Educational Development Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended February 29, 2016; comparisons are with the year ended February 28, 2015. This is an annual filing, not a standalone fourth-quarter report. The company is the exclusive U.S. trade publisher of Usborne children’s books and owns Kane Miller Book Publishers. It sells through UBAM, a direct-sales consultant network, and EDC Publishing, which serves retail accounts.
Financial and operating highlights
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net revenues | $63.62 million | $32.55 million |
| Gross margin | $43.12 million; 67.8% of revenue | $19.78 million; 60.8% |
| Operating expenses | $39.81 million | $18.40 million |
| Earnings before income taxes | $3.55 million | $1.40 million |
| Net earnings | $2.12 million | $0.86 million |
| Basic and diluted EPS | $0.52 | $0.21 |
| Cash from operating activities | $6.65 million | $(0.26) million |
Net margin was 3.3%, compared with 2.6%. Cost of sales was 32.2% of revenue versus 39.2%; operating expenses were 62.6% versus 56.5%. Interest expense increased to $244,900 from $54,000. The income-tax provision was $1.43 million, at a 40.2% effective rate; management cited state taxes and a $67,900 federal tax audit expense relating to 2012.
Balance sheet and liquidity: At year-end, cash was $1.18 million, current assets $22.50 million, and current liabilities $18.78 million. Inventory was $17.48 million current and $0.17 million noncurrent. Total liabilities were $36.47 million and shareholders’ equity was $13.23 million. Debt included $3.33 million drawn on the revolving line and $18.30 million of term debt, of which $0.62 million was current. The $4.0 million revolver had $668,200 available at year-end; a March 2016 amendment raised the facility to $6.0 million.
Operating cash flow benefited substantially from increases in payables, accrued liabilities and deferred revenue. Inventory rose $6.05 million. Investing cash outflow was $24.91 million, chiefly for a new facility; financing cash inflow was $19.06 million. Year-end cash increased by $0.80 million. Dividends paid were $1.37 million; declared dividends were 67% of net income, and FY2016 dividends were $0.35 per share.
Material changes versus the prior year
- Net revenue increased 95.5%, to $63.62 million. UBAM net revenue rose to $52.79 million from $21.02 million; its reported share of company net revenue increased to 83% from 65%. EDC Publishing revenue declined 6.1%, to $10.83 million.
- UBAM’s growth reflected a major expansion of its consultant network: active consultants at year-end rose to 19,600 from 7,800. Orders increased to 682,500 from 136,900, led by online/social-media sales. Average sales per order fell 48%, reflecting the shift from larger in-person parties toward smaller online orders.
- Publishing sales to smaller retail stores increased 5.0%, while sales to national chains fell 14.4%. National chains represented 22% of Publishing net sales, versus 26%.
- The company purchased a new facility on December 1, 2015, increasing net property, plant and equipment to $26.71 million from $2.07 million. The purchase was principally financed with $18.4 million of new term debt.
- Annual results include a significant quarterly variation: FY2016 fourth-quarter revenue was $16.95 million, but the quarter recorded a net loss of $108,200, or $(0.03) per share. The filing text does not provide a clear explanation of the specific cause of this quarterly loss.
Outlook, commentary, risks and unusual items
The filing provides no quantified revenue or earnings guidance. Management described the new facility as supporting growth and said operating facilities meet present and future capacity needs. Sales are seasonal, typically strongest in fall and around the holidays.
- Concentration and supply: Usborne accounted for approximately $20.0 million of FY2016 inventory purchases, out of $29.8 million total. The company notes long international production lead times and minimum print-run requirements. At year-end it had approximately $18.14 million of inventory purchase commitments due in FY2017.
- Debt and liquidity: The new loan agreement includes financial-ratio requirements and restrictions on additional debt, capital expenditures, compensation, investments and other actions. The revolver was close to fully drawn at year-end; availability and compliance should be monitored.
- Facility lease: The company entered a 15-year operating lease with the seller for 181,300 square feet, with monthly rent of $105,800 and annual 2% increases. Future minimum rental income was reported at $21.63 million. Lease income is included in other income.
- Other risks and estimates: Risks include competition in direct selling and publishing, consultant recruitment and retention, inventory demand estimates, customer returns and collectability. Management’s estimates include inventory valuation and sales-return allowances; actual results could differ.
- Filing and audit: The auditor gave an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not attest to internal-control effectiveness. No material pending legal proceedings were reported.
Most important facts for investors to verify
- Whether UBAM’s rapid consultant, order and online-sales growth can be sustained, and whether commission and fulfillment costs remain controlled.
- The drivers of the FY2016 fourth-quarter net loss and whether it reflects timing, seasonal costs or other nonrecurring factors.
- Revolver availability, debt covenant compliance, repayment capacity and the impact of the March 2016 increase in the credit line.
- Inventory quality and sell-through, supplier concentration, and the fulfillment and cash-flow effects of the $18.14 million of purchase commitments.
- How the new facility, including its long-term tenant lease, affects operating costs, rental income and liquidity.