Educational Development Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended February 28, 2018. The filing also reports fourth-quarter results; the requested “2017 Q4” metadata does not match the annual reporting period. The company distributes children’s books through Usborne Books & More (UBAM) and its EDC Publishing division, including Kane Miller titles.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Net revenue | $112.0 million | $106.6 million | +5.0% |
| Gross profit | $81.0 million | $78.0 million | +3.9% |
| Gross margin | 72.4% | 73.2% | Down 0.8 percentage points |
| Operating expenses | $73.7 million | $74.1 million | Down $0.4 million |
| Earnings before tax | $7.8 million | $4.6 million | +69.8% |
| Net earnings | $5.2 million | $2.9 million | +82.3% |
| Basic / diluted EPS | $1.28 / $1.27 | $0.70 / $0.70 | Higher |
| Operating cash flow | $9.2 million | $(1.6) million | Improved |
Net margin was approximately 4.7%, versus 2.7% in FY2017. The FY2017 comparison included a $1.1 million impairment charge for an abandoned direct-sales software system; no impairment was recorded in FY2018. Interest expense rose to $1.1 million from $1.0 million. The effective tax rate declined to 33.4% from 38.0%, partly reflecting the Tax Cuts and Jobs Act.
Segments and material changes
- UBAM: Revenue increased 6.2% to $103.7 million and segment operating income rose 26.4% to $19.4 million. Average active consultants grew to 30,900 from 24,900; 35,500 were active at year-end, compared with 25,800. Growth reflected consultant recruitment and increased internet/social-media sales. Segment gross margin eased to 74.7% from 75.7%, primarily because a supplier volume discount did not recur.
- Publishing: Revenue fell 8.2% to $8.3 million and operating income declined to $1.8 million from $2.6 million. Reduced sales to two large retail customers totaled approximately $0.8 million; one changed its store marketing mix and another changed book-distribution suppliers. Segment gross margin declined to 43.3% from 45.9%.
- UBAM accounted for 93% of FY2018 revenue, compared with 92% in FY2017. Sales are seasonal, generally strongest in the fall.
Cash, debt and liquidity
- Cash and cash equivalents were $2.7 million at year-end, versus $0.7 million a year earlier. Current assets were $33.3 million and current liabilities $21.2 million, implying a current ratio of about 1.6.
- Operating cash flow of $9.2 million benefited substantially from a $7.1 million reduction in inventory. Capital expenditures were $1.4 million, mainly warehouse automation and software to increase shipping capacity. Management said the improvements more than doubled prior daily shipping capacity.
- Long-term debt totaled $20.7 million, down from $21.6 million; the $15.0 million revolving facility had no borrowings at year-end, with $9.424 million available. The facility was scheduled to expire June 15, 2018. Term debt carried stated rates of 4.23% on Tranche A and approximately 4.70% on other variable-rate debt at year-end.
- The loan agreement includes financial covenants and restrictions, including limits on dividends and share repurchases. A prior covenant default in FY2017 was waived under a loan amendment. The CEO and his wife guaranteed up to $3.68 million of specified obligations.
- Inventory fell to $27.1 million, including current and noncurrent inventory, from $34.4 million. The company had approximately $18.9 million of inventory purchase commitments due in FY2019, including $13.4 million with Usborne.
Outlook, risks and other notable items
- Management expects operating cash flow and the expanded credit line to meet liquidity needs. It anticipates using cash for inventory to support continued sales growth and debt reduction, with excess cash potentially distributed to shareholders. No specific revenue or earnings guidance was provided.
- The board approved reinstating dividends after year-end: a $0.10-per-share dividend was approved May 25, 2018, payable June 2018. No dividend was paid in FY2018; FY2017 dividends were $0.27 per share.
- Key stated business risks include recruiting and retaining consultants, obtaining books, fulfilling orders without creating backlog, financing working capital and capital expenditures, competition, and economic or regulatory changes. The company relies significantly on Usborne for inventory and had $5.3 million payable to it at year-end.
- Management reported effective disclosure controls and internal control over financial reporting as of year-end. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. No material pending legal proceedings were reported.
- The filing’s FY2018 share-repurchase disclosures differ: the issuer-purchases table reports 28 shares purchased in the final quarter, while a note reports 6,525 shares purchased during the fiscal year for approximately $63,500. The filing describes small employee-related purchases and no announced repurchases under the public plan.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced after its June 15, 2018 expiration, and the resulting borrowing availability and covenant terms.
- Whether the projected growth in UBAM consultants and online sales continued, and whether it offset Publishing’s retail-customer losses.
- How FY2019 inventory commitments, purchasing plans and inventory reserves affected cash flow and liquidity.
- The reconciliation of the two FY2018 share-repurchase figures and the timing and continuation of the reinstated dividend.
- Any subsequent developments affecting the company’s Usborne supply relationship, tax accounting, or implementation of new accounting standards.