Business context and reporting period
Educational Development Corporation (EDC) distributes children’s books through two segments: Usborne Books & More (UBAM), a consultant-based direct-sales business, and EDC Publishing, which sells to retail accounts. EDC is the exclusive U.S. trade co-publisher of Usborne books and owns Kane Miller Book Publisher. This Form 10-K covers the fiscal year ended February 28, 2022; the filing also reports fourth-quarter results. UBAM generated 91% of fiscal 2022 revenue and Publishing 9%.
Key financial results
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net revenue | $142.2 million | $204.6 million |
| Gross profit / margin | $97.9 million / 68.9% | $144.6 million / 70.7% |
| Operating expenses | $87.7 million | $128.6 million |
| Earnings before tax | $11.2 million | $17.2 million |
| Net earnings | $8.3 million | $12.6 million |
| Diluted EPS | $0.98 | $1.50 |
| Cash from operations | $(21.1) million | $7.8 million |
| Capital expenditures and other investing outflows | $(3.9) million | $(4.1) million |
Revenue fell 30.5% year over year, while net earnings fell 34.2%. Net margin was approximately 5.8%, versus 6.2% in FY2021. Fiscal 2022 dividends were $0.40 per share, compared with $0.32. Fourth-quarter revenue was $23.3 million and net earnings $0.3 million, versus $40.3 million and $2.2 million, respectively, in the prior-year quarter.
Segments
- UBAM: Revenue declined 34.2% to $129.0 million; segment operating income fell 25.6% to $24.4 million. Average active consultants declined 7.8% to 44,900, and year-end active consultants fell to 36,100 from 57,600.
- Publishing: Revenue increased 54.7% to $13.3 million as retail customers reopened and new accounts were added. Segment operating income rose 38.5% to $3.6 million; gross margin percentage declined to 46.1% from 48.6%.
Liquidity, debt and financial position
Cash was $0.4 million at year-end, down from $1.8 million. Current assets were $76.5 million and current liabilities $40.3 million, including $17.7 million drawn on the revolving credit facility; approximately $2.3 million of facility capacity remained. Current inventory increased to $71.6 million from $51.8 million and was the principal working-capital use. Total long-term debt was $25.0 million, compared with $11.0 million, and total debt including the revolving facility was approximately $42.7 million. Interest expense rose to $0.9 million from $0.6 million.
Operating cash outflow reflected a $21.4 million inventory increase, alongside lower accounts payable and accrued liabilities. Financing provided $23.6 million, including $15.2 million of term-loan proceeds and $12.5 million of net additional line-of-credit borrowings; dividends paid were $3.4 million. Management said operating cash generation and available bank credit were expected to support operations, and anticipated inventory declining toward more normalized levels in FY2023.
Changes, outlook and risks
- Management attributed UBAM’s sales decline primarily to consultants returning to full-time work and children returning to classrooms after pandemic-related demand elevated FY2021 sales. It said UBAM sales and consultant levels remained above pre-pandemic levels. Publishing rebounded as stores reopened.
- Gross margin pressure reflected sales mix, fewer volume rebates, higher inbound ocean freight costs, and customer mix. The filing provides no numerical revenue or earnings guidance.
- Inventory has long supplier lead times, and $11.4 million of inventory purchase commitments were outstanding for FY2023. EDC relies significantly on Usborne: purchases from that supplier were $42.6 million in FY2022.
- The $20 million revolving facility was scheduled to mature August 15, 2022. A subsequent April 11, 2022 amendment temporarily raised its limit to $25 million through September 15, 2022 and extended termination to April 11, 2023. It moved the reference rate to SOFR and changed a financial covenant test. The filing notes financial-ratio covenants and restrictions on dividends, additional debt and repurchases.
- Principal risks identified include consultant recruitment and retention, book availability and shipping timeliness, sales-channel shifts, working-capital financing, competition, economic conditions and COVID-19 uncertainty. The company reported no material pending legal proceedings or material off-balance-sheet arrangements.
- The independent auditor gave an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective. No critical audit matters were identified.
Important facts for investors to verify
- Whether inventory levels and purchase commitments are reduced as planned, and whether inventory can be converted to cash without greater discounting or valuation allowances.
- Whether consultant counts, UBAM sales and margins stabilize after the exceptional pandemic-period comparison.
- Current revolving-credit availability, debt balances, covenant compliance and the terms following the April 2022 loan amendment.
- Whether supplier lead times, ocean freight costs and dependence on Usborne affect product availability and profitability.
- Fourth-quarter weakness and subsequent-period trading trends, for which this filing gives no forward numerical guidance.