Educational Development Corporation (NASDAQ: EDUC) — FY2019 Form 10-K
Reporting period: Fiscal year ended February 28, 2019; comparative period is fiscal 2018. The filing also reports unaudited fourth-quarter results. The company publishes and distributes children’s books through Usborne Books & More (UBAM), its direct-sales division, and EDC Publishing, its wholesale division.
Financial results and liquidity
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Net revenue | $118.8 million | $112.0 million | +6.1% |
| Gross margin | $79.7 million (67.1%) | $76.2 million (68.0%) | +4.7%; rate down |
| Operating expenses | $71.2 million | $68.8 million | +3.5% |
| Earnings before income taxes | $9.2 million | $7.8 million | +17.2% |
| Net earnings | $6.7 million | $5.2 million | +28.1% |
| Basic / diluted EPS | $0.82 / $0.81 | $0.64 / $0.64 | Higher |
| Operating cash flow | $3.9 million | $9.2 million | Lower |
- UBAM revenue rose 4.5% to $108.4 million, while segment operating income was nearly flat at $19.3 million. Publishing revenue grew 25.3% to $10.4 million and operating income increased to $2.9 million.
- Cash and cash equivalents were $3.2 million. Current assets were $41.5 million and current liabilities $23.5 million (current ratio approximately 1.8).
- Long-term debt, including current maturities, was $19.8 million, down from $20.7 million. The revolving credit line had no borrowings; reported available capacity was $12.4 million. Interest expense declined to $0.9 million.
- Inventory increased $6.8 million to $34.0 million, including current and noncurrent inventory. Operating cash flow was pressured by the $7.1 million inventory increase; accounts payable increased $2.4 million.
- Capital expenditures were $1.4 million, primarily for warehouse automation. Financing activities used $2.1 million, including $1.2 million of dividends paid and $0.9 million of debt payments.
Material changes and fourth-quarter results
- Annual net revenue increased, but consolidated gross margin as a percentage of revenue declined about 0.9 percentage point. Management attributed UBAM’s lower margin rate to a shift in order mix toward programs with greater discounts; Publishing’s margin rate improved with sales mix and lower discounts.
- Publishing growth reflected higher order volumes from major retail customers and in-store promotions that did not occur in the prior year. National chains accounted for 14% of Publishing revenue versus 8% in FY2018.
- FY2019 fourth-quarter revenue was $23.6 million versus $21.9 million; net earnings were $0.6 million versus $0.8 million, and diluted EPS was $0.07 versus $0.10.
- The company reinstated dividends in May 2018 and declared $0.20 per share for FY2019. In May 2019, the board approved another $0.05-per-share dividend.
Outlook, risks and unusual items
- No quantified revenue or earnings guidance is provided. Management expects operating cash generation and available credit to meet liquidity needs, with cash used for inventory expansion and debt reduction and excess cash potentially returned to shareholders. Management expects the School and Library Certification Program to benefit future results.
- Key business risks include recruiting and retaining UBAM consultants, timely procurement and shipping, competition, and reliance on sales channels including social media. New consultants fell to 21,500 from 32,400; active consultants at year-end fell to 31,800 from 35,500, although the average active consultant count increased.
- Usborne is the largest supplier: purchases from it were $29.8 million of total inventory purchases of $42.8 million in FY2019. The company also reported $13.3 million in inventory purchase commitments due in FY2020. Inventory growth reflected new titles, lower-than-expected sales in the latter half of the year, and early receipt of stock to meet volume-discount thresholds.
- The $15.0 million revolving facility was scheduled to terminate August 15, 2019; the filing describes covenant, borrowing-base, dividend and share-repurchase restrictions. The company reported no revolver borrowings at year-end.
- Adoption of ASC Topic 606 changed the presentation of hostess awards and sales-return balances; management reported no effect on net earnings or retained earnings. A two-for-one stock split was effected in August 2018, and share data were retroactively adjusted.
- The 2019 long-term incentive plan allows up to 600,000 restricted shares tied to revenue and pre-tax performance targets; approximately 308,000 shares were granted in FY2019, with $0.4 million of compensation expense recognized.
- Management reported effective disclosure controls and internal control over financial reporting. The filing states the auditor did not provide an internal-control attestation. No material pending legal proceedings were reported.
Important facts for investors to verify
- Confirm renewal or replacement of the revolving credit facility beyond its stated August 15, 2019 termination date, and review applicable covenants and borrowing availability.
- Track inventory conversion, sales trends, and the company’s ability to sell stock purchased under its $13.3 million FY2020 commitments.
- Assess whether consultant recruitment and retention, and Publishing promotions with major customers, can sustain revenue growth.
- Review the full audited financial statements and auditor’s report: the auditor-report text reproduced in the filing refers to audits of February 2018 and 2017 statements, rather than FY2019 and FY2018, so the periods covered should be confirmed.