Educational Development Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended February 28, 2015. The filing also reports fourth-quarter results; the metadata’s “2014 Q4” does not change the annual period covered.
Business context
EDC distributes Usborne children’s books exclusively in the United States and owns Kane Miller Book Publishers. It sells through EDC Publishing, which serves retail accounts, and Usborne Books & More (UBAM), which uses independent direct-selling consultants. UBAM generated 65% of net revenue, up from 58% in FY2014. EDC had about 7,800 active consultants at year-end, compared with 5,900 a year earlier.
Financial performance
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net revenue | $32.55 million | $26.10 million |
| Gross margin | $19.78 million; 60.8% | $15.57 million; 59.7% |
| Earnings before income taxes | $1.40 million | $873,500 |
| Net earnings | $859,200 | $357,600 |
| Basic and diluted EPS | $0.21 | $0.09 |
| Operating cash flow | $(261,600) | $2.77 million |
| Capital expenditures | $325,000 | $77,500 |
| Cash at year-end | $383,900 | $680,000 |
Net revenue increased 24.7%. UBAM net revenue rose to $21.02 million from $15.13 million; Publishing revenue grew 5.1% to $11.53 million. Gross margin improved, while operating expenses rose to 56.5% of net revenue from 54.8%. Net margin was approximately 2.6%, versus 1.4%.
FY2015 fourth-quarter revenue was $7.63 million and net earnings were $97,000, compared with $5.89 million revenue and a $313,200 net loss in the prior-year quarter.
Liquidity, debt and capital allocation
- Current assets were $15.27 million and current liabilities were $5.68 million at year-end, a current ratio of approximately 2.7.
- The company had $1.40 million outstanding on its $3.20 million revolving credit facility, with $1.80 million available. The rate was 4.0%; the facility was secured by substantially all assets and due June 30, 2015. EDC said it intended to renew or replace the facility.
- Operating cash flow turned negative, mainly reflecting increases in receivables of $1.36 million and inventory of $1.19 million. Financing activities provided $290,500, including net revolving-credit borrowings; dividends paid were $1.28 million.
- Dividends were $0.32 per share for FY2015. Declared dividends equaled 149% of net earnings. A further $0.08-per-share dividend declared in February was paid in FY2016.
Material changes, outlook and risks
- UBAM growth reflected higher consultant counts and strong online activity: Internet sales after commissions increased 131%, and Internet orders more than doubled. The shift to smaller online orders contributed to a 17% decline in average UBAM sales per order and higher transportation costs.
- Management expected operating cash flow to exceed ongoing operating needs and short-term borrowing to be limited in FY2016. It also expected new UBAM and accounting systems, under implementation after a $210,700 initial investment, to be operational in FY2016.
- Inventory purchase commitments totaled approximately $7.61 million, mostly with Usborne. Usborne represented about 79% of products, and purchases from it were $12.2 million in FY2015. This supplier concentration, inventory planning and long overseas replenishment lead times are relevant risks.
- Sales are seasonal, with the strongest period in fall. The company faces competition in both distribution channels. No customer accounted for more than 10% of company net sales; major book chains represented 26% of Publishing division sales.
- The IRS was examining FY2012 tax filings; management expected no material adjustment. EDC reported no material pending legal proceedings. The 2014 Demibooks investment impairment of $430,300 did not recur in FY2015.
- Management reported effective disclosure controls and internal control over financial reporting. The auditor gave an unqualified opinion on the financial statements but did not attest to internal control effectiveness.
Investor facts to verify
- Whether the revolving credit facility was renewed or replaced by its June 30, 2015 maturity, and the subsequent borrowing balance and terms.
- Whether FY2016 operating cash flow recovered as management expected, given FY2015 negative operating cash flow and inventory and receivables growth.
- Whether UBAM consultant growth and online sales continued, and whether order-size shifts and fulfillment costs affected margins.
- How the $7.61 million inventory commitments and supplier concentration affected inventory levels, sales and cash requirements.
- Whether dividends remained sustainable relative to earnings and operating cash generation.