Educational Development Corporation (NASDAQ: EDUC) — FY2020 Form 10-K
Reporting period: Fiscal year ended February 29, 2020, compared with the year ended February 28, 2019. The filing also reports fourth-quarter results. EDC publishes children’s books through Usborne Books & More (UBAM), its direct-sales division, and EDC Publishing, which sells to retail accounts. UBAM contributed 91% of annual revenue.
Financial performance and position
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Net revenue | $113.0 million | $118.8 million | Down 4.9% |
| Gross profit | $76.1 million | $79.7 million | Down 4.5% |
| Gross margin | 67.4% | 67.1% | Up 0.3 percentage points |
| Earnings before taxes | $7.8 million | $9.2 million | Down 15.6% |
| Net earnings | $5.6 million | $6.7 million | Down 15.5% |
| Basic and diluted EPS | $0.68 | $0.82 basic; $0.81 diluted | Lower |
| Cash from operations | $4.2 million | $3.9 million | Up $0.3 million |
- Revenue fell in both divisions: UBAM revenue was $103.3 million, down 4.7%; Publishing revenue was $9.7 million, down 6.7%. Segment operating income was $17.4 million for UBAM (down 9.8%) and $2.7 million for Publishing (down 6.9%).
- UBAM’s decline was attributed in part to $3.0 million less sales activity by active consultants in the fourth quarter. Active consultants at year-end fell to 29,600 from 31,800, although the average for the year increased to 32,500 from 32,000. Publishing cited lower sales to large national accounts and the absence of an in-store promotion with its largest customer.
- Fourth-quarter revenue was $20.2 million versus $23.6 million; net earnings were $0.5 million versus $0.6 million, and EPS was $0.06 versus $0.08.
- Cash and cash equivalents were $3.0 million, down from $3.2 million. Current assets were $37.2 million and current liabilities $16.4 million. Inventory, current and noncurrent combined, was $31.1 million, down from $34.0 million.
- Total long-term debt, including current maturities, was $18.8 million, down from $19.8 million. The revolving line had no balance; reported available capacity was $11.0 million under a $15.0 million facility, subject to borrowing-base limits. Interest expense was $0.9 million.
- Cash used in investing was $0.6 million, principally capital spending on UBAM consultant/customer software. Cash used in financing was $3.8 million, including $1.7 million in dividends, $1.7 million in share repurchases, and $1.0 million in debt payments, partly offset by proceeds from treasury-stock sales and option exercises.
Material developments, outlook and risks
- Management expects operating cash flow and available bank credit to support operations. It plans to use cash for inventory and product-line expansion, debt reduction, and shareholder distributions; the filing gives no earnings or revenue guidance.
- COVID-19-related closures were affecting Publishing retail sales and UBAM school, library and book-fair sales after year-end. EDC obtained a $1.447 million PPP loan on April 16, 2020, then repaid it in full on May 12. The company said first-quarter FY2021 revenue had not declined versus the comparable prior-year quarter, but the pandemic’s duration and financial impact remained uncertain.
- EDC agreed to a three-month rent abatement for its largest tenant in May–July 2020 in exchange for a three-month lease extension. The board approved a $0.06 dividend payable in June 2020.
- Inventory purchase commitments totaled $12.9 million, due in FY2021; $8.9 million was with Usborne, the company’s principal supplier. Supplier concentration, four-to-six-month product lead times, consultant recruitment and retention, retail and online competition, shipping, and access to working-capital financing are identified business risks. The filing does not include a separate Item 1A risk-factor discussion because EDC is a smaller reporting company.
- Debt agreements include financial covenants and restrictions on dividends, repurchases, capital expenditures, additional debt and other actions. The revolving credit facility was scheduled to terminate August 15, 2020. The filing reports $18.8 million of total debt maturities, with $13.2 million due thereafter.
- EDC reported no material pending legal proceedings or material off-balance-sheet arrangements. The independent auditor issued an unqualified opinion on the financial statements. Management concluded internal controls were effective; the auditor did not attest to that assessment.
Important facts for investors to verify
- Whether COVID-19 materially affected subsequent revenue, consultant activity, retail customers, fulfillment, or inventory availability.
- Renewal or replacement of the revolving credit facility after its August 15, 2020 termination date, and ongoing compliance with loan covenants.
- Whether the $12.9 million of committed inventory purchases and inventory valuation assumptions align with realized demand and sales returns.
- Trends in active UBAM consultants and performance of online sales, school/library fairs, and large Publishing accounts.
- Cash generation and the sustainability of dividends and repurchases alongside debt repayment and seasonal inventory needs.