Educational Development Corporation — FY2021 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended February 28, 2021, with comparisons to the year ended February 29, 2020. Educational Development sells children’s books through two divisions: Usborne Books & More (UBAM), its consultant-led direct-sales business, and EDC Publishing, which sells to retail accounts. UBAM generated 96% of FY2021 net revenue. The filing also reports fourth-quarter results.
Financial performance
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net revenue | $204.6 million | $113.0 million |
| Gross margin dollars | $144.6 million | $76.1 million |
| Gross margin percentage | 70.7% | 67.4% |
| Operating expenses | $128.6 million | $69.1 million |
| Earnings before income taxes | $17.2 million | $7.8 million |
| Net earnings | $12.6 million | $5.6 million |
| Diluted earnings per share | $1.50 | $0.68 |
| Operating cash flow | $7.8 million | $4.2 million |
| Capital expenditures | $4.1 million | $0.6 million |
| Dividends per share | $0.32 | $0.20 |
Net margin was approximately 6.2%, versus 5.0% in FY2020. FY2021 fourth-quarter revenue was $40.3 million and net earnings were $2.2 million, compared with $20.2 million and $0.5 million, respectively, in the prior-year fourth quarter.
Liquidity, debt and cash flows
- Cash and cash equivalents were $1.8 million at year-end, down from $3.0 million. Current assets were $58.1 million and current liabilities $37.9 million.
- Total bank debt was approximately $16.2 million: $5.2 million drawn on the revolving facility and $11.0 million of term debt. The company reported $9.6 million of available revolver capacity; the facility is $15.0 million.
- Operating cash flow increased to $7.8 million, but included a $21.5 million cash use from higher inventory, partly offset by increased payables and accrued liabilities. Inventory rose to $52.4 million current and $0.7 million noncurrent.
- Financing cash use was $4.9 million, including term-debt repayments and $2.3 million of dividends, partly offset by revolver borrowings. The company paid off two prior term loans during the year.
- Management said operating cash generation and the credit line were expected to support operations, inventory expansion and debt reduction, with excess cash potentially distributed to shareholders. The quarterly dividend was increased during the year, ultimately to $0.10 per share; a subsequent $0.10 dividend was approved for June 2021.
Material changes and operating drivers
- Total net revenue rose 81.1%. UBAM revenue increased 89.7% to $196.0 million; Publishing revenue declined 11.3% to $8.6 million.
- UBAM’s average active consultants increased 49.8% to 48,700; 57,600 were active at fiscal year-end. Management attributed growth to consultant recruitment and retention initiatives, pandemic-related demand for supplemental income, online selling, and technology improvements.
- UBAM gross margin percentage rose to 71.6% from 69.3%, reflecting a shift in sales mix toward online orders. Higher online sales also increased commissions; management said the net profit impact of the channel mix shift was minimal after related costs.
- Publishing was affected by temporary retail closures and cancelled trade shows during COVID-19. Its operating income was $2.6 million, down 3.7%; customer reopening and expanded online selling supported sales in the latter half of the year.
- Company-wide shipping and handling costs increased to $34.2 million from $17.2 million, primarily with higher order volume. Interest expense fell to $0.6 million from $0.9 million, mainly after early debt repayments.
Outlook, risks and unusual items
- The filing provides no quantified revenue or earnings guidance. Management expressed confidence that operating cash and available credit would meet ongoing liquidity needs.
- COVID-19 effects remain uncertain. Risks include renewed disruption to retail, schools and in-person events; customer credit deterioration; and the ability to recruit and retain consultants, source books, ship on time and finance working capital.
- Inventory purchasing depends on long lead times and minimum print-run requirements. Inventory purchase commitments were $37.6 million, expected to be received and paid during FY2022; equipment commitments for new shipping lines were $1.7 million.
- Usborne is the principal supplier: FY2021 purchases were $50.8 million, and year-end payables to Usborne were $14.6 million. This creates supplier concentration and working-capital exposure.
- The company repaid its $1.4 million PPP loan in full in May 2020. It reported no material pending legal proceedings and no material off-balance-sheet arrangements.
- The auditor issued an unqualified opinion on the financial statements and internal controls; no critical audit matters were identified. Management and the auditor concluded internal control over financial reporting was effective as of year-end.
Investor verification priorities
- Verify whether the unusually strong UBAM consultant growth and online-sales demand continued after FY2021, and how much growth was pandemic-related.
- Track inventory levels, inventory valuation reserves, purchasing commitments and cash conversion, given the substantial inventory build and supplier lead times.
- Review consultant commissions, shipping costs and segment margins to assess whether FY2021 profitability is sustainable.
- Monitor Publishing customer collections, bad-debt reserves and recovery in retail and school/library channels.
- Review the loan covenants, debt maturities, revolver availability and dividend capacity; the filing notes financial-ratio and distribution restrictions.
- Confirm the effect of the April 2021 loan amendment, which reduced the fixed rate on Term Loan #1 to 3.12% and removed the prepayment premium.