Educational Development Corporation — FY2014 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended February 28, 2014, compared with the year ended February 28, 2013; it is an annual report, not a standalone Q4 filing. EDC distributes Usborne children’s books in the United States and owns Kane Miller Book Publishers. Its two divisions are EDC Publishing, which sells to retail accounts, and Usborne Books & More (UBAM), which sells through independent consultants and related channels. Each division contributed 42% and 58% of net revenue, respectively, in both years.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Net revenue | $26.10 million | $25.49 million |
| Gross margin | $15.57 million; 59.7% of revenue | $14.99 million; 58.8% |
| Earnings before income taxes | $873,500 | $1.28 million |
| Net earnings | $357,600 | $802,900 |
| Basic and diluted EPS | $0.09 | $0.20 |
| Cash from operations | $2.77 million | $639,000 |
| Cash and cash equivalents at year-end | $680,000 | $469,100 |
Operating expenses rose to $14.32 million from $13.77 million. Other expense was $378,200, compared with $53,900 of other income in FY2013. Gross margin improved, but operating expenses as a share of revenue increased to 54.8% from 54.0%; net margin fell to 1.4% from 3.1%.
At February 28, 2014, current assets were $14.07 million and current liabilities were $4.18 million, implying working capital of about $9.90 million. The company had no line-of-credit borrowings outstanding, versus $1.25 million a year earlier, and reported $2.5 million of available credit. The revolving facility matures June 30, 2014, is secured by substantially all assets, and includes financial and other covenants. Shareholders’ equity was $12.58 million, down from $13.45 million.
Investing activities used $77,500, primarily for capital expenditures. Financing activities used $2.48 million, including $1.27 million in dividends and $129,200 in share repurchases. FY2014 dividends were $0.32 per share; an additional $0.08 dividend declared on February 28 was paid in FY2015. Management reported FY2014 dividends declared equal to 356% of net earnings.
Material changes and notable items
- Net revenue grew 2.4%. UBAM revenue increased 3.1% to $15.13 million; Publishing revenue increased 1.5% to $10.97 million.
- UBAM internet revenue after commissions rose 34%, while fundraising revenue fell 34%. Active consultants increased to about 5,900 from 4,700; UBAM order count rose 15%, while average sales per order declined 10%.
- Publishing sales to smaller retail stores and inside sales increased, but sales to national chain stores declined. National chains represented 26% of Publishing division sales, down from 28%.
- Net earnings fell 55.5%, with pre-tax earnings down about 31.9%. Results included a $430,300 impairment charge that reduced the Demibooks investment to zero. The effective tax rate rose to 59.1% from 37.4%, in part because of a valuation allowance against a capital-loss deferred tax asset.
- FY2014’s fourth quarter recorded net revenue of $5.89 million and a net loss of $313,200, compared with revenue of $5.56 million and a net loss of $211,200 in the prior-year quarter.
- Operating cash flow increased substantially, but reflected working-capital movements and noncash adjustments, including a $978,000 provision for doubtful accounts and sales returns, increased current liabilities, and the noncash investment impairment.
Outlook, risks, and contingencies
Management expected ongoing operating cash flow to exceed cash needs, short-term borrowing to be limited in FY2015, and FY2015 investing cash use to be below $250,000. It intended to renew the revolving credit agreement or obtain other financing before maturity. These are management expectations, not guarantees.
Key exposures include dependence on Usborne, which supplied about 79% of products and accounted for approximately $9.0 million of FY2014 inventory purchases; seasonal sales concentrated in the fall; competition; and the need to recruit and retain UBAM consultants. The company had approximately $5.27 million in inventory purchase commitments. Inventory valuation, sales returns, and receivable allowances depend on management estimates. The company also disclosed cash balances could exceed federally insured limits.
EDC reported no material pending litigation. The IRS was examining FY2012; management did not expect a material adjustment and recorded no uncertain-tax-position reserve. Management concluded disclosure controls and internal control over financial reporting were effective as of February 28, 2014; the auditor did not provide an internal-control attestation.
Important facts for investors to verify
- Whether the revolving credit facility was renewed or replaced by its June 30, 2014 maturity, and whether the company remained in compliance with its covenants.
- Whether the cash-flow increase is repeatable given the contribution from working-capital changes and noncash adjustments.
- Whether UBAM consultant growth and internet sales can offset declines in fundraising and other channels, and whether average order size stabilizes.
- Whether the $430,300 Demibooks impairment, elevated tax rate, and unusually high dividends relative to earnings have ongoing implications.
- Whether inventory levels, purchase commitments, sales-return reserves, and the company’s reliance on Usborne remain appropriate.