amounts is made by management based upon historical bad debts, current customer receivable balances, age of customer receivable balances, the customer's financial condition and current economic trends. If the actual uncollected amounts significantly exceed the estimated allowance, then our operating results would be significantly adversely affected. Management has estimated and included an allowance for doubtful accounts of $474,100 as of November 30, 2013 and $471,900 February 28, 2013.

Inventory

Management continually estimates and calculates the amount of non-current inventory. Non-current inventory arises due to occasionally purchasing book inventory in quantities in excess of what will be sold within the normal operating cycle due to minimum order requirements of our primary supplier. Non-current inventory was estimated by management using the current year turnover ratio by title. All inventory in excess of 2 years of anticipated sales was classified as non-current inventory. Non-current inventory balances, before valuation allowance, were $727,000 at November 30, 2013 and $934,000 at February 28, 2013.

Inventories are presented net of a valuation allowance. Management has estimated and included a valuation allowance for both current and non-current inventory. This allowance is based on management's identification of slow moving inventory on hand. Management has estimated a valuation allowance for both current and non-current inventory of $351,800 and $400,000 as of November 30, 2013 and February 28, 2013, respectively.

Stock-Based Compensation

We account for stock-based compensation whereby share-based payment transactions with employees, such as stock options and restricted stock, are measured at estimated fair value at date of grant and recognized as compensation expense over the vesting period.


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